Here's Metrostudy chief economist and director of consulting Brad Hunter's take on home building's second-half "Pause" in 2013. In part, Hunter offers plausible reasons for its occurrence. More importantly, he's got a cautionary tale of the "be careful what you wish for" variety. All those lots you picked up in the past 12 months? Some of them you probably overpaid a pretty penny for. Now what?

Hunter is quoted below:

Metrostudy's latest nationwide study reveals that housing starts rose in most markets in the third quarter, but the trends were mixed among markets. A late-summer/early fall drop in sales (referred to on quarterly earnings calls as the "pause") was evident in Metrostudy's local market research. The slowdown in sales was accompanied by a rise in home purchase cancellations, although traffic (the flow of people through builder showrooms) has risen compared with the same time periods last year.

This release is a high-level summary of findings from: 1) the latest quarterly subdivision-level, in-field count by Metrostudy's 350 field researchers, 2) the findings of more than 200 site-specific feasibility studies completed by the firm so far in 2013, and 3) proprietary weekly surveys of traffic and sales.

The latest study shows that the 3Q "gainers" include a number of second-tier markets, while the "decliners" were concentrated in the volatile boom-bust markets. Examples of "gainers" are (showing quarter-on quarter 3Q change in total housing starts):


Nashville has been hot this year. We have done more feasibility studies in Nashville than in just about any other market in the country.


In the case of South Florida, the decline was heavily driven by a single project (Aventura Isles), in which the builder built a large number of homes in the second quarter. Although the "pause" did affect Southwest Florida quite strongly, the decline in Southeast Florida was not due to a reduction in demand in the market.

Is it really a "pause," or is it a sign that we are near the "top"? In order to answer this, we have to examine what caused the drop in sales. In our view, the factors are: 1) overly-aggressive home price increases, 2) the recent mortgage rate spike, 3) a drop in consumer confidence due to job markets and fiscal/debt problems, 4) the "pulling forward" of demand by the first half of the year that normally would have materialized in the second half, and, 5) the return of normal seasonal fluctuations that had been obscured by the secular up-trends and down-trends of the past seven years. Based upon these five factors, Metrostudy finds it likely that demand will continue upward in 2014.

The only factor in this list of five that could precipitate a long-term downtrend is mortgage rates, but mortgage rates are not going to go up sharply next year, so that is more of a long-term problem.

Demand is likely to continue to grow, but the rate of increase in home prices will likely be slower than in the first half of 2013.

The market was so strong in the first half of the year, that "everything worked." All the land deals worked --on paper-- because consumers were willing to pay prices that were going up 15% to 20% a year in "A" submarkets... about eight times as fast as incomes were going up in those submarkets.

Now, we are hearing about a new sense of caution among builder-developers, and about some land deals being dropped.

To paraphrase Warren Buffet, a rising tide lifts all boats, but.. when the tide goes out, you find out who's been swimming naked. "Caught Swimming Naked" is a good analogy, because pretty soon, builders who paid too much in 2013 for land might be caught with their BOTTOM LINE exposed in 2015/16.

Our conclusion is one of cautious optimism. Demand is still rising, and it is still a good time to open new residential developments, but it is now time to base land decisions on solid market research, on both demand and supply.