Thursday, November 01, 2007

Residential construction continues to slide

Well, the Federal Reserve disappointed a lot of people yesterday when they cut their prime rate by only 0.25%. I guess they were expecting twice that, 0.5%. But, this Fall has brought me to the belief that the sluggish housing market cannot be remedied by dropping rates.

To be sure, after their last cut back on 9/18, the industry index (symbol XHB) immediately jumped 5.2%. But, so what?! I mean, this is a bull market, so the increase was simply following the overall trend in its immediate response to a cut. The long term numbers of the fund tell the true story, the industry's stock value has dropped more than 50% since the index was created in February 2006.

There are too many negatives in residential construction right now to expect a Fed cut to turn things around!

The number one problem is record inventories of spec homes, the highest in nine years. If the builders can't sell them, they don't have the cash flow to build more.

The number two problem is the skittishness of lenders, skittishness that is justified given recent events. They are making things harder on would-be borrowers by demanding larger downpayments and tougher property appraisals. But, you can't fault them for taking these actions. They're protecting themselves.

In Florida, at least, it seems the solution to these two real problems is in the hands of the state legislature. They need to tackle the two-headed monster that is prohibiting people from buying up all those spec homes in the builders' inventory. Of course, I'm referring to the soaring cost of property insurance on the one hand, and our ridiculous property tax system on the other.

So far, the gutless wonders up in Tallahassee have failed us by not taking on these issues, generating lukewarm ballot measures that may not even be constitutional.

I assume the situation is the same in other states.

If we could get these state legislators to take action, it would have WAY more of an impact than a Fed rate cut. But, they're not going to do that until we socks in the dryer hold them to account!

Enough ranting. I've got leftover Halloween candy to eat . . .

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