As I read the Los Angeles Times this morning about the lackluster GDP numbers revealed yesterday, I started thinking about what might make those numbers really pop; what could single handedly effect job growth and as a result, personal income, spending, government revenues etc.? Almost as if in passing, the article mentioned the housing market’s improvement, led by tight inventories. …Tight inventories, curious right? What about all those foreclosures and short sales we keep hearing about? For nearly a year I have been calling bottom on the housing market. In fact as early as June 2011, I said the worst was over. I was even quoted by some real estate radio show in Pittsburgh, PA because I called a bottom, right here in the Real Estate Conversation. I believe in fact, had it not been for Congress’s near government shutdown last July/August, we would be even further along in the housing recovery. But what is the significance of tight supply?
We all now the basic tenet of economics is supply and demand. As supply increases, prices must drop to move inventory – this is what we’ve been experiencing for the past several years, an oversupply of homes. Conversely, when the inventory is down or “tight,” and demand remains the same or increases, pricing pressure increases along with it. As an example, in my area, our home inventory has hit a (low) level not seen since 2004 and as a result, we are seeing a staggering 70% of all listings under contract. That number is so ridiculously high, it’s hard to even fathom; 70%?! You know this if you’re a buyer and if you sense you’ve missed the bottom, you’re probably right.
As you may or may not be aware, I started my career in real estate as a builder’s representative, selling new homes. It’s a funny thing about new construction; it employs a lot of people. From the earth mover, to the offsite improvements such as water mains and sewer line’s supplier, to the finish carpenter, painter, dry-waller pick a trade; pick a supplier or manufacturer. Today there’s even solar and other “Green” technology, so it’s not just guys swinging a hammer or digging a ditch, building has an impact on jobs in ways no other industry in America does: quite simply because it employs virtually everyone. My father in law, Mark Bader, was in building for 50 years, selling and managing and he used to tell me as far back as the 1980’s that the building business is the engine that drives the economy. “As building goes,” he used to say, “so goes the economy.”
Fast forward to the L.A. Times article today mentioning tight home inventories; aside from solving many of the underwater borrower problems that we have been so focused on for so many years now, rising home values and a tight inventory will also trigger new home construction. Admittedly, many areas still have a surplus so this little engine of the economy may not be racing its engine at the starting line, but I can’t help but believe it’s starting to rev its motor just a little bit. We’ve seen this in Southern California in the form of rising building permit applications though largely in combined residential and commercial projects; lofts; Live – work spaces; residential over retail, and this may be the trend: building closer in rather than traditional subdivisions in the outlining areas (which remain over built). As this situation plays out and should the inventories remain tight for an extended period of time, that little engine that could can very quickly become the (not so) little engine that is. And folks, when that high-speed rail leaves the station, hold onto your hats and get ready for what promises to be the strongest economy we’ll have seen in years.