Pipeline. I suppose the word stems from the bringing of water from the well to the parched. Perhaps it comes from the ancient times. King Herod is supposed to have built miles of waterways to water the lands of Israel. Where ever its source, the word pipeline might as well be lifeline, for its presence is the difference between struggle and survival. It’s a word that carries undue weight. On Wall Street, pipeline means products are forthcoming. Investors scrutinize a company’s “pipeline” to gauge and forecast what a stock’s value should be in the future. “Apple has 3 new products in their pipeline.” Or “Drugs in Amgen’s pipeline are too far out in the future to place a valuation…” In business pipeline everything. When I sold new homes for Shapell Industries, pipeline meant predictable income. I could see how many homes the builder was releasing and figure that over a certain amount of time I would sell those homes and then the builder would release more. If I had 20 homes a phase and an estimated 3 phases released in a given year, I could calculate my income based on my “pipeline”. In real estate resale, my pipeline is my next listing. In residential real estate, it’s very difficult to know exactly where the next deal is coming from. If you’ve been watching, listening or reading lately, you know that the real estate market is recovering and values rising rapidly. For many this has come as a big surprise, almost “out of the blue”. But if you were watching closely, it isn’t nearly such a surprise. Consider that the home-builder stocks have gone exponentially higher over the past 12-18 months. In fact KB Homes is up nearly 30% just since December. The reason is rather simple actually; when you have a shortage of inventory in housing, there’s only one industry that can manufacture the product needed to meet that demand and that’s home-builders That’s why home-builder stocks have been rising for 18 months straight. But notice I said 18 months. The shortage and need for housing clearly isn’t a surprise to everyone since builder’s stocks began rising long before the general public caught on. The interesting question though is were the home builders in tune with this or were they just marveling at the recovery of their stock’s lost value and a sleep at the wheel? I will admit, I am not in contact with any CEO’s from any of the nation’s home builders and in my area along the Ventura/Los Angeles County line there is no home building from which to assess. However, I have been by the Shapell project in Porter Ranch (an upscale suburb within the San Fernando Valley) and I can tell you that they did not see this coming and are not ready. Their pipeline is in a word, depleted. They have like many builders plenty of land, of that there is no question, but they are not ready to utilize it today. There’s grading, plan submission, utilities, streets: all the components that need to be in place before the first nail is hammered. They could easily be a year and a half out. Were all home builders equally caught off guard? I would guess yes they were. After all, the market was so bad and prospects so dim, how likely was it that home builders were preparing for the housing recovery 18 months ago, before there was any consistent signs of a recovery at hand? So while Wall Street has rewarded home builders with record stock appreciation, it may be many, many months before the home building industry will be producing enough units to offset the skyrocketing demand for housing. Why do I believe that? Although we have seen increases in the number of building permits filed over the past several months, universally critics of the housing rebound have pointed out that many of those permits are for multifamily housing. Moreover that while construction is adding to the employment rolls, it is far more measured than a full blown recovery would suggest it should be. Why? Pipeline. Because of the lag between preparation and delivery in the construction industry, the somewhat uninspired permit and employment numbers suggest the building industry was unprepared for the now vibrant housing recovery. That’s not to say Wall Street investors were wrong to reward building stocks as they have. Perhaps their margins will be greater than they’ve been since builders will be able to take advantage of the housing shortage by increasing each unit’s profitability. Still, with people like Spencer Rascoff, CEO of Zillow saying that some markets are “Bublicious” and predicting a burst is coming, one has to be a little concerned that builders are not prepared to fill he demand through, you got it, pipeline. Chase and Bank of America, two of the nation’s largest banks, are predicting substantial home appreciation in this year through 2015. If supply weren’t going to be constrained for the foreseeable future, they as lenders on these homes, would not likely make that prediction. So what’s it all mean Alfie? What I think it means is this: prices are going to rise and do so substantially until such time as underwater sellers unable to sell at today’s prices, can sell at tomorrow’s because of appreciation and when builders can build enough homes to address the shortage that currently plagues our marketplace. Yes, it’s a little scary that we may be in the eye of another housing bubble hurricane, but more than likely it’s just a powerful storm whose winds are blowing around us. The good news is clear: housing values are going up and builders will begin building just as soon as they can and in doing so have an immediate and profound impact on hiring and thus on unemployment. This in turn will increase the coffers of Washington through broad based increases in tax revenue, reducing the deficit and strengthening our economy even further. All we need now is a little pipeline.