It’s said, when things turn in the real estate business as they’re capable of turning, “the land and the price were fine; it was just horrible timing.”

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The Fed reduced their ownership of mortgage once before, and rates rose. This time, they only announced they are going to reduce their ownership and rates spiked. The health of housing depends more on what they do with their mortgage holdings than their Fed funds rate decisions.

“The health of housing,” in this case refers to the business enterprise vested and invested in producing and offering market rate new construction and new communities – for-sale, for-rent, single-family and multifamily.

Impacts to the health of housing, then, are subject to timing risks.

For instance, a friend in the field many regard as both a seasoned pro and a shrewd judge of homebuilding investment’s critical moving parts frames out a punchlist of just some of the risks – both deadly specific and vaguely troubling – he sees in the fact that he “can’t find anyone in the biz acting like they are worried about our unprecedented housing market … except stock investors. Are they a more rational and disinterested party?” Here are a few of his other pointed observations – mostly coming back to timing:

  • We traditionally worked hard to have sustainable price increases. Makes buyers happy, locks in the backlog, and moves people off the fence. This bidding process worries me. For one, we’re going to have some very unhappy buyers/owners someday when the music stops and subsequent sales are materially lower. And how will we give confidence to the next buyer? With costs completely out of control (and I can’t believe how much worse it got in January), not sure what the solution is.  But does not feel good.
  • Subs now unwilling to hold prices for no more than 30 days. Used to be six months. So even if you sell homes after you start them, you can’t lock in your costs.
  • The publics are doing a bit better on their cycle times and supply, privates getting crushed.
  • I question the public builders saying they are underwriting to their previous gross margins. I doubt it, or rather, I don’t think if you put in this morning’s cost, this morning’s price and the last couple months absorption, you’re getting their old gross margins. You’re assuming costs get better, or prices keep going up, or absorption is no longer constrained and is higher than historical norms in your market. But you are not buying dirt with current price, cost and historical absorption.
  • Why have a complex option process, if SKUs evaporate constantly and any delay in delivery, costs you money with the increase in costs post sale?  Everything’s included on steriods? Just finish the damn things with no options and sell when literally finished? I would have thought six months ago that would be an overreaction, but now wondering. Anyone see a war in Europe helping supply chains? Probably does give the Fed the excuse they were looking for to not raise rates as much.
  • I keep hearing from people “what would be the trigger to slow the market other than big rate increases?”.  I’m not convinced you always need a reason.  Sacramento August ’05, Northern Virginia Sept ’05 went full stop.  For no reason.  Buyers just had had enough of rising prices.  It’s not something you can know – what’s the breaking point.

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