By Alison Rice.
2002 Walk-Through
Bless the Fed. While housing suffered in past recessions, this time home building has been the bulwark of the economy, contributing 4.1 percent to the GDP this year, according to the NAHB.
What's the secret? Historically low interest rates that let consumers buy homes at a record pace--5.3 million resales and almost a million new-home sales--and refinance old ones, with approximately 11 million refinancings in 2002. The high point for interest rate-sensitive home buyers came in late September, as 30-year fixed rates slid to 5.99 percent and ARMs to 4.22 percent, according to Freddie Mac's weekly survey.
Those buyers kept economists on their toes, as preliminary numbers for annualized new-home sales hit one million in May, June, and July. Those estimates were followed by slight downward revisions, but demand for new-homes remained stronger than many experts expected, especially in July.
Housing starts were more volatile. When a warm winter boosted construction activity in early 2002, housing starts jumped to 1.788 million in February, the fastest pace all year--until September, when after three months of declines, starts surged to a pace of 1.843 million, a 16-year high.
Such demand could have made life a little hairy for purchasing managers looking for lumber. In May, the U.S. government slapped a 27.2 percent duty on Canadian lumber, raising concerns about pricing and availability. But prices have remained lower than expected, with a composite price of $272 for 1,000 board feet of lumber in early October 2002, according to Random Lengths. The reason is threefold, says NAHB economist Michael Carliner: The new lumber mills are more efficient, the United States has been getting lumber from other countries, and Canadian producers haven't reduced their shipments.
Things didn't turn out quite so well on Wall Street, which couldn't escape the questions about questionable accounting at Enron, Global Crossing, and WorldCom. But the wave of scandals benefited housing, which received a flood of money as investors sought safer ground in real estate and bonds, which affect mortgage rates. With the S&P down 29 percent for the year as of September and existing home prices notching 7.3 percent appreciation year-over-year, many investors stuck close to home--literally--and supported the housing market.
Photo: Glenn Hilario
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Investors also rediscovered the public home builder stocks. In a challenging 2001, home builders' net income outstripped the S&P 500's by more than 100 percentage points. As a result, the group's stock rose on the Street to trade at nine and 10 times earnings and close to twice book value.
But investors' excitement about builders faded against the stock market's larger backdrop: accounting irregularities, declining stock portfolios, fears of missing the so-called housing bubble just as they did the true tech bubble. By 2002's fourth quarter, the public builders' trading multiples had slipped to the neighborhood of five times earnings and just over book value--roughly half their earlier highs, as investors dusted off their cyclical attitudes toward home building.
"The industry obviously has a record of doing poorly in a recession, just about every other sector has already been whacked, and so few investors are willing to stick their necks out on the chance that this seemingly unlikely sector will be the lone success story," says John Stanley, an analyst with UBS Warburg. "Investors are grabbing any excuse they can to avoid the stocks or to take profits--[home building being] one of the few groups where they have any to take--be it the bubble, interest rates, stock market wealth evaporation, war, etc. Despite this, the group, depending on the day you price it, is still flat or so this year, compared to nearly a 30 percent decline in the S&P 500."
Color Coded
What's in, what's out: The latest interior paint and furnishing colors can update a model in a flash.
Blues, from aqua to navy were back in a big way this year.
Model-home merchandisers took a few steps back from the predictable sage greens and ochre yellows of the late '90s.
Bold reds are still strong, but started to lose some ground this year.
Say bye-bye to beige. A few neutrals mixed in is still ok, but an entire palette of boring beige is a no go. Try deeper neutrals like mushroom or smoke.
Rich, rusty browns added a touch of sophistication to move-up and move-down homes.
