Rodney Johnson | Wednesday, January 9, 2013 >>
The signs of a housing recovery are everywhere. Builders are posting profits as new home construction rises. Existing home sales are moving up, the Case/Shiller 20-City Home Price Index is up, and employment in the sector is stabilizing (even increasing in some areas).
This is not just good news, it is fabulous news!
Housing is the magic potion that can cure an economy in recession. This sector has a tremendous effect on the economy due to the size of the transactions involved as well as the manpower and material required.
Building more homes creates an explosion of economic activity that all but ensures prosperity, which is why so many people are salivating over the thought of a housing rebound.
The problem is, just as Harry discussed in yesterday’s issue of Survive & Prosper (if you missed it you can read it here), we won’t get that expected rebound.
Instead, the two main forces that drive the home building market will fall short of expectations, turning from motors into anchors that hold down the sector. This means that people who are investing for a strong recovery in this area are setting themselves up for a loss.
So why are we so convinced current market trends are NOT the beginnings of the much hoped for rebound to peak prices?
Three words… New. Home. Construction.
As a point of reference, we use new home completions as a measurement, not new home sales. New home sales include only speculative homes built by a builder and homes a builder sells that comprise the home and land together (like what you’d find in a newly developed neighborhood where a consumer chooses a lot and a floor plan and then the construction begins).
The new home sales measurement leaves out homes built on lots already owned by a consumer and homes built to be rentals.
Because our goal is to measure the overall economic effect of home building in terms of employment income, taxes, etc., we include these other types of homes in our analysis.
And here’s what we see…
New Home Completions from 1968 to Third Quarter 2012
Now, building a new home is a large undertaking. It takes lots of money, thousands of man-hours and literally tons of materials and equipment. Then there are the permits, the variances, the taxes and the inspections.
This is just to get the thing built. The home has to be decorated with both fixtures and furnishings as well.
So when the number of new homes completed drops off a cliff – like the 75% drop we saw after 2007 – just think of the huge reduction in economic activity… the credit not extended, the jobs not needed, the taxes not paid, the furnishings not required.
Yes, homes completed have moved higher, from a low of 523,000 units to the September 2012 figure of 772,000 units. This is a high-percentage move of almost 50%. But from the 2.2 million units completed in 2006/7, on an absolute basis, today’s numbers are still small.
The reality is, there will be no rebound to the peak of the housing bubble. If that’s what you’re hoping for, it’s time to reset your expectations.
Ahead of the Curve with Adam O’Dell
The Housing Trend
In the world of technical analysis there are many different ways to define a trend. Of them all, I tend to rely on one of the simplest – the “highs and lows” method.