This morning a phrase popped into my head – “morning ablutions”. I do not believe that I have heard that phrase used in the past thirty or forty years; certainly it is not a common expression these days. But I was pleased that my mind was still functioning, even if in somewhat unpredictable ways.
It occurs to me that everyone would benefit from morning ablutions. If you are not familiar with that phrase which admittedly is somewhat antiquated, you now have an opportunity to expand your vocabulary through a simple Google search. And that brings us to the topic of this blog – necessary daily actions that prepare us to profitably do business in the homebuilding industry. In my opinion, one of the most important of those essential daily actions is reviewing and updating market studies.
In preparing my presentations for several SMCs, HBAs and Builder 20 Clubs later this year I have begun to examine the housing markets in which I will be speaking. In the process of assembling background data I pulled up a format that I have included in my market reports for the past several years and took a look at the base graph from a market in which I have been active and thought I would share this with you.
This housing market does not usually make the national publications. It is not one of the “chosen 20” that comprise the Case Shiller index, nor is it one in which many national builders have chosen to build. But it is, perhaps, indicative of many of the secondary tier housing markets around the country and representative of the challenges that homebuilders are facing today.
One of the several data trends that I regularly examine in housing markets is the ratios of population growth to permits and employment growth to permits. The optimal data source to determine housing demand is household growth but, except in census years, this data is not always readily available or reliable. Population growth provides a picture of “potential” household formations subject to underlying economic conditions and consumer psychology and confidence while employment growth (or loss) provides a forecast of those economic conditions as they impact consumer willingness to purchase.
In a typical primary housing market, household size now averages 2.25 persons while household formations typically require 1.40 jobs. Obviously those figures must be adjusted for local market conditions including the presence of military installations (non-civilian employment), attractiveness of the area for retirement or resort/second-home usage, and higher than typical incidence of removal of existing housing stock but they are a good starting point.
As you can see on this graph, the green line which represents actual population growth has only reached or exceeded this number in one of the past six five-year periods while employment growth has only reached or exceeded this number on one of the past four five-year periods. The obvious conclusion is that this market is overbuilt and has been overbuilding for many years. While the reality of underlying demand may be hidden in times of a “hot” market, as markets cool the real demand soon becomes apparent to everyone.
When starting in 2004 I attempted to caution several homebuildiersand developers in this market regarding excessive land inventories and speculative homes, as the future was readily apparent to me, I was told that their market was phenomenal and it looked to them as if it would never stop.
“Never” is apparently a much shorter time than these homebuilders and developers expected for this market peaked in number of sales in 2006 (and had actually peaked in absorption trending in 2005) and now sits well below the 2001 levels which existed at the beginning of the boom. Permit levels for new housing are 70% below the average of the past 10 years with 2011 running 25% below 2010 (unfortunately the previous lowest level on record).
Several homebuilders and two major developers in this marketplace are no longer in business because they failed to prepare themselves for the coming slowdown that was obviously on the horizon. On the other hand, even in a far more limited market, two homebuilders who did listen to the market are enjoying their most profitable years ever.
We don’t all have crystal balls but it appears to me that anyone can clearly see the future if they simply take the time to look at the data. So let’s take the daily actions that prepare us to profitably do business in the homebuilding industry including our morning ablutions. Of course, that’s just my opinion.
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