Economic Analysis of the Home Building Industry

Essay by swshraderjrUniversity, Bachelor'sA-, May 2006

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How do forecasts and economic indicators help one determine strategic initiatives and the direction in which to take one's business or decision to purchase a new home? One will find detailed knowledge of several economic indicators: real GDP, inflation, unemployment, interest rates, capacity utilization and housing starts. Herein one will read in-depth knowledge about how the above economic indicators and some forecasts for them might affect the home building industry. Lastly, the reader will see the authors' opinions and decision based upon their comprehensive research.

Home Building Industry Overview

The home building industry is comprised of companies that provide new residential homes. The homes they build can be divided into two main categories: conventional site-built homes and manufactured homes. Site homes are built on a piece of land that is sold along with the house. Types of conventional dwellings include single and multi-family units, which can be attached or detached, townhouses, etc...

Given the considerable amount of money consumers must borrow to purchase the typical site-built home, the homebuilding industry is based predominately on the level and direction of interest rates. Sales of manufactured homes are less influenced by interest rate trends because of the lower cost of the units. The critical factors driving cycles within that sector are pricing, the supply and demand ratio and the availability of rental units.

Some of the key drivers of revenue are interest rates, housing starts, and pricing. In assessing the overall industry outlook for homebuilders, the level and direction of interest rates are typically the most important factors in determining future housing market trends. New home sales have long been known to move in the opposite direction of long-term interest rates; as rates rise, so does the cost of a monthly mortgage payment. Similarly, a drop in interest rates makes home payments...