They call it the housing cycle—boom followed by bust followed by boom followed by bust followed by….
Personally, I’d rather see slow, steady, unexciting, unbooming growth—growth that’s driven by the increase in population/ households and by slow, sustainable gains in the rate of homeownership.
That’s never going to happen. Optimism and greed won’t let it. Don’t get me wrong; optimism and greed in moderation are essential components of a thriving economy. In excess, though, they exacerbate the next crash and destroy companies.
We’re stuck with the cycles. The trick is to figure out where we are in the cycle and watch for the turning point. In bad times, we’re all pretty good about looking for that turning point because we need it so desperately. We pull back, we cut expenses, we do everything necessary to adjust to reality and cover our bills. And we pay very close and critical attention to the economic reports.
The problem occurs when we’re on the upside. That’s when optimism and greed take over. We stop looking for the turning point because we don’t want to find it. We ignore the warning signs. We overshoot, overbuild and overspend. And that’s what makes the next downturn so painful.
We’re never going to change and the cycle is never going to go away. And we’ve made the questionable career choice to be in the most cyclical of businesses. But we really should be a little more circumspect when, after years of strong growth, we plan our next major expenditures and initiatives.
There are times when being boldly aggressive makes sense, especially early in the upturn. There are other times, as the boom nears its peak, when pulling back is the more sensible thing to do. When you’re in a low margin, highly cyclical business, being aggressive at the wrong time can be deadly. You want to remodel your store, buy that next truck, and hire more help early in the up part of the cycle or, better yet, very late in the down, but certainly not late on the upside.
Since 1960, we’ve had 17 changes of direction in the housing market—nine up and eight down. Only twice in that 50+ year period have there been five sequential up years. We’ve had one 4-year positive run, five 3-year runs, and one 2-year. After a few years above or below trend, we really should be looking for signs of reversal.
So how will we know when the up will turn down or the down will turn up? We’re in a pretty pure supply and demand business. Increases in population/ households create the demand for more housing units. Population and households grow at a slow, steady pace with very little volatility.
The gold bars in the graph show how the housing industry satisfies this very steady, very predictable demand. Adding a linear trend line to the housing graph clarifies the picture. If we build above trend for too long, it’s time to start looking for the downturn. If we build too little for too long, pent-up demand will pressure the market upward.
Ultimately, the area above the trend line will be equivalent to the area below it. It’s always a good time to be looking for the signs. But after we’ve been running above or below trend for a few years, it’s imperative. We’re pretty early in the up right now and still running below trend. Barring any significant negative events, we should have a few good years ahead of us.”