Have You Checked Job Growth Lately?

Let's review the housing market:

• Falling mortgage rates are converting renters into homeowners.
• Rising home equity and falling mortgage rates are converting current homeowners into luxury homeowners.
• Falling stock prices and rising home prices are creating the perception that the only way to get rich is through homeownership.
• New home sales set an all-time record in July.
• Builders are enjoying record profits.

Does job growth even matter any more? What happened to all those economists who started every conference with phrases like, "As long as job growth exceeds building permits, our market will remain strong"?

Two-thirds of the metropolitan markets in the country are losing jobs. You can track the unemployment rate and job growth in your market each month by visiting this NAHB Web site: http://www.nahb.com/facts/default.htm. Generally, an unemployment rate of less than 6% and job growth of 1% or more are considered to be good. I have compiled a list of all markets and highlighted those with no job growth and an unemployment rate above 6%. Click here to view the list.

The markets with the largest job losses over the past year are some of the largest housing markets in the country: Chicago, Atlanta, Seattle, Boston, Los Angeles, Denver, Philadelphia, Dallas, Phoenix, San Jose, Calif., etc. Because Atlanta, Boston, Denver, Philadelphia and Phoenix still have unemployment rates below 6%, job losses have not affected these economies too significantly, but they are in danger if unemployment continues to rise.

So What?
Does all of this mean anything for your business? Well, if you want to continue to enjoy the strong housing market and be more prepared than your competitors for a downturn if job losses result in a slower housing market, I have three suggestions that will help you make more money, regardless of market conditions:

1. Study local demand: With census data, this can be done quickly and painlessly.
2. Put your money in the markets with the most potential: See below for suggestions.
3. Reinvest some of your profits in process improvement.

Strategy No. 1: Study local demand
For larger builders, it is always a good idea to have a diversified product mix targeted at residents who already live in your market. By analyzing census data (http://www.census.gov/main/www/cen2000.html), you can determine which components of housing market demand are most likely to grow, with a focus on those aspects of demand that cannot be met by the resale market. In most markets, the largest components of demand will be:

1) lower-priced housing for young minority families,
2) lower-priced housing for older first-time buyers,
3) move-down housing for retirees, and
4) luxury housing for move-up buyers.

In some markets, you can add second homes to the list.

The most profit will likely be in luxury housing when market conditions are strong, but we all know that a luxury home buyer can defer the purchase for many years if market conditions are weak.

With high land prices and extensive government regulation, "new" and "affordable" are oxymorons when it comes to housing. However, there always will be buyers willing to sacrifice square footage and a large yard for a well-designed new home in a great community. Without knowing your company or your market, I would suggest that you consider having at least some of your homes built for luxury buyers and for entry-level buyers. If luxury buyers are your niche, you need to have patient capital sources when the market slows.

Strategy No. 2: Put your money in the markets with the most potential
While this strategy primarily applies to the corporate headquarters of large builders or equity providers who can determine investment allocation by the strength of each market, I suggest looking at a few new markets. Interestingly, the markets with the strongest job growth include some areas ù Riverside-San Bernardino, Calif., Las Vegas, Kansas City, Fresno, Calif., Nashville, Tenn., Jacksonville, Fla., etc. ù that are benefiting from an insurgence of home buyers fleeing expensive markets. In most areas, there are also outlying areas that tend to do well when the expensive markets decline. You will want to have investments in these markets if the more expensive markets slow.

Some of the smaller markets around the country usually perform quite well when the major markets get very expensive. These smaller, more affordable markets benefit from an influx of buyers priced out of their original market, or older buyers cashing out and retiring. If you don't believe me, ask builders in these smaller markets about their housing cycles. You likely will find that their boom years were 1990 to '93, and significant appreciation started only in the past year or two. While some of these markets are not markets where you would want to make significant investments because they are small, history suggests that they experience job growth and price appreciation when the more expensive, larger markets experience declines. If you still don't believe me, look at where some of the larger builders (KB Home, Lennar and Centex come to mind) are buying smaller builders or ramping up operations.

Strategy No. 3: Reinvest some of your profits in process improvement
While I hope it never happens, at some point poorly run home builders will have a tough time making money. While we don't know which builders are not run well because almost everyone makes money when home prices are appreciating rapidly, we will find out who they are when appreciation slows. The equity sources ù and to some extent the banks ù then will be choosing builders to finish their projects for them. You will want to be one of those builders. One of the most successful builders during California's last recession was The Akins Cos., which built homes for capital sources for a fee before selling the company to Catellus when market conditions improved.

About the Author John Burns publishes three free Building Market Intelligence e-mails each month: U.S., Local and Strategic. He helps real estate executives develop and execute strategic plans, conduct market research and maximize profitability. More information is available at www.realestateconsulting.com.