Home Builders, New Homes Sales And The Affordability Myth


What’s up with the Home Builders?

You may remember this statement from my  2015 Housing Prediction Article:

“You get my drift: The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds.”

XHB 29.75  quote today over $38 in 2015
TOL  27.08 quote today  over $42 in 2015
DHI  The new darling of Wall Street down after earnings 5%

And last June on CNBC, I tried my best to present a cautious view of the Builders in terms value, when they were falling short of their sales expectations.

You will see my statement starting at time 2.21 on the video.


If you look at all my new home sales, start and permit predictions over the years, I have always said housing has legs. We had an 82% correction from peak to bottom in sales and starts, and permits crashed as well.

This housing cycle is expanding from the lowest sales we will ever see in our lifetime.

From Doug Short


The same can be said about housing starts and permits.
From Doug Short 
Permits and Starts Logan Article

We can expect housing to have slow and steady growth for years from such a low. But that is not what we hear from those who have a vested interest in housing growth.  Instead, we have seen sensational headlines and hype.

We all remember Ivy Zelman bold call on March 7, 2013: “We’re In Nirvana for Housing.  XHB was trading at 29.06 on that day, and today it still has a 29 handle.

Nirvana, refund anyone?

Then in 2014, Ivy Zelman’s call was: “Nirvana around the Corner.”  

Shortly after that…existing home sales went negative, year over year, and new home sales missed sales expectation by 20%.

Haven’t made it to that corner yet, I guess.

But our friend Ivy is not the only delusionally optimistic housing pundit.  In  2015

“Downtown Josh Brown gave us this call:

“10 reasons the housing market could go ballistic this spring.”    Oops!

Despite these calls, XHB and a lot of builders have been struck as has the entire stock market.

Last summer, I raised the alarm bell once again that the housing story was being overhyped. You may have seen some of my many stating that new home sales were decelerating in their rate of growth, and revisions were coming in negative.

Here are two of them.
New Home Sales Need A Strong Total Report  August 19,.2015


New Home Sales Miss Forecast Months Ago  October 26, 2015


What happened?

The pundits, economists, and analysts (Ivy Zelman, Janet Yellen, and others) all say the same thing: Housing is so affordable.

But, if Housing is so affordable, then why do we have this data line showing, with the lowest interest rate curve post-WWII, we still have the worst demand for existing homes on record.  And new homes are much more expensive.


The clear picture below that the bigger home construction model from the builders this century has created an affordability issue for new homes in this cycle.

From Political Calculations

1967 MI2


Keep in mind that the affordability index used by nearly everyone is terribly flawed. It assumes all Americans have 20% down, starting debt to income ratio of 25% and no credit card revolving debt. Does that seem to you to be a realistic expectation for our average American?   This is why we haven’t seen Nirvana in new homes.

New home sales numbers are coming out this week, and I expect we ill end the year off with double-digit growth —  but it will be the 3rd year new home sales missed their expectations.

I predicted 8%-12% growth in 2015 with upside if median sales priced cooled because that would imply that there were less expensive homes in the market place.

On the upside, the housing market isn’t falling apart.  It’s still at recession levels, so it’s not going to go lower. With 153 million-plus working Americans out of 322 million total Americans, we are fighting hard to get  500K new home sales in year 7 of the economic cycle with 3.625% -4.125% rates. Yikes.  If you don’t have a boom, you can’t really have a bust.

Housing has legs, but it’s slow and steady, No Nirvana or Ballistic Growth. Today is a much better entry point in the XHB and a lot of builders than last year. XHB is back to 2013 levels as we speak today.

Discipline, discipline, and more discipline is needed from the housing community and a lot less hype.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com 


One thought

  1. Thanks for this beginning of the year update.
    I can document that your 2015 call on housing appreciation is correct.
    My Q4 2015 “Mallinson Appraisers Quarterly”on the web at House Referee.com is a 10 year barometer of OC residential price fluctuations and it supports your predictions perfectly.
    Keep up the good work.

Comments are closed.