If you’ve read my personal history from my website, www.1000OaksRealEstate.com, Facebook, LinkedIn etc., you know that I worked in new home construction, developement and sales for 14 years. So a gauge I pay particular attention to is the National Home Builders Association Builder Confidence number. This week’s number showed a 5% increase in positive sentiment. “So?”, you ask? To understand this significance, you first have to understand that Home Builders are all about the future. They have to plan for the future by purchasing land, getting it entitled through the City or County, grading, infrasturcture, design and finally building permits – just to be able to start a home, which then takes months to build before a buyer can move in. So when the builder’s see their fortunes are looking up, I take notice.
We have been hearing (or wishing), for months that buyers should be buying because prices are down 30% and rates are down 30% to historic lows. It’s been going on so long now, the words are almost hollow in meaning. But here’s the connection to the NAHB confidence number: builder’s senitiment improves when they anticapate an improving market, an improving economy and ultimately a shortage of inventory. Does any of this sound like our market? You’re probably thinking, “No, we have millions of distressed properties and sellers and we won’t work through the inventory for years, and prices are still going to go down”. Yet here are the builders thinking, “I better get ready to ramp up production” – why?
I have been saying for sometime, like so many economists, that I believe employment is the lynch pin for any recovery – duh… right? But ask yourself this: once employment starts to improve, will people be more interested in buying than they are today? Of course. Once employment starts to improve, that means the economy’s improving (employment is a lagging indicator- or in other words, hiring takes place after the economy is getting better), so then, what’s the Fed going to do about interest rates? Afterall, rates are almost zero and the Fed has been printing money like water to inflate us out of this recession… So they’re going to raise rates to counter inflation (just as China did yesterday to slow their 10% annual growth). If there is improved employment, and the economy is strengthening, which inturn leads to increased demand for all goods and services including homes, and we have rising interest rates to counter inflation, would you say it’s fair to conclude that the result will be an increase in demand for housing as buyers rush in to buy before rates rise? Naturally, but here’s the rub: I believe when this starts, it will happen quickly, which in turn will absorb any unsold inventory and thus creating a shortage and then an expontential rise in home values. This is why the NAHB’s builder sentiment number is so significant. The builders are anticipating this very outcome. Something else: builders, particularly in Southern California, have been underproducing units for our ever expanding population, many of whom are immigrant entrepeneurs buying the American Dream: a home for the first time. This has been going on for several years, because demand has been so weak. The the lack of substantial home production equates to shortages long term. In our area of the Conejo Valley for example, I think there are about 10 new homes a year being built – 10!
My conclusion is that when employment starts even a moderate improvement, and consumer confidence inches upward, the speed at which the housing market will correct, is going to be staggering, and I believe the NAHB agrees and is planning for it.