Home Construction Surge – Continuing Forward

Story first appeared on USA Today

Many homebuilders were forced to drastically scale back construction on new homes during the aftermath of the housing bust, to reduce the risk of being left with multiple newly build but as of yet unsold properties.

But an improving housing market has homebuilders feeling more confident about sales, and that's likely to kick the pace of new construction into a higher gear this year.

The Commerce Department said Thursday that builders broke ground on houses and apartments last month at a seasonally adjusted annual rate of 954,000. That's 12.1% higher than November's annual rate. And it is nearly double the recession low reached in April 2009.

Construction increased last month for both single-family homes and apartments. And the pace in which builders requested permits to start more homes ticked up to a 4½ year high.

For the year, builders started work on 780,000 homes. That's still roughly half of the annual number of starts consistent with healthier markets. But it is an increase of 28.1% from 2011. And it is the most since 2008 — shortly after the housing market began to collapse in late 2006 and 2007.

Steady hiring, record-low mortgage rates and a tight supply of new and previously occupied homes available for sale have helped boost sales and prices in most markets. That has persuaded builders to start more homes, which adds to economic growth and hiring.

David Williams, a homebuilding analyst with Williams Financial Group, says builders are very closely tied to what's happening in the housing market and they're going to build homes to meet demand, but not go overboard.

"I don't think, at this point, that they're going to overbuild," Williams said, noting that homebuilders are still holding back on building too many spec homes, or properties built before they're sold.

Having some spec homes can help sales, especially when a buyer isn't willing to wait several months for their home to be built. Builders tend to put up more of those homes heading into the spring home-selling season that traditionally begins next month.

Larry Webb, CEO of homebuilder The New Home Co., in Aliso Viejo, Calif., says he is building homes at a faster pace than a year ago, but he sticks to a sell-first, build-second approach.

Overall, Webb is selling and building a minimum of four homes a month, at least double the pace of sales and construction two years ago.

Webb believes the stepped-up pace of home construction will continue this year. But he's holding on to the sell-first approach.

"Based on what we've gone through in the last recession and the way we do business, we think we should primarily build after we sell homes," he said. "We only build after we sell."

The company, which builds homes in California, has 10 open communities and plans to open another 14 this year.

"Normally there's a big drop off between Thanksgiving and Christmas," Webb said. "We saw very solid traffic and we're anticipating a very good first quarter."

Thursday's positive housing report, along with a steep decline in unemployment benefit applications, contributed to a strong day on Wall Street. The Standard & Poor's 500 closed at a five-year high.

"There is no denying that the housing market recovery is solidifying, and we expect construction activity to ramp up to the 1 million annualized threshold by the end of this year," said Michael Dolega, an economist with TD Economics, in a note to clients.

Dolega said the gains in home building helped boost construction hiring in December by 30,000 jobs — the most in 15 months. He predicts the construction industry could add half a million jobs in 2013.

In December, the pace of single-family home construction, which makes up two-thirds of the market, increased 8 percent. While that's well below healthy levels, single-family housing starts are now 75 percent higher than the recession low reached in March 2009.

Apartment construction, which is more volatile, surged 23 percent last month. It is now back to pre-recession levels.

Applications for building permits, a sign of future construction, inched up to a rate of 903,000 — the highest level since July 2008.

"The strong rise in single-family starts is a clear indication of builder confidence in the sales outlook," said Pierre Ellis, an economist at Decision Economics, in a note to clients.

Confidence among homebuilders held steady in January at the highest level in nearly seven years. But builders are feeling slightly less optimistic about their prospects for sales over the next six months, according to a survey released Wednesday.

In November, sales of previously occupied homes rose to their highest level in three years, while new-home sales reached a 2 1/2-year high.

Those factors have helped make homebuilders more confident and spurred new home construction. But homebuilders' are still warily watching the current standoff in Washington between President Obama and Congress over several approaching budget deadlines, including the need to boost the nation's $16.4 trillion borrowing limit.

Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy.   For each home built, there is approximately $90,000 in tax revenue and an average creation of three jobs lasting for at least a year, data from the homebuilder’s association shows.

Reorganized Building Companies Now Realize A Competitive Advantage

Several home buyers have already signed contracts for homes still in development in a new community in Fort Myers, FL. Although the new lots have yet to open, the lure for early investing comes from attractive prices starting at about $140,000.

The company motivating such early sales at low entry level prices is WCI Communities Inc. They have earned a competitive advantage in the housing market after a promising bankruptcy court outcome.

