‘The Accidental Economist’ with Jack Kern: Why Frozen New Home Sales are Good for Builders and the Apartment Industry.
- Feb 25, 2011
Albert Einstein is quoted as saying, “In the middle of every difficulty lies opportunity.” We are at a point in the economic cycle where it’s logical that new home sales would still be struggling. For a lot of reasons, I’m actually happy about this. To me, markets have to proceed in an orderly fashion and today’s news that new home sales are essentially at the same point they’ve been since the middle of last year is a good sign. Let’s go to the videotape:
The headline is that new home sales declined by about 12.5 percent to a 280,000 annual rate in January. Existing home sales were up about 2.5 percent during the same period, mostly likely due to incentives and low pricing on foreclosures. Now there is most certainly a seasonal component to this, but before the Congress and the lobbying from the National Association of Home Builders goes nuts over this, I hope some reasonableness factor becomes evident, and here’s why.
There are still a substantial number of homes in foreclosure and more on the way. The good news is that in 2007 the number of homes on the market in foreclosure probably hit around 72 percent of the total inventory, while now the number seems to be closer to 25 percent. Part of the reason is that more homes are being offered for sale by people who waited for their markets to improve, and the rest is due to judicial intervention (activist judges, political wrangling and tighter controls on courthouse processes) that caused the volume to slow down. Quite simply–and I don’t think anyone disagrees with this–we have to clear out the inventory of unsold, foreclosed homes before the rest of the markets can return to a more normal state.
Apartment owners are achieving significant gains in rents in many markets for the moment, and while that is going to be a somewhat short-lived phenomena, it will permit most properties to return to post-2008 rent levels by mid-year. Some may even see rent increases getting them closer to their previous 2009 rates. What isn’t happening for the most part is a huge flight to apartments from single-family foreclosures, even though some members on Capitol Hill seem to feel that’s the case. A recent call from one of the dumber members of the Federal Reserve calling for another round of housing stimulus will hopefully fail to materialize.
There are, in the parlance of land traders, an astounding number of low-priced builder lots in the home-building shadow market in most of the states where you’d expect to see huge gains in construction of new single residences. It would literally take just a few months for these previously approved parcels to start construction without the usual delays and entitlement issues and cause a flood of new units, which cannot compete in price with foreclosures and the decline in home values in most markets. The net effect, according to some staff at the NAHB, is to build much smaller, much less expensive starter homes, which would only add to the inventory glut. Thankfully that isn’t happening very much.
So why should builders be happy about this? Because the process is proceeding along in an orderly fashion, and once the balance of the single-family home market shows its inevitable correction, then builders will have free rein to start offering new, more innovative products to homebuyers at prices that make sense. By then capital markets will have returned to a more normal level and financing standards will be much more reasonable for new home purchasers. And apartment developers, now seeing the benefit of an emerging national economy and increases in rents, will once again probably lose the customary 18 percent of residents to new and existing home purchases.
I’m all for a balanced national housing policy, and with any luck at all, this time around rental alternatives, in both multi- and single-family will gain as much respect and attention with the administration as home ownership. It is nice that, at least for now, multifamily is the shining star in investment and management and doing everything right. Homebuilders will get their turn, and will hopefully remain patient, at least until apartment rents return to pre-recessionary levels.
Jack Kern is the managing director of Kern Investment Reseach, LLC, a consultancy specializing in multifamily research. He is also an avid forecaster and is in the process of completing his next round of employment and rental market forecasts for 2011 and 2012. If you’d like to be invited to the next comprehensive markets call, please drop him a note at firstname.lastname@example.org.