Home building is a cyclical business. Few other industries experience the same roller-coaster ride in demand and price. As clear as this seems in retrospect, it was far from conventional wisdom during the housing boom. For an unprecedented fifteen years, beginning in the early 1990s and lasting until the boom's peak in 2005, home building posted steady annual growth in activity, sales, and profits. Even during the 2001 recession, the industry's ascent was interrupted only briefly.
The home-building industry seemed to have gotten its act together in the 1990s. From a fragmented collection of small, privately held and essentially local builders, each putting up a few dozen homes a year, the industry had transformed itself, becoming dominated by a dozen publicly traded national firms who built thousands of homes annually. In 1990, less than one in ten U.S. homes was built by a publicly held firm; by 2005, the proportion was nearly one in three. The industry's consolidation had been driven by the cost savings that came with scale.
Everything from lumber to dry wall was cheaper in bulk. More important than materials, however, was the big builders' ability to acquire large tracts of the most attractive land in the nation's most lucrative housing markets. Because of their heft, large firms were better able to navigate the labyrinth of zoning and permitting restrictions thrown up in many places to thwart development. Builders with large national operations were also more likely to withstand the kinds of regional economic downturns that had done in many of their smaller competitors.
In theory, publicly traded builders' advantage included more and better information about their customers and markets. They had the resources to precisely gauge the demand for their product and what the competition was up to; therefore, they were less likely to make a serious business misstep. Small builders knew their communities, but they had little understanding of the broader economic and demographic forces shaping demand and supply for homes a vital tool for success in such a sensitive business.
Shareholders and the global capital markets were also expected to impose discipline on the large construction firms, improving their performance. The smart money, it was believed, would ensure that egotistical builders didn't get carried away and put up more homes than the market could absorb. In the past, many smaller home builders had gotten into trouble erecting homes "on spec" that is, with no bona fide buyer, only a local banker willing to put up the funds in anticipation of a sale. This sort of trouble wasn't going to happen again, or so it was thought.
The optimism was misplaced, however. On the contrary, publicly traded builders' access to freely flowing capital enabled them to put up homes long after housing demand had begun to wane. In the end, builders and their shareholders turned out to be about as good at gauging demand as Silicon Valley's tech gurus had been during the dotcom craze of the late 1990s. Like tech-company executives, builders had become intoxicated, as well as hugely wealthy, by their own lofty stock prices.
Such prices could be justified and sustained only by building and selling more homes at higher prices. The builders quickly forgot the pain experienced by their colleagues in the manufactured housing industry just a few years earlier. Mobile homes had gone upscale in the mid-1990s; the industry thought it had found a foolproof way to turn lower-income renters into homeowners while attracting older empty-nesters as well. At one point, manufactured housing accounted for an astounding 20% of all residential construction.
But those soaring sales did not stem from genuine growth in demand or better product design they were simply the result of very easy credit. Loans to buy mobile homes were being securitized and sold into global capital markets. Households were happy to borrow the nearly free money they just weren't able to repay it.
When global investors figured this out, the lending stopped. Without credit, unsold manufactured homes piled up on dealer lots, and the industry has never recovered. It was a sobering tale the home builders knew well; they just figured it didn't apply to them. During the decade's housing boom, builders put up far too many single-family homes and apartments.
At its worst, millions of empty units flooded the housing market. Builders were choking on unsold inventory, and investors who had purchased homes couldn't sell or rent them. There just weren't enough American households to fill all the vacant homes. And unlike past periods of regional overbuilding, such as Texas in the mid-1980s, these unsold homes weren't stick-like structures that could as easily be torn down as sold; they were large and well-appointed residences.
Builders had swallowed their own marketing hype. The industry's most vocal CEOs argued that demand for new homes would rise strongly ad infinitum, powered by a steady increase in foreign immigrants seeking a first home and aging baby boomers looking for a second one. Builders also had faith that Americans would rather own than rent, and that with low mortgage rates and ample credit, the national rate of homeownership could climb steadily higher. But their logic and arithmetic didn't add up. Home builders' enduring optimism, so instrumental in driving past housing cycles, had completely pervaded this one.
Our website is not responsible for the information contained by this article. Webworldarticles.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
This article was sent to us by:
Silvia McVolan at
06102010
1. The debt recovery claimant receives various documents from the court
All articles in this directory are property of their respective authors. Additionally, read our Privacy Policy
© 2010 WebWorldarticles.com - All Rights Reserved. Partners: Gunblade Saga