February 20th, 2014 3:35 PM by Nick Rapplean
The topic today is new-home construction. The number of new home starts fell again in January--this time by 16%--while new building permits fell by 5.4%. Why the big disparity? Most likely because the number of permits taken out is less affected by how the weather is today than are the actual building of homes.
We all had a chance to look at weather conditions in the east and Midwest. Imagine being a carpenter who had an extremely cold and wet day of home building ahead of him if he went to work. But, most builders called in cold, and the construction of new homes slipped and skidded, with 16% fewer new homes in the initial phases of construction as a result.
Every month, the National Association of Home Builders surveys a broad group of builders to find out 1) how business is and 2) how the future looks at this point. You can imagine builders opening the shades on their windows and finding that the future of their business looks very poor, indeed. Potential home buyers did the same thing, staying at home in front of their TV sets rather than trying to drive down the snowy streets of the cities. The NAHB Home Market Index, gauging how good the market looks, plunged from 61 in December to 51 in January.
Notice that the number is still higher than 50, and so it still represents an expending market for new homes, but just barely. The future sales category fell 6 points, landing at a sturdy 54. All was not buried in the snow.
But there are many ways of reading these numbers. We can try to pin the slowness of the real estate market entirely on weather conditions--and it’s certainly true that weather problems were pervasive throughout the new home market. But, they don't explain everything. The unfortunate fact is that the new home market has been, for the most part, a non-starter in this recovery. Yes, we have had a few brief, strong spikes in new home sales and starts, but they have not held up. Look away and they're gone.
Why? My guess--and its only a guess--is that most builders have never yet overcome their wariness, having lost bushel baskets of money in the last slowdown. As with any product, builders need to figure out what will sell successfully (rather than sit expensively on the shelf.)
They have sponsored endless studies about what potential buyers want today, how important so-called green building and fuel-efficient features are to today's buyers, and just what features and trends are fairly certain to sell the homes they build. Though they have had good responses to energy-efficiency and other features, nothing is breaking down the doors of the homes they offer for sale.
The effects of the weather will pass, of course. Whether we emerge into a truly strong market, though, remains to be seen. It will be fascinating to watch because the guy who finds the formula for a new home that grabs people's attention and check book will lead the way for all of us, showing what the new trends will look like, and helping to reignite homebuilding and the fortunes of those who do it right.