Housing recovery, as slow as it is, continues.
Image courtesy of the Wall Street Journal

On one coast last week in Miami, the talk among housing experts and observers focused sharply on what's wrong with housing. On another, in San Diego, conversation centered more on what's okay, and what people are doing to make it more okay every day.

Economists preoccupy themselves with the fact that, for all the progress housing and its key players have made in the past four years, its current heights are nudging but 75% of the level of a 14-year patch from 2000 to 2014. Interestingly, to me, those economists addressed writers and editors of the National Association of Real Estate Editors, which is largely where and how the "story" of what's going on in the housing market takes shape and goes out among the newspapers, bloggers, and TV reporters who cover real estate.

To listen to the economists, a) home builders have been building the wrong new homes for the past couple of years, and b) the fact that they're holding back on building the right ones--entry level homes for less well-heeled buyers--is the main reason for housing's sluggish performance over the past couple of years. Wall Street Journal staffer Kris Hudson, reporting from the National Association of Real Estate Editors annual meeting in Miami last week notes that home builder blind spots account for why the market won't jump start. He writes:

Two real-estate economists said Thursday that many home builders aren’t doing a good job of determining what home buyers want.

Nela Richardson, chief economist for brokerage Redfin Corp., and Selma Hepp, chief economist for Zillow Group’s Trulia real-estate website, both said builders aren’t constructing enough entry-level housing to meet demand. They’re focusing more of their resources instead, the economists said, on building pricey homes for buyers with ample credit.

Now, there's real insight, eh?

And how about what a great job those economists have done understanding a whit of what has gone on economically in the past 10 years, let alone lacing into other business communities for not doing their jobs right? I wonder what kind of marks their clients and customers would give them for all the helpful, illuminating, precise, and actionable data products economists have provided corporate and public agency clients over the past decade-plus.

What exactly is the audience to infer from this story? That the home builders are "clueless" about who their customers are and what they want because they're selling higher-end homes to customers who can pay more for their new homes? That the home builders are miscalculating the market because they're building and selling homes for a higher profit margin? That the home builders are virtually complicit in their withholding of lower-priced inventory from the available for-sale housing stock because it's in their interest to constrain supply?

That's a bunch of horse-xxxx! Still, the unfortunate thing is this. These blow-hard, self-affirming, misguided missiles from real estate economists become the narrative line that journalists pick up on as the true story. It's industry economists and experts who are unwilling to come clean with their own business agendas who think it's all well and good to take pot shots at the home building industry. Seriously? Are we really being asked to believe that it's responsible economics to spout off about how mistaken home builders are in their business strategies because those strategies--for this part of the recovery cycle--focus on building communities and homes for discretionary purchasers, who have greater price elasticity, more time, and ensure a higher profit margin in the process?

This piece is not to say that home builders and residential developers have done every thing right through the first leg of recovery. Nor is it to say that there isn't more opportunity--for both the companies and builders and the home buyers--that will reveal itself as more "within reach" homes get underwritten, built, and delivered to the market place.

Still, there's a big difference between acknowledging that a gap in the marketplace exists and saying that builders don't understand who their customers are want what they want.

Fact is, where I was last week--the Pacific Coast Builders Conference--there was virtually a disproportionate focus on precisely the areas of the marketplace our economist friends were saying home builders and developers are ignoring. Affordability, Millennials, density, expense management, efficiency, capital investment in B and C lots, land cost base, time to install, scheduling, cycle time, etc., all of these obsessions orbit around meeting market demand for home buyers and borrowers who are housing finance-bound, vs. cash-fueled.

Among the denizens of that conference, whose ideas, actions, success stories, and achievements may make it as fodder for real estate editors and writers' awards next year, the sentiment is this. It's a good thing that recovery--such that it is--is a slow one. This way ...

  • More people who borrow money for a home will prove that they can and will repay the loan;
  • More banks' loans will pass as a sound basis for secondary market investment;
  • More communities will be populated with people who want to live in them, rather than buy and then flip the homes to other buyers;
  • Prices at the low end won't move off the charts as quickly;
  • Construction workflows, supply chain, and completion cycles will remain manageable, pacing demand and capacity at equal and balanced measures;
  • Liquidity's inflow will take place in measured increments rather than as a tsunami, so that residential real estate won't necessarily need to follow its boom-and-bust pattern, and growth can be achieved among those who are strategically smarter.

We don't think it's either helpful or correct to conclude that the reason for the lopsided recovery trajectory to date owes to the fact that home builders don't know what they're doing, or don't want to play a committed and contributive role in the United States' economy. The fact that economists can get away with such pronouncements without challenge from the media is part of the problem here.

Rather than to accentuate the negative, we'd say that builders have done a good job at meeting the part of the market that would respond most nimbly and zealously to a new level of value in homeownership, and we've only begun to see how that will play out among other parts of the average selling price spectrum.