Not Your Average To Do List
Conspicuously absent from the New Deal 2.0 priority list: fixing housing.
The Wall Street Journal analyzes the massive two-year program president-elect Barack Obama has in the works for a stimulus bill he wants to sign into effect on his Inauguration Day.
Can you say $600 billion to $1 trillion in 31 words or so? The WSJ can.
Mr. Obama has announced the five broad categories of the plan: transportation and traditional infrastructure; school construction; energy efficiency, especially in government buildings; broadband Internet access; and health care information technology.
Still, our industry’s Fix Housing First Coalition of more than 600 builders, manufacturers, and materials suppliers plies on in its effort to put sales of homes into the limelight of the emergency national agenda.
Builderonline senior editor Alison Rice reports on a press blitz organized this week by the National Association of Home Builders to call more attention to home builders and building trade players in distress as a way to jolt legislators awake to the issue.
At the risk of sounding a note of bail-out envy, NAHB president Jerry Howard wants Congress and appointed governement officials to get their priorities right.
“In a healthy economy, housing-related spending is 15 percent of the GDP. It is the single largest component of the gross domestic product,” said Jerry Howard, NAHB’s president and CEO, referring to the size of the U.S. economy. “With all due respect to Detroit and the auto industry, it is but a small part of putting the economy back on track.”
Craig Webb, editor of ProSales magazine, covers the ever-widening sphere of interests beyond home building companies whose businesses and livelihoods rely on healthy residential construction to get by.
Maybe home builders, manufacturers, trades, materials suppliers, and ancillary businesses should rebrand their coalition looking for a stimulus program to pay all home buyers a $20,000 tax credit and lock in mortgages shy of 4% for a jolt. Looking at the above, it might best be called Fix Housing Sixth. It would then make the list Obama’s rushing into the form of a bill, and would tack on a mere $20 to $40 billion to the final tally.
Lennar Opts for Silver Lining
On CNBC this ayem, Wilber Ross notes about the auto companies that you can’t have an industry lose half its volume and still stay in business.
Hmmm. Does this suggest extraordinary resilience among home building companies to date, or that the plot line contains lots of carnage in the chapters ahead?
Take a look at Q4 earnings call transcripts featuring remarks from Lennar CEO Stewart Miller from a year ago, and you’ll see lots of gloom and doom. It was the same at the end of 2006, looking ahead at market conditions for 2007.
Here’s a sum up line from Miller from the year-ago call.
Our fourth quarter results reflected very strong and definitive movement by our company to deal with the realities of the market conditions as they exist and processed and to try to get ahead of a curve while we expect market conditions to remain soft and perhaps continue to deteriorate as we go into 2008.
In fact and then retrospect market conditions have been consistent throughout 2007 and what we now know as required us and the entire industry to reconsider our positions, our sizing, our asset based and our strategy. The market has given us cause to pull back to retrench, to reconsider and to position for another day and that’s exactly what we’ve done.
Our overall strategy throughout the fourth quarter was to address the component parts of our asset base, while we drove to turn hard assets into cash. And this is consistent with our long standing focus on our balance sheet first. This meant continuing to impair property values to properly state every asset on our books, so it can contribute to profitability in the future.
Car companies have shown they have the capacity to deliver and sell 18 million vehicles in 12 months, and it looks like they’re on pace to do half that.
Home builders were doing 60% more than they are two years ago. Can they survive.
Miller, who runs one of home building’s bellwether companies, is striking an upbeat note as he looks ahead, even as the lifeblood of home builders–orders–continue to deteriorate and then further erode with cancellation rates of up to 40%.
The Wall Street Journal reports on Lennar earnings prior to its call. We’ll update this post when we have some choice quotables from Mr. Miller on what he sees in the months ahead. Equity analysts looking at Lennar numbers see positives in the company’s reduced exposure to joint ventures, but can’t take their eyes off the grim “orders” metric that foretells more pain.
This wrap from UBS might say it best:
Reducing EPS Estimates to Reflect Limited Visibility
Despite generating ~$220mn in cash from HB in F4Q, the net debt-to-cap (adj for FAS 109) was flat seq. at 30.2%. In turn, we continue to believe LEN has the requisite liquidity to withstand the downturn. That said, reflecting the order declines experienced, we’re reducing our F09E EPS to ($1.50) from ($1.00) and F10E to +$0.30 from +$0.75; our F11E &F12E EPS have been changed similarly. These changes are insufficient to impact our PT and Neutral rating.
Design without Reach–Architects with Less Portfolio
Architects’ billings, a leading indicator of commercial construction development, are out and they’re down, posts Calculated Risk.
CR observes:
There is “an approximate nine to twelve month lag time between architecture billings and construction spending”, so we should expect the first decline in architecture billing to impact non-residential structure investment this quarter (Q4 2008), and a further downturn in non-residential construction activity in mid-2009.
Lunch today with principals at an international architecture firm left the distinct impression that billings opportunity comes in many shades of green for the near term. Or sovereign wealth.
