March, 2007

Turnaround Artists

The downturn is real—and no amount of positive spin will change that.

By Steve Easley

If you’re not familiar with a company called Despair Inc., it’s time to visit the site: www.despair.com.

The site’s “Demotivator” images are razor-sharp parodies of the motivational posters that decorate many corporate offices. For example, one is a photo of a snowball rolling down a hill above the caption, “Teamwork: A Few Harmless Flakes Working Together Can Unleash an Avalanche of Destruction.”

Why is visiting this site timely? Because the company’s tagline, “Increasing Success by Lowering Expectations,” sounds a lot like the housing industry these days.

In 2006, most dealers were relieved if sales fell a mere 20%; everyone knew someone who had it worse. The burning question remains: “When will the market finally turn?” While many experts are unflinchingly bullish, they’re also leaving themselves plenty of wiggle room.

In the Jan. 29, 2007 Nation’s Building News, for example, NAHB cited job growth, low interest rates, and declining core inflation as reasons to look for “an upturn in national housing starts by the second quarter of (2007)” and “a gradual recovery through 2008 as inventories are worked down.”

It’s true that new home inventories are coming down. Econo-Matrix, a weekly compilation of housing and economic data by Chicago-based LBM Research (www.lbmresearch.com), shows that inventories hovered between 4.0 and 4.5 months’ supply in the first half of 2005; peaked at 7.2 months in July, 2006, and then dropped back to 5.9 months by December.

Unfortunately, inventories of existing homes have been more stubborn. Like new homes, 4.0 to 4.5 months’ supply was the norm until mid-2005. The peak was 7.4 months in October 2006, but inventory levels only fell to 6.8 months by the end of the year.

Speculators may be the reason, according to the Wall Street Journal Online. A Feb. 5, 2007 article reported that 2.1 million existing homes for sale are vacant. That’s 2.7% of the market, the highest level since the Census Bureau began tracking vacancies 40 years ago—and more than all the single- and multi-family homes built in 2005, the peak year of the boom.

Some speculators are already dumping homes at a loss. If the market stays sour, more will be forced to do the same, which would make things worse. So what can you do? Send them this Demotivator: a photo of a snowboarder leaping off a 50-foot cliff and spinning out of control. The caption reads,  “Regret: It Hurts to Admit When You Make Mistakes, But When They’re Big Enough, the Pain Only Lasts a Second.”

Interest rates and job growth are also shaky indicators. The 30-year fixed rate is still under 7%, but home prices have risen more than 40% since 2002. According to the Harvard Joint Center for Housing Studies, 1 in 5 home buyers opted for ARMs or interest-only loans in 2005. As prices fall, sub-prime mortgages are a trap, not a tool.

Likewise, jobs are plentiful but good jobs aren’t. Unemployment was just 4.5% in December, but median household income declined every year from 2000 to 2005, and rose just 1.1% (about $400) in 2006. Again, there’s a Demotivator for the occasion—a photo of the Taj Mahal over the caption, “Discovery: A Company That Will Go to the Ends of the Earth for its People Will Find It Can Hire Them for about 10% of the Cost of Americans.”

Pessimism does drive downturns, but the underpinnings are real and no amount of positive spin will change that. This is not a time to sit back and ride it out; the safest course is to pretend it’s 1980 and aggressively go after alternatives to the new construction market.