Industry research and analysis

Home Industry

There are a number of factors facing home builders that affect the home building industry in unique ways that other industries do not have to concern themselves with. On the reverse side, however, the home building industry also affects the economy and job markets more so than probably any other industry. Researching the components of the home building industry, therefore, should take into account the position assumed by such an influential industry.

One of the factors most prevalent in the industry is that it is closely linked to the investment community, and that Wall Street and the Federal Reserve Bank keeps a very close eye on what is taking place within the industry. Recently the Federal Reserve lowered key interest rates to allow more money into the banking system in an attempt to ease the constraints in providing mortgages and the capital needed by home builders to build homes. This action was taken in direct response to the hardships being faced by the home building industry.

An August 2007 article in the U.S.A. Today Money sections states; "Fears that lenders have been tightening the cash spigot have been troubling stocks for weeks. The Fed's decision, though, to leave its target for short-term interest rates untouched and the lack of serious concern in its statement removed some of the panic." (Fed's 2007-page 1B)

This action taken by the Fed's may have 'removed some of the panic' but it did not alleviate the situation in as much that the Fed came out with even stronger language concerning the housing market less than a month later. had to take even stronger action less than a month later.

"Ben Bernanke, the Fed chairman, did his statesmanlike best to exude confidence, reiterating that although the central bank should not protect lenders and investors "from the consequences of their financial decisions," it would act "as needed" to limit damage to the broader economy." (Tangled 2007-page 80) Shortly thereafter the Federal Reserve lowered interest rates in order to shore up the shaky industry. The Fed did this not only to assist the home building industry, in particular, but also to quell any carryover effect into the equities market, and the economy in general. The action portrays the importance the housing market has in maintaining a strong economy. The Fed uses interest rates to stimulate or curtail growth depending on how fast or slow the economy is moving.

"Rates typically have the largest influence of any factor driving home sales, based on their effect on mortgage payments and income needed to obtain a mortgage." (Stovall 2004)

Interest rates are imperative to a housing industry that is one of the key variables in predicting exactly how the rest of the economy will perform. Due to its importance, the Fed keeps it under a very close scrutiny. Whenever the housing market(s) suffer, the rest of the economy suffers as well. Evidence of this statement is the key interest rate cut of.5% affected by the Feds at their meeting in September 2007. Many experts had suspected that the Feds were going to cut the prime rate, but there were not many of those same experts that had predicted a.5% cut, most were predicting a.25% cut.

The equities market responded the very next day with a resounding gain, and has continued to gain (with very little setback) since that time. The credit market in particular showed a rebound from its previous doldrums.

The current situation in the home building industry is in stark contrast when compared to the early part of the twenty first century when housing was booming and builders could not build homes fast enough to supply demand. Towards the end of 2005 many economists were already sounding warnings of a slowdown in the housing market.

In late 2004, Michael Jaffe, S&P's Sector Group Head for Industrials and Materials believed; "Technicals aren't the only reason to think that this group has seen better days...the fundamental outlook also is negative." (Stovall 2004)

Jaffe was not the only expert who thought that looking ahead, the housing market was not in as good as shape as many had believed. The market continued to plug along at a somewhat even keel into 2005 but then began to falter.

2006 was a year that many builders, investors and money managers would like to forget, and the housing decline continued into 2007 "The decline in the stocks of the home building industry in the U.S.after a batch of poor quarterly financial results and new economic data reinforced investors concerns about a deepening slump in the U.S. housing market." (Bogoslaw 2007-page 15)

After a year and a half of steady declines in housing values, mortgage defaults and a deepening credit crunch, the housing market needed a boost in a bad way, and the Fed responded by cutting the rates.

Interest rate cuts aside, there are other factors that help to influence the housing market. Homebuilders themselves can influence how they are perceived and add to, or distract from the natural reluctance many individuals face when making an investment decision that will be one of the biggest they make throughout their life. The profitability in the housing market is one that draws many individuals to that industry, and not all of these individuals are scrupulous.

"The faster a house is constructed, the greater the profit, and thus many homes are now built as though on an assembly line, often in as little as 90 days." (Patterson 2005) Many builders use that profitability to maintain a facade of wealth and honesty, while in reality they are cutting corners. Some builders take shortcuts that are not readily discernable when an unsuspecting buyer first examines a house, but after moving into the residence discover a myriad of problems. There are no amount of interest rate cuts that are going to alleviate the problems associated with a poorly built or designed house, and many times it is caveat emptor. Many times, after the closing, the buyer is stuck paying for repairs that many experts believe the builder should be responsible for. Home builders often have much more influence (and money) to leverage against a home buyer when such events take place.

"Builders have been the main beneficiaries of a decade's worth of Texas tort reform laws -- laws that, for homeowners, amount to little more than a maze of obstacles designed to obstruct the filing of lawsuits." (Patterson 2005)

Laws passed to the benefit of the builders and against the home buyers show the influence that the industry has in some states, with many of the builders influencing much more than the building industry.

The home building industry in general suffers from these unscrupulous builders, which is likely one of the reasons why the industry's reputation is not as squeaky clean as it could be. The industry, however continues to have heavy influence due to its importance to the economy. Oftentimes, this influence is perceived by some builders as a measure of their own importance. The home buying public can have an entirely different perspective. One couple's experience in the state of Texas was chronicled in a recent article that showed just how much influence the industry has.

"She filed claims under her homebuyers' warranty (which turned her down for not following proper procedure), under her homeowners' insurance (which rejected her because its inspector found the house "deviates from the industry standards"), and under Stature's liability insurance (which said that it would cover property damaged by "these construction defects," but not the defects themselves). Jordan went to the district attorney's office, the state attorney general, the Texas Department of Insurance-nothing." (Patterson 2005) When forced to deal with several different agencies and still not being successful in gaining any resolution can be very frustrating and can lead to a distrust of builders and the building industry in general.

The article went on to state that a Texas homebuyer's only real hope for recovery, then, is to raise hell and that builders know that most people don't have the stomach for that.

One solution offered by an architect is to build houses using an assembly line method to do so. Ken Larkin thinks that we should 'build houses the way we build computers. This would alleviate the problems builders face when building custom homes under a deadline that, if missed, affects their profitability. Larkin says his idea will be that 'every new house would have a structural frame, or "chassis," that would be expected to last 200 years or more.' From that structural framework a buyer will choose different options to customize the home.