Forecasts, With a Grain of Salt

In business, forecasting is important and, in home building, a must

January 7, 2019
Building industry forecast_image of bar chart with magnifying glass_Pixabay

There’s been a lot of talk lately about a slowdown in housing, even from builders whose companies continue to do well. Up until a few months ago, it appeared to be just that, talk, but housing data show that home building’s numbers seem to be ticking down. 

In December, Toll Brothers CEO Doug Yearley appeared, in part, to blame the media for the slowdown, and while there is good reason to believe a spate of news reports on a topic can create a shift in thinking on how things are going—as an example, one need only look at what happened to home builder stocks after Yearley’s remarks—there are also real signs of a modest decline.

Census Bureau data for November showed starts down by 3.6 percent year-over-year and permits lower than 2017 by 0.4 percent. Overall, starts increased in November, but that was due to a surge in multifamily construction. Single-family starts dropped almost 13 percent below this time last year. New-home sales numbers for October (the latest available at press time) were lower by a total of 12 percent year over year, even as the median sales price decreased, and sales of new homes have declined for 11 straight months. Comparing the current numbers with a previous drop five years ago, Yearley, in Toll’s most recent quarterly report, said, “We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum.”

That event, known as a taper tantrum, sometimes occurs when the Federal Reserve announces it will be reducing the amount of money going into the economy, lessening the value of the dollar. In 2013, rates leapt up when Fed chairman Ben Bernanke announced the scaling down of the federal government’s bond purchasing program, and home sales suffered. Mortgage rates recovered fairly quickly, however, as did the housing market. 

Will we see that happen again in this case? Probably not. As National Association of Realtors chief economist Lawrence Yun put it, “this time, interest rates are not going down.” He followed that by adding, “In fact, they are probably going to increase even further.”

Zillow, in its 2019 forecast, predicts that rising interest rates will affect almost everyone. How? By compounding ever-increasing home prices, making new homes even more unaffordable, which will then put pressure on the number of rental units available, which will cause rents to go up. In addition, it may make current homeowners think twice about moving up into a new home with higher interest rates than the one they have now.

Those of us who have been around for a while take the prospect of fear of interest rates in the 5 percent range with a grain of salt, but for Millennials, who now make up the lion’s share of homebuyers, higher rates will pose, at least, a “psychological” barrier, says Barclays analyst Matthew Bouley in the Financial Times. Bouley remains “cautiously optimistic” about home sales in the spring, but also says “it’s likely homebuilders’ pricing power will be undermined. They will have to offer incentives to spur demand . . . [and] all these things are going to pressure margins.” 

National housing forecasts are often contradictory and many builders give them too much or too little credence. But, when running a business, forecasting is important and, in home building, a must. A builder has to, for example, be able to gauge how much land to have in order to build the number of houses it expects to sell. Not having enough land could be the missed opportunity that does a business in, and we know what happens when companies are left holding the bag (of land) when a recession hits. It’s a good idea to listen to what economists are saying, but do it in conjunction with your local intel. No one knows better than you what’s going on in your market, on your website, and in your models.

editorial director

Denise Dersin, editorial director of Professional Builder, Custom Builder, PRODUCTS, NKBA Innovation+Inspiration, and co-editor of Multifamily Design+Construction, has been in publishing as an editor and writer for 30 years and has worked in the housing industry for much of that time.

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