We are now entering the 11th year of economic and housing recovery which is the longest in the U.S. modern history. An economic cycle normally lasts seven years. On the surface, the economy looks strong with above expected job growth, low unemployment, wage increases, strong consumer spending, and the stock market hitting new records almost daily. However, there are some underlying nagging problems with the economy. The manufacturing and non-manufacturing segments are softening, consumer confidence has been declining especially for future expectations, the GDP growth has been slowing, the trade war with China has not been resolved, and the international economies are weak.
In response to the soft underbelly of the economy, the FED has reduced interest rates by 0.25% three times in 2019 with a 4th anticipated by the end of this year or the 1st quarter of 2020. This is good for housing with the 30-year mortgage interest rate dropping 24% from last year’s 4.83% to 3.69% in October. However, the home buyer has not responded as expected to the reduction in mortgage interest rates. This year, housing has not met expectations. To date, both single-family building permits and housing starts are down around 2.0% (1.85% and 2.6% respectively) from 2018. New house sales overall are up 7.2% but the northeast and midwest are both down over 10%.
So, what about 2020? Very little growth in housing is being forecast for next year. The news will be dominated by politics since it is an election year. Washington will probably be able to prop up the economy through election day, but I would expect some softening of the economy after the election no matter which party wins. I would be conservative on my business planning forecast for 2020 and bracket my most probable forecast with 10% above and below forecasts. The business forecast should be reviewed quarterly to determine which of the three is most accurate for the direction of your local market conditions. I would play the short game when it comes to buying land. You need to maintain about 18 months of finished lots to stay operational, but I would be very cautious about acquiring any long-term land commitments. Remember land and land debt is what puts builders out of business. The upper priced homes have been very soft in most markets but the demand for lower priced homes has been strong. Develop smaller, lower base priced homes for your product mix to cater to the millennium buyer who is now in the marketplace.
If it is going to be a slow growth year for your company in terms of homes sold, try working on growing your profits and your efficiencies during this time so you will be better equipped to take advantage of the strong growth which is going to occur for the housing industry as the millennial generation fully enters the housing market.
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