Pay Attention to Housing -- It Could Be Huge for Jobs

Pay close attention to what Hovnanian (NYSE: HOV  ) CEO Ara Hovnanian told CNBC this morning:

"We are undoubtedly well on the recovery route. It's not a question of are we beginning it. I'd say it began at the beginning of this year and that's not just for Hovnanian, that's for the entire industry," Hovnanian said, noting that net sales orders for the 10 public homebuilders have increased 30 percent year over year. ... "That means we're all going to start building, which means we're going to be hiring, and that will boost employment and help strengthen the economy overall."

This echoes something Warren Buffett said last year: "We will come back big time on employment when residential construction comes back. You will be surprised, in my view, how fast employment changes when that happens."

As I wrote last week, we're currently building close to a million homes a year below what is needed to keep up with likely household formation. Each new home generates between two and three news jobs. Add it up -- it could have a big impact on unemployment.

Other major homebuilders have been just as optimistic in recent conference calls. Here's Stuart Miller of Lennar  (NYSE: LEN  ) :

Simply put, the housing market is recovering. Not only are sales, margins, and backlogs improving, but the beginnings of a sense of visibility are coming back to underwriting land acquisitions and planning for the future. The homebuilding business is beginning to revert to normal, and that's positive for the U.S. economy in general, which is, in turn, good for a sustained recovery in the housing market.

And Jeff Mezger of KB Homes (NYSE: KBH  ) :

We're on offense and pursuing our growth targets. ... The housing market recovery is accelerating as inventory continues to decline and prices are now rising. 

And Larry Nicholson of Ryland (NYSE: RYL  ) :

We believe that many families who deferred the decision to purchase a home for several years are starting to move out of their rental units and look to buy a new home. In many markets, owning a home has a reduced cost when compared to renting. Given the passage of time, previous homeowners who had been kept out of the market due to credit issues are eligible for a mortgage again. These factors together with pent-up demand resulting from an unprecedented downturn in housing are driving a resurgence in the housing industry today.

And finally, Richard Dugas from Pulte (NYSE: PHM  ) :

With new home demand having accelerated quickly and having remained strong throughout the year, the number of markets feeling some degree of labor pressure is growing. In fact, almost all of our markets have now reached a point where labor pressures are being experienced to some degree. [Translation: It can't hire fast enough.]

This isn't just blind bluster. After stagnating for three years, housing starts (construction of new homes) have surged recently:

Source: Census Bureau.

Meanwhile, the supply of for-sale homes has declined sharply, now at the lowest level since 2005. Home vacancies are at the lowest level since 2004.

Last year, the House Budget Committee asked Ben Bernanke whether there was any historical precedent for an economic recovery without a strong housing market. "It's normal for housing and construction to be an important part of the recovery," he answered. No, in other words. Housing itself won't drive a strong recovery, but it's important enough that there hasn't been a strong economy without a strong housing market in modern history. Residential construction has historically made up about 2% of GDP. It's currently less than 1%. That's the neat thing about this recovery: No one's calling for a new boom per se. Just returning to historic averages would be a big leap forward.

What could go wrong? A new recession, which is likely if we go over the fiscal cliff, would set housing back. It's also possible that household formation patterns have shifted permanently, with fewer families being created as unemployed twentysomethings live with their parents. A quick housing rebound isn't guaranteed. But for the first time in six years, things are really, truly looking up. That's good news for the housing industry, and it's good news for the unemployed. 


Read/Post Comments (12) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2012, at 2:04 PM, Tomohawk52 wrote:

    "Given the passage of time, previous homeowners who had been kept out of the market due to credit issues are eligible for a mortgage again."

    Deadbeats can go out and spend, spend, spend! Yay!

    In my parents' day it was considered a stigma to have "credit issues". Now it just seems like a strategy.

  • Report this Comment On November 17, 2012, at 12:44 PM, snapperreef wrote:

    T...52,

    Aint it the truth!

    Amazing how quickly the term "subprime loans" has been forgotten. Maybe a quick way to make some big money fast would be to bundle up some of these loans into CDOs and get them rated AAA and sell them if no one has thought of it.

  • Report this Comment On November 17, 2012, at 1:10 PM, blairsp wrote:

    I keep hearing from Realtors about the second wave of foreclosures to be released in January. I don't have a clear picture of this but form what I understand banks sold property to hedge funds who now have been blocked from selling them except to investors by the U.S. Government. It seems release of such properties would result in a down turn in housing starts.

    Thoughts?

  • Report this Comment On November 17, 2012, at 3:26 PM, daliya wrote:

    These companies should be drummed out of business for building toxic plastic and particle board homes that blow down in the wind. Building should be built like sustainable concrete domes and these companies that you advise to invest is should be stopped from their profiting from paper houses.

    http://www.monolithic.com/topics/homes

    THEY CAN BE MADE SAFER THAN MOST OTHER BUILDINGS AND THEY WONT FALL APART IN A HURRICANE OR STORM OR FLOOD .

  • Report this Comment On November 20, 2012, at 2:08 PM, Darwood11 wrote:

    "Warren Buffett said last year: "We will come back big time on employment when residential construction comes back. You will be surprised, in my view, how fast employment changes when that happens.""

    I agree and that's also why I made plans for substantial changes to my personal investment in 2006. As I explained to the spouse and the relatives "consider how may secondary jobs are impacted by home building. We need carpets, appliances, furniture, wire, copper pipe, etc. etc. " My thinking was that when the housing market tanks, the economy will tank.

