Today's market—massive housing supply and pulseless demand—has this message for builders: Outdo your competition. With December housing starts down to an annual rate of 550,000 units—the lowest level since 1947—the market can't support the number of builders it did when starts peaked at 2.15 million in September 2005.
Creative problem solving is critical to distinguishing yourself from competitors. Timely, reliable information is a key ingredient to creative problem solving.
In early 2006, the yield curve inverted. In my February 2006 Big Money column, “In Every Trend, a Silver Lining,” I wrote: “This is a big ‘uh-oh' moment because inverted yield curves have foreshadowed each of the last five recessions. Why now? Our economy is finally moving forward, showing strong GDP growth and employment growth. What possible trouble can the yield curve data be signaling? Does the inversion mean tougher times for home builders?”
A builder in early 2006 who heeded the signal of the yield curve might have made vastly different decisions knowing a recession was imminent. On the other hand, if you ignored the yield curve and believed good times would continue, you may have made bad—possibly fatal—decisions.
The yield curve plots investors' yield requirements for various maturities of U.S. Treasury bills and bonds. The shortest maturity, one-month Treasury bills, is on the far left followed by lengthening maturities of three months, six months, one year, two years, three years, five years, seven years, 10 years, 20 years, and, to the far right, 30 years.
It depicts two key components: the curve's slope and height. There is normally more risk with longer investment periods, therefore, the yield curve usually slopes gently upward as maturities lengthen and yields rise. The height of the curve signals the market's yield, or interest rate, requirement for each maturity and expectations of economic activity and inflation.
The current slope is upward, signaling that the market expects the economy to improve. The yield curve is steeper than average, implying that the market expects the economy to strengthen more than average. Given our current situation, this is welcome news.