This Cycle's Recovery Will Be Distinctive

To find which market will recover first, put on your consumer hat

December 10, 2008


Single-Family Permits 1980-2007.

Graph shows single-family permits as percentage of peak, 1980-2007

In the 1980s and 1990s, a diversified geographic footprint served builders such as Centex and Pulte very well. Note in the chart below how Texas fell from 1983 to 1989 while California did the opposite. Diversity Not Helping Right Now

The benefits of geographic diversity were not lost on many regional players, such as D.R. Horton, KB Home, Lennar and K. Hovnanian, who expanded geographically in the late 1990s and early 2000s.

Unfortunately, this downturn is national in nature, although Texas held up for one year longer than most other markets. There is nowhere to go where selling homes is easy. Looking at the multi-market states of California, Florida and Texas since 1980 (which together make up anywhere from one-third to one-quarter of total single-family permits during this period) gives us a glimpse of how a diversification mentality might have proven to be affective during the 1978-1982 downturn, and even more dramatically in the 1986-1991 cycle.

Since 1995, the housing markets have behaved very similarly, with the exception of the five markets (San Jose, Denver, Raleigh, Seattle and Austin) that got hit especially hard by the NASDAQ collapse. We divided the 183 largest markets across the nation into two camps — those that troughed in the mid-80s and those that peaked in the mid-80s — and you can see that construction trends behaved very similarly.

Diversity Will Help Going Forward

Our Custom Consulting team has conducted field research on almost 1,000 communities this year, and we strongly believe that this turnaround is going to vary geographically. The best areas are where job growth continues (or returns first); where affordability is at or below its historic norm, which is rapidly occurring in almost every market; and where the oversupply of resale and new homes subsides. Washington, D.C., and San Diego are two markets that we believe will be among the first to stabilize.

Every metro area in the country will have certain submarkets that stabilize first. To prepare for the recovery, we have divided the 30 largest markets in the country up into more than 300 submarkets, and we are collecting the information needed to help our clients invest in the right

Total Single-Family Permits 1996-2012P.

Graph of total single-family permits (1996-2012P)

submarkets. Put on Your Consumer Hat

What are the right markets? To answer that question, you need to put your consumer hat on. Here are some suggestions to guide your analysis of submarkets. Do the following in all your metro areas:

1. Best Submarkets: For every significant household composition, psychographic profile and price range, imagine that you were advising a friend who had been transferred to your market about where to buy a home (not necessarily a new home). Where would you recommend that they buy? You will probably choose areas near the job centers and in the best school districts where undeveloped land is tough to find.

2. Emerging Submarkets: Ask yourself which submarkets are going to change for the better. Areas where employment will grow (including currently empty office buildings) and a low ratio of

Click to view larger image.

*Peak activity since 1985. **Annual Mortgage Costs + 1/7th of the down payment divided by income. ***Proprietary affordability scale with 0 meaning most affordable time since 1983, 5 meaning median affordability, and 10 meaning least affordable time. Data on all markets available at Sources: John Burns Real Estate Consulting, Bureau of Labor Statistics and U.S. Census Bureau through the month ending August 2008.

Notices of Default/HH are often adjacent to the best submarkets and are likely to fare best. Areas with new infrastructure improvements that improve commute times will also become more desirable.

 3. Quantify the Demand: For the markets you recommended and identified as good emerging markets, buy the sales volume by price range activity (including resales) over the last 12 months and during the peak of the market. This will give you a range of sales volume to plan for.

4. Target the Land: Find the land in those submarkets, which is always easier said than done.


It looks like 2009 is going to be a very tough year, probably worse than the last two years. While you battle your way through it, remember that there is a very bright light at the end of the tunnel:

  • The number of adults who want homes grows every single year.
  • There is no new technology that is going to wipe out the industry.
  • People value homeownership.
  • Your best land purchases are on their way.

The home building landscape will change, but you will be smart enough to change, too, and you will make a wonderful living building the American dream.

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