Why are home builders so happy?

In 2022, housing demand collapsed, and homebuilder confidence surveys collapsed in a cascade similar to that seen during Covid-19 and the Great Financial Crisis. But something changed towards the end of 2022, and with stock prices soaring with confidence, homebuilders are now singing party-rock anthems.

As can be seen from the graph below, NAHB/Wells Fargo The Home Market Index (HMI) data, which tracks home builders, climbed above 50 again. This means that home builders feel confident that they can issue more housing permits as the number of single-family home permits has increased in recent months.

The housing market in general changed on November 9, 2022. (More on this in this episode of the HousingWire Daily podcast). However, even though housing dynamics have changed, existing home sales are not enjoying the same sales growth as the new home sales sector.

With housing starts data released on Wednesday, builders have begun to boost the number of single-family home permits. Last year people talked about the second housing bubble bursting because builders had too many outstanding orders to issue new permits. What a difference a year can make!

from Census: building permit: The annual number of private housing units granted construction permits in June (seasonally adjusted) was 1.44 million units. This is 3.7 percentage points below the revised May 2022 rate of 1,496,000 and 15.3 percentage points below the June 2022 rate of 1,701,000. There were 922,000 single-family home approvals in June. This is 2.2 percentage points higher than the May revision of 902,000.. The permit for buildings with five or more units was 467,000 in June.

Builders make a profit, they’re not building homes to deal with housing shortages. They sell homes at the highest profit possible, which is a given, and that’s their business. Last year, home sales experienced their biggest drop of the year, but that didn’t lead to brisk property growth. It’s still close to its lowest level in decades.

from NAR data:

  • Total Active Listings in 2007: 4 million
  • Total Active Listings in 2023: 1.08 million, It is also decreasing year by year.

From 2020 to 2024, homebuying demographics will be better than the last decade. Unfortunately they didn’t have enough products.

So the builders worked on a deal. They are very competent sellers. If necessary, they will lower prices and offer lower mortgage rates than existing homebuyers are getting to transition their offerings. They did so as sales of new homes increased 20% year-on-year, while sales of existing homes fell 20% year-over-year.

how? Their profit margins are still above pre-pandemic levels, so they still have room to spare and not all the homes they sell get this measure. Now you can see why their stock has performed so well. For example, I always refer to Toll BrothersStock prices after the crucial November 9th.

In this environment, homebuilders have an advantage they didn’t have before, as the total number of active listings from 2007 to 2019 was too high, giving people more choice. Now builders have cut their monthly supply to 6.7 months, almost back to pre-COVID-19 levels, as the chart below shows.

This is why home builders have been so happy lately and why stocks are doing so well. I might add this to my list of things that don’t happen when the housing bubble bursts. Last year was a crazy year, but I can understand why the usual housing bust people went all out. So it’s now his 12th year of the bursting of the housing bubble 2.0.

But several other people who don’t normally fit the crash premise join the party, and as I’ve stressed over the years, using the 2008 housing economy model just won’t work this time around. (See my discussion with a stock trader last year on this subject here.)

One of the problems I’ve seen over the last decade is that everyone is focusing too much on the crash in existing home prices instead of the economics of housing. Remember, economics done right should be boring and you always want to be a detective, not a troll.

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