Catching up on the week’s financial news (life interfered with blogging again this week), I noticed a pair of housing-related stories early in the week that pointed in exactly opposite directions.
The bullish story got all the coverage. What a surprise. On a month-over-month basis, new housing construction went up more than expected.
The bearish story came from housingwire.com, and it was more than a monthly snapshot. It was the grim reality of nearly four years of overhanging supply.
The thing that surprises me is how the world views these two types of home supply. Unlike every other market, housing has always had more “used” houses sold than new (typically at a ratio of 4-1 to 5-1). You can’t say that about any other capital investment.
For some unknown reason, the market looks at “discretionary” spending, but ignores the biggest discretionary item of all — whether to buy a new construction house. So let me share some thoughts on home building, home buying, and where we go from here.
First, let’s look at the decision to have a home built to specifications. You get exactly what you can afford, but no more. Don’t imagine, for example, that a home builder is actually building you a new house to take a loss while keeping their crew working. Neither should you imagine that tough negotiation on price will do anything other than cheapen the construction and quality in places you can’t see.
As a really good contractor once told me, once the sheet rock goes up, all the sins are hidden. Hidden, that is, until five or seven years later, when a persistent damp spot gets traced to a “cricket” in the flashing that had a couple of inches less lead or copper used under the overlap (if they even use lead or copper).
This economic reality is especially significant in areas that have had 30% or more deflation in house prices. Unless you have to have specific very difficult features put in (e.g. handicap access or assistance) you’re almost sure to get more from your money by buying an older house. Some would say that if you can live in a house from the 1960’s or earlier, you’ll get better lumber and fewer toxic chemicals, also called a “healthier” house.
With the overbuilding caused by low interest rates and tax incentives ($500K tax free capital gains every two years on both first and second residence), the supply of houses exceeds the supply of qualified buyers by two or three years’ worth of population growth.
For that reason, it’s kind of surprising that any new housing is being built. Admittedly local markets may have shortages of available housing on the secondary, but those should be few and far between, given the stress now apparent in the middle and higher end borrowers/homeowners.
Does that master bath with showed and tub really justify paying 30% more for a house? I think not. Granite countertops and professional appliances in the kitchen can’t be as much at 10% of the price of the house, so why pay more?
But I was well into my 40’s and earning seven figures before I got around to buying a new car, so what do I know?
Still, between the two stories, I’m inclined to believe the shadow inventory story, and position my porfolio for continued deflation.