Thursday, December 2, 2010

Is the Housing Market Worse Than the Official Numbers would Indicate?

I went to go hear the management of PulteGroup (formerly known as Pulte Homes) yesterday.

Pulte is the nation's largest homebuilder, building single-family homes across the nation. The company also develops residential communities. In other words, if any company has a decent read on the housing market, it would be Pulte.

Unfortunately the story they painted was not a good one. Housing sales across the nation are poor, and most of their sales agents are not painting an optimistic picture for 2011.

Pulte will be focusing on two areas next year: cutting administrative costs (i.e. layoffs) and reducing their debt burdens. They don't see a lot of opportunity to buy land for future development; most of the significant plots they have looked at are either less desirable for building new homes (e.g. the land is near electric power lines or power plants) or there is significant local resistance to more housing developments.

If all of this is not gloomy enough, there doesn't seem to be much they can do about boosting sales. The obvious response - cutting house prices - doesn't seem to be working. Instead, Pulte feels that the real problem is buyer paralysis: no one wants to buy a house now since most are expecting prices to move lower in the months ahead. As they put it, buyers are afraid of feeling stupid by overpaying today.

Then you add this twist: Apparently there is a movement in Washington to privatize both Fannie Mae and Freddie Mac. In their opinion, this would be disasterous for their business, since these two agencies seem to be the only ones offering mortgages for home buyers. Without Fannie and Freddie, they felt, whatever meager housing demand remains would collapse. They even felt that eliminating the mortgage interest tax deduction (one of the current proposals of the deficit reduction committee) would be less harmful to their business than the removal of Fannie and Freddie from the market.

Pulte's gloomy outlook echos comments from another home builder, DR Horton, a couple of weeks ago. Horton too is very pessimistic on the prospects for 2011.

What's interesting about Pulte's comments is how different their view than that of many economists. Already you are seeing talk in the media that housing has stabilized, and that some areas are seeing signs of improvements in house prices. However, these comments seems to be largely based on broad market indices like the Case-Shiller index rather than people with "feet on the ground".

Out of this picture of gloom comes only one hopeful thought: in many industries, companies are often the last to actually see the improvements in business that are coming down the pike. These same housing developers that are so gloomy today were also very optimistic just a few years ago, and were aggressively adding new housing developments to their portfolios.

But if Pulte, et.al. are correct, next year might not bring the recovery we all want.