Press Reports Housing Starts Are Down…No Kidding!

Westcoe Realtors, Riverside California…The local Press Enterprise reported yesterday that on a nationwide level, housing starts were below projections…and this news seemed to startle some on Wall Street.  For those of us in this business who work in the sales trenches on a daily basis, our only response was surprise that anyone in the world could be surprised that housing starts are down.  Unless you have been dwelling on another planet unaffected by the economic issues of the past couple of years, reduced housing starts are a “no-brainer”…and here’s why.

Understand that builders are hampered by such a long time frame between when they purchase land and when they actually have a product to sell (permits, environmental reports, plans, city regulations, etc) that unless they have a really good crystal ball, they are very hesitant to get involved unless they know the market will be good for selling when they are ready.  Holding on to vacant land until the market recovers is how one becomes an “ex-builder” in a hurry, so they want to get in and get out as quickly as they can….anywhere from 12-24 months.  So, until anyone can tell a builder what the market will be like in 12-24 months, most will simply pass and wait…which means once the market actually does get better, the builders will be about a year behind.  Hence, building starts are down, and will remain down until this market becomes stronger…or at least predictable.

Next, there is also the issue of pricing.  Right now, in the Inland Empire area, prices have fallen so much that it would be almost impossible for a new home builder to sell his finished product and break even, much less make a profit.  In fact, one large builder said that land in our area has a negative value…meaning that even if you gave him the land for free, he could not build a home and make a reasonable profit (let’s say around 10%).  In essence, it would cost him more in building and labor costs than he could make by selling the home…and last time I checked, no builder is going to take all the risk to lose money.  In essence, unless the land owner is going to pay the builder to take the land off his hands, the builder will simply wait until housing prices rise enough to make a profit.

All this means is that housing starts will remain down until housing prices start to rise again…and who knows exactly when that will happen.  Almost all of the new homes being sold now were already in the process when the real estate market began its swoon, and therefore the builders had no choice but to forge ahead and finish what they had started.  They were damned if they stopped, and damned if they continued, but continuing was the better of two evils.  However, that does not mean they will volunteer for this path again…which implies that housing starts will continue to decline until there is hope that pricing will rise again…and even then, unless a builder has taken a huge gamble and tried to “predict and jump the market”, new homes will be 12-24 months behind the rising price market.

Take care, have a good weekend, and let us know if there is any issues you would like to see addressed in our blog.