All across America this morning, people will be grabbing their morning paper (online most likely) and reading an article that was circulated through the Associated Press about the new home construction industry. As a matter of fact, the article features a picture of a home being built in Tallahassee (and that is how this feed caught my attention).
Unfortunately, the article is grossly misleading. The authors of this article apparently did not consider "supply and demand" in real estate to be a factor that home builders should consider when deciding what to do.
In the real estate equation, the supply side is filled by:
- New home builders building homes
- Existing home owners selling their home
- Banks and asset managers liquidating their inventory
On the other side of the real estate equation, the demand side, is filled by the growing need for new homes from:
- Home buyers
- Home renters (this is also where we would see home investors)
Glut Of Homes Force Smart Home Builders To Wait
The fact is, there is a glut of homes on the market that is forcing wise home builders to wait for the real estate market to need more houses. The Associated Press article leads us to believe that this is a "shocking new development."
Construction of homes unexpectedly plunged last month to its lowest point since April, the Commerce Department said Wednesday. The weak figures show that builders still lack confidence that buyers can soak up the glut of unsold homes already on the market — a supply magnified by a record number of home foreclosures.
The real estate market's glut of homes is not a big surprise. All a home builder has to do is track the inventory of homes on the market and then make a decision on where the entry point will be for his (or her) construction company.
So, how and when does a home builder choose the entry point to start building? Well, first of all, the answer should be based upon real market information, not the Associated Press' news release. Information needs to come from each location that the builder is considering. For example, if we look at the relative supply of homes for sale in Tallahassee, we get the following information:
What this shows me is that there might exist an opportunity for a home builder. With inventory levels down near market equilibrium in the $150L-$200K price range (in Northeast Tallahassee), I would look to see if a construction company could build a home in this price range that would be competitive with what else is available on the market. I would also have to take into account all the other homes in this price in the other sections of the Tallahassee Real Estate Market.
So, if a builder could buy a lot and build a home that features similar amenities as what is currently available, this might be an opportunity. But the builder would also need to factor in the Shadow Inventory of homes that we have addressed in the past. Historically, home builders only had to compete with other home builders, but the asset management teams and banks with REO properties are soon going to be the largest supplier of homes on the market.
Weakness In Housing Starts Is Beneficial
While our economy would love to see the jobs that a re-energized new home construction market would bring, it would unfortunately kill any chance of seeing a housing market recovery in the next ten years. We need to cool our jets and clear out all the existing (and soon to be emerging) inventory of existing homes.
The market was over-built from 2004 through 2006, and it will take some time to consume the levels required to bring home builders back into prosperous times. The sad thing is ... home builders know this. It is not newsworthy if you are paying attention and the fact that new home permits are down should not affect the broader markets. But according to the Associated Press, th
On Wall Street, stocks edged down after the unexpected drop in home construction and disappointing forecasts from technology companies. The modest drop came a day after major stock indicators closed at 13-month highs, including the Dow Jones industrial average, which has risen nine of the past 10 days.
None of these "disappointments" should be surprising, as we consider future drops to be expected in the Tallahassee housing market. Our new home sales versus new home permits graph tells the tale.
The only surprising news story will be if we see a rush of new home construction in the next year. Home builders are tightening their belts and looking at ways to stay afloat until we can get our supply levels back under control.
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Joe Manausa is a real estate blogger, a real estate investor and the Broker-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.