WCI's 1,150 home community project is the first new sales and construction project since the company came out of Chapter 11 litigation last year.

While under court protection, the company cut its costs and overhead by almost 75%. Adding to the savings, WCI has been able to write down the values of its properties to the current market - a major influence to the housing market crisis.

While vast majority of home builders have met their fate from the collapse of the housing market, some builders now fully revitalized from bankruptcy are realizing less debt, top picks for land, and a better approach to business. Like the case for WCI, these reorganized companies are likely to be owned by their creditors.

Without the previous pressure from shareholders to maintain their stock value and break even with expenses, these builders are granted significant write-downs on their land value, which was commonly the case during the industry's opulent past

Overall, that enables the competitively competent to drive home prices low enough to attract buyers while still earning a profit.

Publicly traded rivals of companies like WCI are struggling to keep pace with the new competition. Unlike their revived peers, these companies who have avoided bankruptcy based on solid business are finding themselves in a tough situation.

On the other hand, some experts in the industry believe that lack of access to public markets and tightened credit will keep the bankruptcy veterans in check.

The CEO of a Cleveland home remodeling company claims his underlying concern is the lack of recovery in the housing market.

"Even for companies in decent shape, the business for new construction, room additions, and overall home remodeling in Cleveland Ohio is inconsistent," said the CEO. An inflated surplus of low priced resale and foreclosed homes makes it a challenge for many home builders to reel in consumers.

However, the market for homes is cyclical. "This housing slump won't last for forever," says a bankruptcy attorney at a Pennsylvania law firm.

A profitable turn of the cycle is what Orleans Homebuilders Inc. is relying on. Initially, the company intended to sell most of its properties to a rival. Instead Orleans chose to pursue reorganization.

The mission for Orleans's is to succumb from bankruptcy later in year, and as a result, slash its debt in half. The company seeks to improve organizational efficiency and reduce expenses by cutting back on the variations of homes it offers.

Housing experts claim the rejuvenated Orleans could sell off less-prime properties. Acquiring buyers shouldn't be an issue because many builders are offering bargain-priced properties as they ready themselves for revival in the market.

Other companies are finding a niche to overcome a tough housing market. One building company that specializes in bathroom and kitchen remodeling in Cleveland is keeping pace with an unpredictable market.

"We promote more affordable and realistic services for the penny pinchers trying to improve their living standards." said the company's owner. "You'd be surprised by the amount of homeowners who are electing to redesign, rather than sell and re-purchase. We have experienced a high volume of sales simply through our Cleveland Ohio Home Remodeling division." He adds.

Meanwhile, several home builders are taking the approach of new construction sales for higher margins.

Florida based WCI Communities came out of Chapter 11 last fall with debt of nearly $450 million. The company sold off land that didn't align with its new business plan and kept roughly 9,000 acres for future construction.

The cost of land for the company now averages 10% of the price tag for one of its properties, down from about 20% at the market's peak.

In addition, WCI reduced its labor force and the variety of options for homes it offers. Overall corporate costs per year dropped from over $150 million to about $40 million.

Production Probably Driving U.S. Recovery as Home Construction Languishes‏

Bloomberg

 

Builders in the U.S. probably started fewer homes in September, while production rose for a seventh month, evidence of uneven growth, economists said before reports this week.

Work began on 580,000 houses at an annual rate, down 3 percent from August, according to the median estimate of 56 economists surveyed by Bloomberg News before Commerce Department figures on Oct. 19. A Federal Reserve report tomorrow is forecast to show output at the nation’s factories, mines and utilities increased 0.2 percent for a second month.

Mounting foreclosures, home sales near record lows and a lack of jobs will make it difficult for housing to recover from the worst recession since the 1930s. Manufacturers, responding to rising business investment and stronger economies overseas, remain a bright spot for the recovery, which Fed officials have said may require an additional boost from easier policy.

“Housing has remained a drag in this recovery and the growth has really come from manufacturing,” said Michelle Meyer, a senior U.S. economist at BofA Merrill Lynch Global Research in New York. “Key to a sustained recovery is job creation and that’s been insufficient. Given the backdrop of unemployment and continued weakness in the housing market, we believe the Fed will ease policy further.”

Fed Chairman Ben S. Bernanke last week said more action may be warranted because inflation is too low and unemployment is too high. “There would appear -- all else being equal -- to be a case for further action,” Bernanke said in remarks given at a Boston Fed conference.

Shares Rally

Speculation that the Fed may purchase bonds has spurred a rally in stocks and pushed down Treasury yields to record lows. The Standard & Poor’s 500 Index has gained 12 percent since the end of August.

