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Thursday, March 28, 2024

Economic Denial From Builders: The Sequel

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


On this date last year I shared a chart with CNBC’s Diana Olick, which indicated how far removed home builders were from economic reality. Titled appropriately “Economic Denial From Home Builders”. The chart and article can be read here:

http://loganmohtashami.com/2013/09/17/economic-denial-from-home-builders/

Now, one year later, the builders have raised confidence to yet a higher and ever more disconnected from reality level, by reporting confidence levels equal to the number recorded back in November of 2005. At that time, numbers of total starts were quite high compared to today’s numbers. Also, it is notable that November 2005 was in the middle of the housing bubble that being formed.

Below a chart, from Diana Olick on CNBC, illustrates the current disconnect. As can be seen, we are witnessing the summer sequel of economic denial by home builders.

An irony to this is that 2014 has been the most disappointing year from new home sales and starts that I can remember since I began tracking housing data. A year when 1) sales growth was expected to rise 20% or more and 2) starts were expected to show growth in single family starts is puttering to a point that we are now questioning if sales and single family starts are even going to be positive year over year. As for starts, those are led by multifamily expansion, which has been booming in this cycle for good reasons, but not reasons which bode well for single family housing.

One reason for these trends, I believe, is that new home buyers are more interested in the fresh existing inventory crop that is coming back to the market than in buying a new home. Why would this be?

Existing inventory provides two advantages to a buyer:

  1. Much cheaper
  2. Geographical advantage in any given city

At the beginning of the year, my conservative outlook was for 8% sales growth year over year due to the “low bar we had to beat” factor and the fact that the new home buyers are coming from more affluent class of Americans. But now, even 8% is looking doubtful.

As always housing is soft because we have both a DTI ( Debt to Income) and LTI (Liability to Income) problem. Here’s another great chart from Professor Antony Sanders:

http://confoundedinterest.wordpress.com/2014/09/17/got-rent-homebuilder-confidence-rises-to-9-year-high-despite-stagnant-wages-and-declining-labor-force-participation/


Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com.

Visit his LoganMohtashami.com blog.

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