How can home building have gotten to be so complex when building homes is no more difficult? Today’s hostile market--massive housing supply and pulseless demand--has this message for home builders: Outdo your competition. Why? With December housing starts down to an annual rate of 550,000 units—the lowest level since 1947—the market can’t support the same number of builders it did when starts peaked at 2.15 million in September 2005.

It’s like the story of being in the woods with your buddies when a bear attacks. Don’t try to outrun the bear; do outrun your buddies.

Creative problem solving is key to distinguishing yourself from competitors. Timely, reliable information is a key ingredient to creative problem solving.

In early 2006, the yield curve inverted. In my Big Money column in February 2006, "In Every Trend, a Silver Lining," I wrote: "This is a big ‘uh-oh’ moment because inverted yield curves have foreshadowed each of the last five recessions. Why now? Our economy is finally moving forward, showing strong GDP growth and employment growth. What possible trouble can the yield curve data be signaling? Does the inversion mean tougher times for home builders?"

A builder in early 2006 who heeded the signal of the yield curve might have made vastly different decisions knowing a recession was imminent. On the other hand, if you ignored the yield curve and believed good times would continue, you may have made bad, or possibly fatal decisions.

The yield curve plots investors’ yield requirements for various maturities of U. S. Treasury bills and bonds. The shortest maturity, one-month Treasury Bills, is on the far left followed by lengthening maturities of three months, six months, one year, two years, three years, five years, seven years, 10 years, 20 years, and, to the far left, 30 years.

The yield curve depicts two key components: the slope of the curve and the height of the curve. There is normally more risk with longer investment periods, therefore the yield curve usually slopes gently upward as maturities lengthen and yields rise. The height of the curve signals the markets yield (interest rate) requirement for each maturity and expectations of economic activity and inflation.

The current yield curve provides timely information. The current slope is upward, signaling that the market expects the economy to improve. The yield curve is steeper than average and therefore implies that the market expects the economy to strengthen more than average. Given our current situation, this is welcome news.

The yield curve two years ago inverted as short-term yields exceeded long-term yields. In February 2006, the market pre-indicated that the economy would fall into recession. Investors’ expectations proved accurate. The yield curve in February 2007 was inverted in the short-term, indicating economic problems in the then-near future.

Current yields are at historic lows by virtue of the severe economic downturn we’re in now. Investors are fleeing to high quality investments. Since Treasurys are a safe investment, big demand for Treasurys puts downward pressure on Treasury yields.

Second, lower yields along the yield curve are the market’s signal that it does not expect a great deal of upward pressure on interest rates due to a significant pick-up in economic activity. With an upward and reasonably steep slope, the market indicates that it expects interest rates to move higher. While we don’t know if the market believes interest rates will move higher due to improving economic activity or a fear of inflation due to the government’s stimulus, it is most likely a combination of both.

The takeaway for builders: The market forecasts that the economy will improve and interest rates will remain reasonably low compared with historical averages. Builders with capital may want to start looking to tie up land positions on soft terms with as little risk as possible. This strategy will allow builders to develop land positions at attractive prices and in a risk prudent manner as the economy returns. Builders who lack capital may want to position themselves to be attractive to investors in order to secure capital and take advantage of current conditions in the land market.

I hope when I write my next column on interest rate expectations I can look back and say the market’s predictions were correct again—the economy did strengthen and the recession of 2007–2009 did end in 2009. Builders who heeded the yield curve positioned themselves for success coming out of the worst recession of our lifetimes.

Jamie M. Pirrello is president of Berkeley-Columbia Partners and acts as the CFO of Michael Sivage Homes and Communities. He may be reached via e-mail at jpirrello@jamiepirrello.com.