Housing’s inability to rebound is one reason the economic recovery is not strengthening. Housing permits, a sign of future construction, probably rose last month, according to the median estimate, a sign the real estate market has at least stabilized.

After reaching a record low in March 2009, permits climbed through April this year, the deadline to sign purchase contracts and become eligible for a government tax credit. Since the end of the incentive worth as much as $8,000, sales and construction have again weakened.

Foreclosure Investigations

With foreclosures reaching a record in September, U.S. regulators last week said they were investigating whether employees of lenders including Ally Financial Inc., JPMorgan Chase & Co. and Bank of America Corp. had falsified documents used in the proceedings. Ally Financial and Bank of America are among banks that have suspended some foreclosures or evictions to review paperwork, which may further delay a recovery in housing.

Carmakers are among manufacturers seeing a pickup in the U.S. Auto sales increased in September, reaching a seasonally adjusted 11.8 million pace, the fastest since the federal government’s “cash for clunkers” incentive program last year.

Another report from the Philadelphia Fed on Oct. 21 will show the region’s factories expanded this month after contracting in each of the prior two months, according to economists surveyed.

Companies such as Caterpillar Inc. and General Motors Co. are benefiting from expanding markets in China and Brazil and ongoing capital investment in the U.S. even as unemployment restrains consumer spending.

Rising Shipments

CSX Corp. Chief Executive Officer Michael Ward said Oct. 13 increased U.S. auto production is helping drive a gradual economic recovery. Total shipping volumes at the second-largest publicly traded U.S. railroad rose 10 percent and sales increased 16 percent.

Except for housing, “we’re seeing things continue their gradual recovery,” Ward said in a telephone interview.

The Conference Board’s index of leading economic indicators, due Oct. 21, rose 0.3 percent in September for a second month, according to economists surveyed. The gain signals the economy will keep expanding in the next three to six months.

Stronger-than-forecast retail sales and inventory numbers prompted economists at Credit Suisse last week to raise their forecast for third-quarter economic growth to 2.6 percent from 2 percent before the report. They lowered their fourth quarter growth forecast to 1.6 percent from a prior 2.2 percent estimate, partly due to less homebuilding.

The economy expanded at a 1.7 percent annual pace in the second quarter after a 3.7 percent rate the previous three months.

With the approaching Nov. 2 congressional elections, Americans continue to have a dimmer view of Congress and President Barack Obama’s handling of the economy. Obama’s job approval over a three-day period that ended Oct. 12 was 45 percent, compared with 52 percent at the same time last year, according to a poll from Princeton, New Jersey-based Gallup.

Home Construction Drops 6.2%

A steep decline in new-home construction last month to a 17-year low suggests that the hoped-for stabilization of the housing market -- key to boosting the U.S. economy -- is still a ways off.

Construction of new homes dropped by 6.2% in August to a seasonally adjusted 895,000 annual rate, the Commerce Department said. Construction of multifamily units fell sharply. Single-family home construction fell by a smaller amount but remained at very low levels.

Newly issued building permits also declined in August, suggesting that construction could continue to drop in coming months.

Economists have been watching for signs that home construction, which has been a significant drag on U.S. economic growth, is beginning to stabilize. But the latest data, mixed with the results of construction bonds and combined with gloomy sentiment among home builders and worsening problems in credit markets, suggest that conditions in the housing industry could worsen further.

"A credit crunch is materializing with significant force that completely invalidates the notion that the housing slump is 'bottoming,'" said Roger Kubarych, chief U.S. economist at UniCredit, a markets and investment bank.

The government also reported that the U.S. deficit on trade, income and other payments widened this spring as the price of imported oil surged.

The current-account deficit increased to $183.1 billion in the second quarter, compared with a revised $175.6 billion in the first quarter. Nearly half of the increase came from a rise in the cost of petroleum and related products. With oil prices falling in recent months, the deficit is expected to shrink.

Strong export growth in the second quarter is also expected to slow. Exports of goods rose by $19.5 billion to $337.3 billion in the April-June quarter, helped by a weak dollar and strong foreign demand for U.S. goods. The trade balance provided a huge boost to U.S. growth in the second quarter, so slowing exports could hurt growth in the months ahead.

The trade report also showed that foreigners bought $17.7 billion in U.S. corporate and agency bonds in the second quarter, compared with $28.7 billion in the first quarter.

By: Kelly Evans and Jeff Bater
Wall Street Journal; September 18, 2008