The recovery in the U.S. housing market has gotten a lot of attention lately. The government reported that January new home sales surged to an annualized rate of 437,000 units, which is up from roughly 300,000 at the bottom of the market.
Interestingly, this move was not mirrored by the sale of existing homes.
Sure, there has been an upswing, but nothing like what has occurred in new homes. So I began wondering why this might be the case…
To make this divergence more interesting, new homes now cost 37% more than existing homes, which is the largest gap since this measurement began back in 1968.
If new homes cost a lot more, why are new home sales picking up faster, particularly in an economy marked by flat and falling wages?
I didn’t have to look very hard to find the answer…
New home builders are now drug dealers.
It is not that every new home comes with a mirror full of cocaine or a bale of marijuana in the basement. No, for my purposes the drug is not a substance ingested to create an altered mental state. Instead, it is an obligation assumed to create an altered physical state.
The name of the drug is debt… and apparently we are still addicted.
We want our homes and we don’t care what cost we inflict on ourselves, or our fellow citizens, to get it.
People want homes but cannot afford them. They have declared bankruptcy in the past few years, or have other “blemishes” on their credit reports. They have been turned down by lenders. The situation is difficult, and more than just a bit of a pain to deal with.
Then they walk through new home models. Home builders talk about how they can smooth out the process of getting a loan, easing the burden of the buyer. This all sounds great, so people buy new homes.
But as usual, there’s more to the story.
Home builders are in the business of building and selling homes. The pool of qualified home buyers has shrunk dramatically in the last six years because lending standards have returned to some level of reality and consumers are in a worse financial position. These two things are at odds, so home builders took the obvious path…
They began “assisting” people with mortgage qualification like never before.
Home buyers are put through builder-sponsored credit counseling in order to help repair their credit reports. Builders have associated mortgage companies that help buyers apply for FHA- or VA-backed mortgages, which require little in the way of down payment. Want to use a monetary gift to make a down payment? I bet a home builder can show you how!
Amazingly, all of this is leading people to purchase new homes instead of existing homes. Along the way, buyers are buying more home than they otherwise would have, at the highest price in history when compared to existing home stock.
So home builders are relying on sales to marginal buyers who have trouble qualifying for loans in order to boost sales. Along the way, the home builders are making great use of government-guaranteed mortgage programs, which puts the burden of default on taxpayers and requires little down payment on the part of the borrowers.
This is the good news everyone is so giddy about?!
Did we learn nothing from the housing meltdown?!
Call me crazy but this does not sound like the beginning of a flourishing market to me. Instead, it sounds like a story with a predictably bad ending. And it’s one more reason you should avoid home builders at all costs.
Ahead of the Curve with Adam O’Dell
The run up in homebuilder stocks is nothing short of spectacular… and suspicious.