    When the housing market returns it will have similar impact on the economy. But it will be far more modest. For example, GE won't be offering Mr. Buffet any special deals. In other words. before we go dancing in the streets, I suggest that the problem isn't "if" but "when." I also suggest we won't experience a "roaring back buying panic. "

    I'm not a market timer. In other words. I don't know when people will have the confidence to make a long term purchase in a home. I don't know when they'll have sufficient confidence to take a 6-10 year plunge into a piece of real estate. Why 6-10 years? That's a realistic break even point in any "buy versus rent" calculation, fire sales excluded.

    Yes, we need more single family dwellings and yes, there are a lot of foreclosures being held by the banks.

    But I won't be holding my breath.

    I suspect this economy will continue to recover slowly.

    Is this a good time to buy a home? Mortgage rates are very low, and to be honest, even if the U.S. Government and the Obama Administration fell off the cliff, it's difficult to argue against the current low mortgage rates.

    For those who want to play the "rates will be lower next quarter" game, I suggest they run the numbers. Yes, you may save $20 a month if you wait. But what if the price of that home increases 2% or if mortgage rates rise 0.25%?

  • Report this Comment On November 20, 2012, at 2:11 PM, Hammerhorn wrote:

    daliya,

    If (big IF) the building codes are followed, new homes are strong enough to withstand extreme winds and typical earthquakes. This discounts the eyes of CAT 5's and the very strong earthquakes. So, in the RARE, RARE, chance that the later could happen, we should not be buildings the homes that people want to buy? In regards to your dome homes, I hate concrete homes, impossible to retrofit later (electrical, plumbing, add ons, HVAC, etc)

    Oh, I just don't see residential single family housing coming back anytime soon. Multifamily construction is going to continue growing for the next two to three years.

  • Report this Comment On November 20, 2012, at 2:59 PM, superbinvesting wrote:

    While the housing market appears to be rebounding, the overall US job market is still very sluggish. Some states have experienced stronger improvement in the job market than other and this is what is causing home builders to experience an increase a very specific increase in demand. Until the entire country rebounds this bounce could be temporal.

  • Report this Comment On November 20, 2012, at 3:00 PM, superbinvesting wrote:

    While the housing market appears to be rebounding, the overall US job market is still very sluggish. Some states have experienced stronger improvement in the job market than other and this is what is causing home builders to experience an increase a very specific increase in demand. Until the entire country rebounds this bounce could be temporal.

    ingeniousinvesting (dot) com

  • Report this Comment On November 20, 2012, at 3:16 PM, kahunacfa wrote:

    The housing market recovery is being greatly delayed because mortgage lenders have for the most part gone back to the lending rules employed in the early to mid-nineteen seventies.

    The price of a property a prospective lender will approve for a home buyer is 2.5 time the buyers Gross Income. So if the buyer earns $42 thousand per year, they can carry a mortgage equal to 80% or 95% of a home valued at $105,000. The difficulty is that there are few, if any, three bedroom homes that cost only $105,000 in most areas of the United States.

    Kahuna, CFA

    Investment Professional

    1974 - Present

  • Report this Comment On November 21, 2012, at 12:55 AM, TerryHogan wrote:

    Morgan,

    Keep giving us numbers.

    Not that I disagree, but I'm not impressed to hear CEOs of homebuilders saying the economy is looking up, after all, it's in their best interests to say so.

    Remember that KBH was the same group of geniuses buying back shares at over $50.

    From KBH 2006 report:

    "Our outlook is tempered with caution, however, as conditions in many of the markets we serve across the United States have become more challenging in recent months. A number of our markets have been affected by a build-up of new and resale home inventories, higher interest rates and higher cancellation rates, particularly markets that have experienced rapid price appreciation or substantial investor activity, or both, in the past few years. As a result, our sales have been adversely affected....."

    [So far so good]

    While we expect the current negative trends in the U.S. housing market to continue for the remainder of 2006 and, possibly, into 2007, we anticipate individual markets will normalize at different rates depending on the degree of disparity in the balance of these characteristics presently. In the long run, we believe the underlying fundamentals of strong demographics and job growth continue to support favorable domestic housing demand.

    Due to these strong fundamentals, expectations of an overall healthy U.S. economy and the geographical diversity of our homebuilding operations, we remain optimistic about the long-term prospects for our business and will continue to adhere to the operating disciplines of our KBnxt operational business model.

    - I guess they can still be proven right, but usually CEO's don't mean 7 years out when they talk about the long-term in their annual report (although they should)

  • Report this Comment On November 21, 2012, at 5:54 AM, MichaelDSimms wrote:

    Just don't see it. I see many homes on the market and a lot of empty one's banks seem to be sitting on. Without a job market there is no one to buy, and unemployment is going back up. Obamacare is a jobs killer. And taxes are going up as well.

  • Report this Comment On November 23, 2012, at 8:13 PM, dsciola wrote:

    Echo a lot of comments prior...dont buy it that its a positive ppl with bad cr may now have regained ability to buy homes again, just sounds like we didnt learn our lesson. Also, more hard facts = better than CEO's saying things look rosy.

    With that in mind, do appear to be some bright spots, e.g. new housing starts up nearly 42% YoY (yCharts)

    More meat, e.g. details, would help clear the signal from all the noise.

    DOm

Add your comment.

DocumentId: 2113797, ~/Articles/ArticleHandler.aspx, 4/19/2014 8:59:53 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement