Whence this Mess Began–Home Prices–We’re Not There Yet
From BIG BUILDER staffers: What puts the vicious in the vicious circle that’s got our economy on a spiralling collision course with a credit freeze up? Home prices. Yale economics professor and latter day mega celebrity Robert Shiller’s monthly Standard & Poor’s Case-Shiller Home Price index came out today–the data equivalent to another blow to the abdomen. The sole silver lining contained in the numbers is that the pace of deterioration has eased somewhat.
“There are signs of a slowdown in the rate of decline across the metro areas, but no evidence of a bottom,” said David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “Little positive news can be found when cities like Las Vegas and Phoenix report annual declines as large as minus 29.9% and minus 29.3%, respectively, and all 20 cities are still in negative territory on a year-over-year basis.”
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Where are prices holding up better? Where are they the weakest?
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Read more less-than-uplifting analysis that applies directly to your business.
Here’s some “topline” analysis on pricing trends and their ramifications for home building companies from housing analytics guru Ivy Zelman, ceo of Zelman & Associates.
Ø Based on the composite-20 index, home prices in July decreased 0.9% sequentially, larger than the sequential declines of 0.5% in June and 0.8% in May.
Ø We had forecasted a 0.7% sequential decrease.
Ø On a year-over-year basis, the composite-20 index was down 16.3% year over year, continuing a decelerating trend that is now in its 32nd month.
Ø We estimate that the composite-20 markets overlap 43% of our group’s communities, ranging from 55% for MDC and TOL to 29% for MHO.
Ø Each of the 20 metro markets declined on a year-over-year basis led by Las Vegas (down 30%), Phoenix (down 29%), Miami (down 28%) and Los Angeles (down 26%).
Ø Based on futures contracts on the composite-10 markets in the Case-Shiller index, investors anticipate an additional 7.2% decrease in existing home prices over the next 12 months.
Ø We are forecasting an approximate 5% decline for new homes prices from 2Q08 to 2Q09.
Home Builders to Capitol Hill Gang: Stop Foreclosures
From BUILDER, by Alison Rice: Amid continued political wrangling over revisions to a $700 billion rescue plan aimed to stabilize the fast-deteriorating U.S. financial complex, home builders believe focus belongs on the cause of the economy’s meltdown, not on its symptoms. BUILDER captures the perspectives of home building leaders from Atlanta to Washington State, as they react to Monday’s failed rescue measure, and offer opinion on what needs to be done first to prevent home prices from plummeting farther: Stop foreclosures.
Larry Webb, chief restructuring officer for LandSource, agrees with Hawksley about the complexity of the current housing and economic crisis. “There is no silver bullet,” says Webb, formerly of John Laing Homes. “Foreclosures must be absorbed, inventories must be reduced, financial institutions must be stabilized, and the economy must be strengthened.”
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BIG BUILDER’s Sarah Yaussi writes about other CEO’s views for what’s needed.
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Read about the status of an anticipated reworking of the financial rescue measure.
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Here’s what pros in other industries told CNBC about revisions to the plan; and leaders in other sectors who call for the rescue plan’s passage.
Why it ain’t over
From CONSTRUCTION PULSE, by John McManus: Here’s what to know about September 29, 2008, on Capitol Hill. “There is no extra courage to go around,” Rep. Jim Cooper (D., Tenn.) told the Wall Street Journal after Monday’s stunning 228-205 vote against the $700 billion plan to stabilize U.S. financial markets. A one-point-two-trillion-dollar one-day panic says there’s more work to be done on all fronts, and like as not, our elected representatives will neither further ennoble nor endear themselves to many of us as they try to get their minds around the task at hand.Lots of American people are angry, and they’re letting it be known. American homeowners are angry because deflation continues to rob many them of the un-hard-earned paper profits they’d used to live above their means for more than a decade, and the home price correction has made many of us who bought in the past few years “the greater fools” for thinking the music wouldn’t stop at least until we had a wad of cash in hand. Non-homeowners are angry because their households will suffer the burden of a society that mistakenly over-prioritized and over-priced homeownership to fund its agenda for the past decade or more.
Still, the rescue bill will come back up again because it must. 435 politicos, who never stop campaigning, must continue to wrangle and tweak, lead and concede, and ultimately they need to use whatever suasive powers they possess to talk clearly and candidly to the one-third of their constituencies who “don’t know” whether they’re for or against the Federal government’s massive plan to stabilize the financial system. “Don’t knows” may justifiably resent the folly of financial companies who never learn the lessons that borrowing short and lending long harshly teach.
But “don’t knows” may also be able to get their minds around the surreal-but-real potential of soup kitchens and bread lines. [In light of today's market bounce, remember that 1929 and 1930 saw several big market rallies even as things headed to decades-long lows].
Authors of the next go-round of language for the rescue package have to do three things by they time they bring language for the legislation back to the House of Representatives for consideration after the Rosh Hashana holiday.
One, the authors have to get up in the balcony for a better view of the drama that’s unfolding. U.S. Treasury Secretary Henry Paulson has been so frank and earnest about his concerns for “the financial system,” but evidently he hasn’t a clue about Retail Politics 101. Bank failures only tend to strengthen a lot of smart people’s convictions that dastardly deeds and toxicity confine themselves to the financial sector. But we rank-and-filers’ indignation about the thievery of bullet-proof billionaires must be set aside for a moment while this thought gets a chance to enter our minds: Layoffs.
Do we really need a Ford Motor Co. or a McDonald’s to file BK before we believe this matter is a buckling of the economic ground beneath Main Street as much as it is a toppling of the citadels of Wall Street? Do we need lines of shivering people wrapped around the block on the dole?
- The bill’s rejection was the product of a failure of political leadership in Washington, as the principal players appeared not to comprehend or address in a convincing way an intense strain of voter opposition, The New York Times wrote.
This notion of skyrocketing unemployment and mass distress remains in the black box of the unimaginable. But for how long if we don’t compell our leaders to crack the code of failing confidence and freezing credit?
When next the Treasury Secretary or the President or the leaders of the Senate or House majority or minority parties in Congress open their mouths about this plan, they’ll need to have reworked the measure and its ambitions enough to be able to assert honestly that they address American business’s woes only insofar as they plan to use Federal power to try to ward off a worsening crisis for all Americans.
Two, the authors of the plan–whether they like it or not–are married to the sliding scale of accountability on the part of our elected lawmakers. Crisis or no crisis, their foremost interest is re-election. Mounting urgency, strong medicine, fairly estimable economic strategists and tacticians, and a virtual declaration of war on the economic crisis by the nation’s chief executive proved only that electoral politics trump sanity, and we should not be surprised by that.
Being right won’t win the day. The dilemma now is whether to try to swing no-voting Republicans across the aisle via Democratic concessions, or the other way around. In case we need reminders, we’re a polarized bunch today, and it seems the only shared trait in the halls of Congress is a desire to grandstand ad nauseum. At any rate, our current President’s role as a domestic lame duck has been dramatically confirmed, and it’s going to take the emergence of true leadership, political fortitude, and courage to get backing for the next go-round here. Partisans take heed, being right for all the wrong reasons may be hazardous to one’s position in current polls, but it’s the way to put America first in this case.
Three, stop focusing only on assets, and restore people’s and businesses’ trust in getting access to their money. When people enjoy safety, they take it for granted. When they begin to sense danger, they covet safety. Suspend FDIC limits, or raise them to $1 million. Yes, there’s a price to pay, but it’s probably less than the $1.2 trillion in value that vanished from the stock market yesterday.
Smart Faster–Your Dashboard for Housing Economics Literacy
From CONSTRUCTION PULSE, by John McManus: Apologies to one of history’s tactical military geniuses, but all of construction–especially residential, commercial, and public works construction–is divided today into four parts, nearly equal in magnitude and importance. The four parts are 1. what to ask, 2. what to know, 3. what to think, and 4. what to do in light of the fact that within the past few hours’ time, your Congressional representatives voted no on the “Emergency Economic Stabilization Act of 2008.” This 110-page document would have changed the game. Some form of it will see the light of day, or today’s Wall Street panic will become a true contagion.
For the moment, there’s but one place to go for a thorough debriefing on the terms, conditions, concessions, and caveats in the measure, and why Congress caved at the moment of truth. But if you want a variety of perspectives on the package, Barry Ritholtz’s The Big Picture rolls up a linkfest with an assortment of sources. One of the best “U.S. Economic Crisis for Dummies” visuals is the Sunday, Sept. 28th New York Times’ infographic on the tally of federal government initiatives aimed to “calm the system.” None of them have.
Suffice to say, that as grave a moment as the U.S. financial system has faced, our elected officials have behaved predictably. Like the aforementioned Roman conqueror, they saw, they came, and they made the $700 billion plan all about them and their present and future ambitions in electoral politics.
A plan so hugely ambitious almost inevitably dies five deaths before people come around on it. And why not? It’s extremely complicated. When an iteration of this measure eventually passes into law, important questions remain, and they’re important to answer for yourself soon.
One concerns a potentially crippling abyss between Capitol Hill and Wall Street on one side and an American populace that feels it’s been hurled to the lions by Washington and big money interests. The question is, can anyone of the principals succeed in framing the plan as a sweeping restructuring of the U.S. financial system, as opposed to a bailout of avaricious, culpable, Wall Street risk-takers?
How do you yourself view the measure? As a bailout? or a sweeping financial reorganization?
It’s important for us to know the answer to this question, because, even as the votes, and the signing into law, and the handshakes, and the thumbs ups turn into photo ops galore, the effectiveness of the measure will come down to two matters of critical importance to your companies. They are, will you be able to borrow capital to run your business? And, will your home buyer customer be able to borrow money to buy a home?
Big question two regards the proverbial symptom vs. the sickness. Consumer spending, the last we looked, still represents 70% of GDP. The economy is suffering a consumer spending-led downturn, and has been buoyed for the last few quarters solely by exports. Look at the way the economies of Europe and Asia have been acting lately and you’ll see that our 2.8% GDP growth mark this past quarter is bygone. Unfreezing the credit markets, as necessary a step as this is, will just get us to the starting line of what will be broader economic downturn, with a slow and feeble recovery starting in the back-half of 2009 and barely pulsing through 2010. So question two for you is, are you prepared, or can you at this point prepare for a recessionary environment, with little-to-no consumer spending tailwind for the near future and little to be encouraged about on the capital spending side of businesses either?
Third big question that qualifies as an 800-lb gorilla in the room is “When did you plan to retire?” If House Speaker Nancy Pelosi tells us “the party is over,” is the newsflash actually, time is no longer money, because there is no money and you’ve got nothing but time?
Questions you should raise both at home and in the office over the next few days as you consider calling or writing your anxious Congressional representative with your views of his or her performance in the hard light of this moment.
In turn, hopefully we’ll be here for you to consider as a resource on the other three parts of the construction landscape I mentioned above… 2. what to know, 3. what to think, and 4. what to do.
FDIC Backs Commercial Banking Industry
From MULTIFAMILY EXECUTIVE, by Les Shaver: Although investment banks continue to disappear from the landscape, Federal Deposit Insurance Corp. Chairman Sheila Bair insists that the commercial banking sector is doing just fine. Read the complete article.
- Read more on the FDIC role in easing credit crisis fears.
- Should FDIC limits be raised?
- FDIC bids to increase deposit insurance.
Former Treasury Secretary to Paulson: Next Solution Must Address Rising Mortgage Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: As current Treasury Secretary Henry M. Paulson Jr. continues pitching his estimated $700 billion bailout plan to Congress and other stakeholders, former Treasury Secretary Lawrence Summers warns that any solution to the problem will be incomplete unless it addresses shrinking home values and mounting mortgage debts. Read the complete article.
KB CEO Takes Dim View of Rescue Package
From BIG BUILDER, by Sarah Yaussi: Going into this weekend, President Bush was confident that, despite delays, an agreement would be reached between Democrats and Republicans over the U.S. Treasury’s $700 billion bailout plan. Still, at least one of home building’s leaders doesn’t think there’ll be much to celebrate. Read the complete article.
- Read KB Home president and CEO Jeff Mezger’s transcript for Q3 ’08 earnings and 2009 forecast.
- See JPMorgan equity analyst’s KB Home Post-Call Notes.
- See Yahoo Finance charts, forums, analyst ratings for KBH.
Do home builders of all sizes have the representation they need on Capital Hill as Federal agencies, Congress, and the Administration deal with the credit crisis and reshape the financial landscape?
ICC Votes to Include Fire Sprinklers in New Homes
From BUILDER, by Alison Rice: The long-running battle between firefighters and builders over whether or not to require fire sprinklers in new homes ended this week, as the International Code Council (ICC) approved the inclusion of such a mandate in its 2009 International Residential Code (IRC). Read the full article.
Government Seizes Washington Mutual; Sells to JPMorgan Chase for $1.9 Billion
From BUILDER, by Alison Rice: Troubled bank Washington Mutual (WaMu) has been purchased by JPMorgan Chase for $1.9 billion, according to the Federal Deposit Insurance Corp., which seized the bank Thursday and announced the critical deal the same evening. Read the complete article.
KB 3rd-QTR Loss Is $144.7 Million
From BIG BULDER, this staff report: KB Home early Friday reported a net loss of $144.7 million, or $1.87 per diluted share, for its fiscal third quarter as revenues declined 56% to$668.3 million on a 51% decrease in homes delivered, to 2,788, and a 10% decrease in the average selling price, to $239,700. Analysts were expecting a loss of $1.22 per share. Read the complete article.