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Home Builders
by David Stanowski
20 September 2007


The National Association of Home Builders produces the Housing Market Index (HMI), a weighted, seasonally-adjusted statistic derived by surveying builders on their outlook for: current single-family home sales, single-family home sales in the next six months, and buyer traffic. The first two components are measured on a scale of "good" "fair," and "poor," and the last one is measured on a scale of "high," "average," and "low."

A rating of 50 indicates that the number of positive, or good responses received from the builders is about the same as the number of negative or poor responses. Ratings higher than 50 indicate more positive or good responses.


The graph below is an interesting record of the single-family home builders projections on their market from January 1985 to August 2007. The survey hit a low of 20 in January 1991, near the trough of the last major real estate decline. From there, it hit an all-time high of 78, in December 1998, near the previous stock-market top. It declined to a low of 46, in October 2001, along with the stock market decline, and then rallied to a high of 72 in June 2005, at the height of the real estate bubble. It has now declined all the way down to equal its previous all-time low (January 1991) of 20 in August 2007!

It was very surprising to find that home builder sentiment did not meet, or exceed, its 1998 all-time high during the end of the real estate bubble, from 2004-2006. Why weren't they more optimistic at that time? It is also interesting to note that, last month, pessimism equaled its all-time low, at this early stage in the decline. We should expect even lower numbers in the months ahead.


Recently, the NAHB has developed a more complex index to measure builder sentiment in the multi-family home building market. This survey is only done on a quarterly basis, and it includes both apartments and condos. The graph for their sentiment on current condo sales is shown below.

Without more data, all that can be noted is the peak of 66.9, in 1Q 2005, and a decline to 23.1 in the most recent quarter.



Since both of these indexes show that builders see the problems in their market, and
current estimates indicate that they are more than 2 million vacant housing units already for sale; the obvious question is why are they still building? 

From 1978 to 2006, home builders have built at least one million new housing units per year; averaging about 1.5 million! Source: NAHB
This year they are on a pace to produce another 1.3 million housing units, which is down substantially from the 2.068 million units built in 2005, BUT it is only slightly below the long-term average. They have cut back on their output, but what is the demand going to be for 1.3 million more units on top of the 2 million vacant units already looking for buyers?

Vacant Homes
Number of Vacant Houses in the U.S.

At the end of this year, with the current vacant units, plus more foreclosures, and new housing units being completed, there could easily be 3 million vacant housing units on the market! With an average output of 1.5 million housing units per year, from 1978 to 2007, this means that what the U.S. home building industry REALLY NEEDS TO DO is to shut down for two years, to allow the market to absorb this tremendous glut of inventory!!

However, individual companies are NEVER going to see this as a workable alternative, so they are going keep building more housing units! This desperate need to keep building, to stay in business, even when there is no market for the new housing units, will make the already difficult situation into more and more of a crisis!


This is why you see places like Miami in the middle of a building boom even as they have a glut of inventory. In this article, Bloomberg reports that there are there are 20,000 new condos being built just in Miami's 1,040 acre downtown area, even as there are 22,294 condos already for sale in  Miami-Dade County!! MoodysEconomy.com expects this over supply of condos to force prices down as much as 30%. Foreclosures are on the rise, and as many as 50% of buyers may walk away from their deposits. Many also fear seeing completed condo towers with floors of dark windows, and empty balconies.

How is this drama playing out here in Galveston, TX? Hardly a month goes by without the newspaper reporting a new project! This week it was another $250,000,000 worth of condo conversions and other development. The Census Bureau showed 30,017 housing units, in Galveston, during the 2000 Census. There are currently 919 condos already for sale plus 4,246 under construction (sources PaperEconomy.com & GEDP).

This means that Galveston has 919 + 4246 = 5,165 potential condos for sale, or 5,165 / 30,017 = 17.21% of the total housing units that were standing in the year 2000!!

The Census Bureau showed 852,278 housing units, in Miami-Dade County, Florida, during the 2000 Census. There are currently 22,294 condos already for sale plus 20,000 under construction (source Bloomberg).

This means that Miami-Dade County has 22,294 + 20,000 = 42,294 potential condos for sale, or 42,294 / 852,278 = 4.96%
of the total housing units that were standing in the year 2000!!

There is no historical data to show what percentage of housing units for sale, versus a previous total number of housing units, constitutes a glut. However, if many experts agree that Miami-Dade has a tremendous glut, by this rough estimate, Galveston could have three and a half times more of a glut, for its size (17.21% versus 4.96%)!!!

Another way to look at this is that if the number of condos potentially for sale, in Miami-Dade, was based on 17.21% of the total housing units, it had in place, in 2000; it would now have 146,677 condos for sale, instead of 44,294!!

And, these figures do not count single-family homes in either area! Galveston currently has 6,636 total housing units under construction, or 22.11% of all the housing units that were standing in 2000!


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