John McManus

Editorial Director
Anje Jager/ John McManus Editorial Director

In the past couple of weeks, we got some time away from our D.C. offices to spend a few days with folks in the trenches, and we can say that while the jitters quotient is certainly rising with each successive week’s passel of brow-furrowing economic tidings, the actuality in at least some of new-home building’s bellwether markets is that things are holding up okay.

A widening ripple of foreboding is that the market is just a single headline zinger away from locking up and shutting down for the third year in a row, whether the sound bite originates from China, the Eurozone, or Capitol Hill.

Offsetting that headline risk, interest rates for 15-year mortgage loans have the number two right in front of a decimal point, and price tags for new homes practically give people 50 cents or 75 cents of value for every dollar they spend in today’s market. What’s more, a good number of people are starting to believe experts who say the pricing bottom is in, so their sense of risk has diminished.

Put that together with people marrying, having babies, divorcing, having grandchildren, and either keeping a job or landing a new one, and you’re describing what some people like to call “pent-up demand.”

Of course, in the trenches, home builders have heard of the term pent-up demand, and they may even use the expression when they see who’s coming in to talk about buying a new home at a sales or model center. Still, when they hear economists and academics mention it, home builders in the trenches wince.

They know the hard truth about pent-up demand is that it’s not really pent-up until and unless it becomes real, an actual person in the flesh, money-in-hand demand. Pent-up demand is not an economic quantity, it is a real household making the sometimes difficult choice, commitment, compromise, and sacrifice to buy a home or not.

The moment suggests that demand may have gone through structural change in the past few years, although anyone who pretends to know that is lying. At least it may be plausible that the statistical pattern of demand over the past five to 10 decades may undergo profound shifts in the next five or 10.

Still, from our time in the trenches, we’ve learned something else about the moment, and it’s probably this that distinguishes this year from the false-start years 2010 and 2011. Those years, the enemy of housing recovery, clearly, was oversupply.

Believe it or not, the enemy of a full-fledged recovery for the residential construction economy is under-supply. That is, under-supply of new homes in good locations for a price people consider fair value in today’s market.

A key to sustaining even a plodding, fits-and-starts recovery is capacity to feed more units into the “signs of life” machine of early recovery. Flexibility, speed, service, customization, etc., are all important to the experience of an early-recovery buyer.

So is cost, not necessarily in the absolute dollar sense, but in the value sense. A buyer gets value today, hands down.

For builders to give that value, the hard part comes with putting a price tag on the land.

They say, “Land is like ice cream. The right amount is wonderful. Too much makes you sick.” They say, “Land acquisitions experts used to be called ‘gut-guys.’ There are no more ‘gut-guys’ out there because ‘gut-guys’ can’t know what they need to know about how the market’s going to work.”

They also say, “If a land acquisitions person doesn’t buy lots in today’s market, he or she will get fired in six months. If they buy lots and the deal winds up not working, he or she will get fired in 18 months.”

So, as it happens, a four-letter word—land—will have more importance in the timing and trajectory of new-home building in America than the Eurozone debt crisis, China’s economic slowdown, and the political antics on Capitol Hill.

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