The Calculated Risk Blog reported today that Builder Confidence decreased in may.
As you can see in this chart a substantial drop in builder confidence has predicted each of the last 3 recessions. It’s true that a drop in 1994 did not predict a recession.
I’m reminded during this period of frenzied home buying in certain locales and amidst an absurdly exuberant stock market bull run of the same feeling I had late in 2006.
I was working with a lot of small developers at that time and something and I could feel that a correction was on the horizon, and so could they. Maybe its a part of having so much on the table and being so close to the actual transactions.
It was in mid 2006 that I began to change the direction of my business to begin to focus on distressed assets and institutional sellers.
I was a bit early, but I’m sure glad I did.
A small drop in the National Association of Home Builder’s confidence is certainly no reason to run for the doors but if we continue to see a persistent slide in confidence then history tells us that we’ve got a 75% chance that something ugly is on the horizon.
How do you hedge against something ugly when you’re in the real estate or note business?
Well you move towards the bottom of the capital stack.
Keep your eyes and ears open people. Strange things are afoot.