A middled aged, banker who made money lending money to his nearly bankrupt cronies condemned my report when I said there was a "glut" of housing on the market. "Glut is an insulting word, it suggests gluttony." Which I thought to myself, "Well, that's exactly what's been going on, hasn't it????"
Regardless, I changed the word to "oversupply" but that still doesn't change the fact that the best word in the entire English language to describe the situation was indeed "glut." There was a 12 month supply of housing for the particular area we were looking at and it was the four letter word known as "glut."
And though I have no direct experience in home building, with such over supply and low housing prices it seemed to me that home builders would quit producing homes altogether. That new housing starts would drop to zero, allowing the market to catch up and eat through this excess inventory. Alas, this has not seemed to happen;
For while housing starts have plummeted, they're still producing them at a near historic average. And what I don't get is how home builders can't look at this and realize that are now facing a commodity market. And that if they continue to produce more homes for an already gluttonous market, it will depress their prices further. Therefore home builders as a whole are not much different than OPEC in the late 90's where the price of a gallon of gas was 85 cents. The price of their good is at a historic low and if they were smart, they'd cut off the supply.
Seriously, the best thing for home builders would be to take a year long vacation. You can work 60 hours a week, but the market price for your end product will be so low, that if you just wait a year or two, you could work 40 hours and make the same amount of money in just two years. Why work? Do America and all of the home owners a big huge favor and go on vacation.
Of course, I'm assuming home builders have a basic grasp of economics. And given the ruinous oversupply (read "glut") of homes they produced with not one of them, NOT ONE, conducting an absorption study, I am foolish to think they'd drive housing starts to my recommended red line.
7 comments:
The X-axis of the chart says "thousands of units", so it's an absolute measure. But the American population has gone up at least 50% since the 1960s. Shouldn't the chart be adjusted for population growth?
Of course I know that you have presented us convincing data in the last months, showing that the housing market is still on its way to the bottom. But then I ask, why hasn't the overall demand for housing gone up in the US in the last decades?
Yeah, i noticed that too, so you'd think it would be growing exponentially, but it hasn't. I think it operates at the marginal increase in demand for housing, so while the population has grown, housing has been made for it over time and thus, per year, there are only X thousand new homes in demand.
Don't the home builders build new houses after a certain cutomer put money down to build the house? or do they mass produce little house and hope someone will buy them?
While the market price level would rise from reduced supply, the revenue of the builders who reduce their production would drop. So they lose.
The maximizing strategy is to let the other suppliers cut their production while you enjoy the resulting price increases on your production.
Welcome Back Ro!
Both, but more recently I've seen about 75% being built and then hope they sell and 25% requiring a down payment.
Also, a lot of them will "pre-sell" homes which means somebody signed a purchase agreement that is effectively worthless because they can bail out on the purchase of the home.
Zephyr,
Exactly, it would be the prisoner's dilema, which is why they'd have to form a cartel.
Right now, I see these idiots still producing more. It's gotten so bad that since they can't sell any of their EXISTING houses, they pitch ideas to banks for new developments, taking the proceed from that loan to pay off the contractors from the previous development.
Well apparently you're not the only one calling it a "glut"... http://money.cnn.com/2007/08/10/real_estate/home_glut_worsens/index.htm
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