Volume 48, Issue 6 - November/December 2009
IN THE NEWS
by Jeff Johnson, president, Western Pacific Building Materials, and immediate past president of the Association of Millwork Distributors. Mr. Johnsons opinions are solely his own and do not necessarily reflect those of this magazine.
Light on the Housing Horizons
Last November my head was spinning. Sales were dropping, permits had fallen off the charts, the banks were in crisis and the stock market had endured a major correction. I really could not get a feel for where we were going as a company or industry.
Today, there are some positive signs pointing to a stronger 2010. Sales have stabilized, permits are trending upward, home sales have increased resulting in a decrease in housing inventory and I understand the rules of the new business world.
"We are clearly eating
away at the housing inventory hangover created by the overbuilding of 2005 to
2007. It is estimated that a 6-month supply of homes is an equilibrium state,
so we are getting close."
Stats and Permits
There is a significant change in new home permits for 2008 versus 2009. In the western states, permits for the beginning of the fourth quarter 2008 were running an average of 55 houses per week and the trend was down. In the fourth quarter of this year, we are seeing an average permit level of 64 houses per week and the trend is increasing. This is an increase of 14 percent! Historically, we see a decrease in housing permits going into the winter months.
I have been reading that the estimated national housing starts for 2009 will be 570,000 dwellings. This number includes single and multi-family structures. Single-family home starts are projected around 357,000 houses this year. From a historic standpoint, we have seen only two time periods with lower numbers: World War II and the Great Depression. This would indicate we are near or at the bottom of housing starts.
Projected Household Growth
The current annual birth rate in the United States is 4.5 million new babies each year. This is where our future demand for new houses is generated. Historically, 25 percent of this new population will purchase new homes. This means we need to build 1.2 million houses per year to satisfy demand. You can see we currently are building about half of the demand required by our population growth. The demand is building and growing each day.
Looking ahead a few years, there is more positive news for future demand. Freshman college applications have been at all-time highs for the last five years. Applications are projected to peak this year. This would indicate there is another housing boom heading our way somewhere in the next ten years.
Home inventory levels are on the other side of the supply and demand equation. There is good news here. According to the National Association of Realtors, July existing home inventory levels were at 9.4 months. In August, home inventory levels fell to 8.5 months and September saw another declined to 7.8 months supply. We clearly are eating away at the housing inventory hangover created by the over building from 2005 to 2007. It is estimated that a 6-month supply of homes is an equilibrium state, so we are getting close.
Permit levels indicate that builders are seeing new potential for homes sales and are setting the groundwork for construction to begin in the spring of 2010. The largest percentage of housing permits we are seeing are starter homes. The move-up housing cycle has to start all over again. People have to start building equity in their homes before we will see significant sales movement on the upper end of the market.
Unemployment seems to run in the exact opposite direction from the new home construction market. Historically, when housing starts are at a peak, unemployment is at its lowest level. The opposite also is true. When housing starts are at low levels, unemployment is at is peak. Just before I wrote this, I heard that the government reported that unemployment climbed to 10.2 percent and most likely will edge slightly higher.
Commonsense would say it is close to the peak; therefore, housing is bouncing on the bottom. Interestingly, housing starts tend to increase as a result of demand and seem not to be affected by what is happening with unemployment.
Banks and Stocks
The banking climate is much different than a year ago. Then it seemed the business world had come to a stop as we waited for the banks to understand their balance sheets. This year, the banking climate has changed. Business loans are based on sales and strong balance sheets. Mortgages require a job, a credit score and jumbo loans are very expensive. Loans are out there, but you have to qualify, and this is not a bad trend for sustainable economic growth.
The stock markets have improved and this has created capital for new construction down payments and remodels to existing homes. Our remodeling business has seen significant increases and most are self-funded. The stock market tends to have a series of corrections but it is heading in the right direction.
The basic economic data indicates to me the demand for housing is starting to build and I feel the Spring will bring a slight increase in business. This is a 180-degree turn from this time last year. I now feel the bottom and understand the rules of the new business game. Set your ship for a stormy winter, but I see the sun starting to rise on the distant horizon.
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