This morning’s housing starts and permits data confirm that the housing market will improve, via the method of getting worse first. The sharp drop in new starts is absolutely vital. When there’s a million-house excess supply, then new construction should decline until the excess is worked off.
OK, there’s reason to build new homes in some parts of the country where excess supply is not overwhelming, and where certain types of new homes are in demand. By my very rough estimate (based on scratching my chin and gazing out at the Oregon sky) is that we ought to have half a million new housing starts.
Why are builders continuing to build? You’ve built up a company that builds houses. You have project managers, estimators, coordinators who all do a good work. They know their jobs, and they are valuable members of the team. If you lay them off, you may not be able to re-hire them when the market turns up. So you keep them on staff, with a bare level of work to keep them sort-of busy. This makes sense if, in fact, the market turns around soon.
The other strategy that bears consideration: lay off all staff. Sell all houses you now have on the market at distress prices. Develop a three-year plan to learn how to surf, or play the guitar, or fold paper into beautiful birds. Then re-open your business in 2011.