I know, I know, I’m pounding the inventory drum to death. I guess I just can’t help it; it’s just so painfully obvious. Do you remember the Hans Christian Andersen story of the emperor who is persuaded by a swindler to wear invisible clothes? The swindler is so convincing in his sales pitch that the emperor, for fear of not seeming enlightened, believes him. All those around him are so unsure themselves, that they too stay quiet to what is so obvious: that the emperor has no clothes. It’s not until a little boy shouts it out that everyone opens their eyes to the obvious. I guess I’m that little boy.
Consider the builder’s data out today: Housing starts rise 23% in November. 23%! An astonishing number. Why? Why does any manufacturer increase production? There’s a shortage of available inventory and a perceived opportunity to profit. National home builder Lennar reported today that their orders up 13% for the quarter and prices are up. Their numbers would be even higher if they had more developed lots in urban center areas where Reuters reports, “Demand is high.” And they went on to say that Lennar is actually better positioned to build than other builders because they purchased land in the down turn. And yet Reuters reports they are short of lots….
It is painfully clear to me, and apparently no one else including National Association of Realtors chief economist Lawrence Yun, that the decline in sales is directly linked to a shortage of available inventory. There just aren’t enough homes to satisfy buyer demand, so consequently sales numbers are down from a year ago. Oh sure, Yun comments that many buyers are sitting on the sidelines frustrated at their inability to win a bidding war for property, but he says it as an afterthought to his reasoning that rising rates and rising prices are the culprit quashing demand. As my grandmother used to say, hogwash! Why do you suppose there are multiple offers and bidding wars? Not enough homes for sale given the number of buyers. Sure, some buyers are being priced out of the market and until wages catch up, they will have to continue to rent. But let me tell you about renting: residential rents are skyrocketing. I have tenants looking for single family homes to rent and there ain’t nothin’! And I mean nuthin’! So what does that portend? How about rents continue to rise? As rents go up, the attractiveness of buying increases, thus increasing demand to buy even more. Why is the rental market tight? We haven’t been building enough apartments and condominiums in “urban areas where demand is high,” and this is spilling over to the ‘Burbs. It’s really the perfect storm: A shortage of buildable lots; a labyrinth of government red tape before a nail can be hammered into a board; an expanding population; the failure of most developers to anticipate the turnaround in housing and thus finish raw land into developed, buildable lots; 10% of all homeowners are still underwater therefore unable to sell and we’re at the end of the historic low interest rate period that so many property owners refinanced to, compelling many would be sellers to stay put. And that doesn’t even touch on the improving economy and escalation of accompanying household creation. Even Ben Bernanke and the Fed recognizes this and announced yesterday that it was beginning the end of Quantitative Easing, its tool used to boost a struggling economy.
So listen up: “The Emperor has no clothes!” There simply aren’t enough homes to sell for there to be increasing year over year sales figures and until that changes expect the lower-sales-numbers trend to continue; rents and prices to rise and builders to ramp up construction. Which by the way improves the employment picture more than any other component in our GDP and its ripple, affects the health of the entire economy. This in turn does what? Increases the demand for housing. Can you say housing and employment boom? I can.