Got Motivation? How about More Crotchety Colleagues?
This should light a fire under those who may not properly understand all the consequences of a financial crisis that goes on unchecked.
The geezer, coot, and codger count at the office goes up as retirement fades from the near future to Neverneverland, as Cheryl Russell points out in her latest “American Consumers,” newsletter. If we don’t fix this thing soon, human resources folks will have to come up with new euphemisms to counsel managers on acceptable limits of grouchiness in the workplace.
The labor force participation rate of men aged 65 or older climbed 3 percentage points between 2000 and 2007.
AARP and TARP may need to JV on this issue.
Calpers CEO Succession Draws WSJ Headlines
Calpers and its home builder and real estate development travails have been a hot story for Big Builder in 2008, with more than 20 specific stories focusing on the huge pension fund’s exposure to the housing and land bubble.
Today’s Wall Street Journal wraps up a package of coverage on how up to 10% of Calpers $182 billion portfolio may be at risk thanks to exposure in residential and commercial real estate. Calpers, the WSJ reports, may get its new chief executive as soon as this week. Chances are, he or she will be interested in selling, not buying land at a pretty good pricepoint.
Hov Not Quite out of the Woods
From BIG BUILDER, by William Gloede: Compare.
Goldman Sachs’s 4th quarter swing from 2007 to 2008: $5 billion to the negative.
Morgan Stanley’s 4th quarter swing from 2007 to 2008: $1.3 billion to the positive (on a loss of $2.3 billion).
Hovnanian Enterprises 4th quarter swing from 2007 to 2008: $19 million to the positive (on a loss of $450 million).
Home builders have been digging out of a ditch of their creation for three years now. Progress is hardly forward, but things like FCF, zero balances on revolving credit facilities, and the mere fact that one remains a “going concern” earn high marks as blood in the street levels rise from ankle-high toward the knee-cap.
The comparisons are for context. The intersection of home builders’ fates and those of Wall Street institutions and their populace is and shall be significant beyond the present mess. Fourth quarter earnings comps will shake free of parentheses next year or in 2010.
But we’re still trying to get a grip on all that led us down the road we’re on. Big Builder senior online editor Bill Gloede blogs intelligently as a way of getting that grip.
New Meaning to the term: “Cut us some Slack”
A mini-niche opportunity for some clever economist who can write might be “Nouriel Roubini for Dummies.”
With a global recession a near certainty, deflation — rather than inflation — will become the main concern for policymakers. The fall in aggregate demand while potential aggregate supply has been rising because of overinvestment by China and other emerging markets will sharply reduce inflation. Slack labor markets with rising unemployment rates will cap wage and labor costs.
Further falls in commodity prices — already down 30 percent from their summer peak — will add to these deflationary pressures.
Policymakers will have to worry about a strange beast called “stag-deflation” (a combination of economic stagnation, recession and deflation); about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness); and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions and governments).
With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary. And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important.
Stag-deflation. That wouldn’t be a puncture wound in my front-yard inflatable Rudolph, now, would it? No, says, Roubini.
It was clear to those of us that saw early on the risks of a severe US and global recession that, once that recession would emerge, deflationary rather than inflationary pressures would emerge as slack in goods markets, slack in labor markets and slack in commodity markets would emerge. So now we need to worry about stag-deflation, deflation, liquidity traps and debt deflation. Welcome to the world of stag-deflation or, as Krugman would put it, to the world of “depression economics”.
“All Available Tools” i.e. 138 Million Taxpayers
We’ve known this day was coming.
It was a matter of when.
Zero, or rather, ZIRP.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
The “tools,” of course, are we taxpayers.
- The Wall Street Journal’s “Economists React.”
- Paul Krugman sounds off as the weatherman telling us which way the wind’s blowing.
- Comment from Mannwich on The Big Picture blog: “I’m long food.”
USDA Home Loans on the Rise
From BIG BUILDER, by Lynn Norusis: Until about mid-September, dollar figures in the billions used to impress when they were gains, losses, investments or returns. Now the “TR”-word, especially associated with bailouts, seems to be what it takes to get a rise out of people when it comes to dollar denominations, what with $10 trillion we’ve seen in wealth destruction thanks to home price declines and equity meltdowns on Wall Street.
A billion here and a billion there, and pretty soon you’re talking real money, no?
As in USDA backed home loans, which home buyers can still avail of with no money down. Big Builder senior editor Lynn Norusis first broke the story of the surge in USDA insured lending after talking with several home builder executives at the Big Builder ’08 conference in Washington, DC.
The move to get buyers into the USDA loan program has caused the government to step up and re-fund the program in Florida and Texas, said Natasha Cartagena with Shelter Mortgage Co. LLC. “There has been a rampant movement toward these loans.”
And for good reason. There is no rhyme or reason as to where a USDA rural loan area might be, Shelpman said. “A property that used to be an orange grove in the 1950s but is now a subdivision could be eligible,” she explained. Of Holiday’s 40 active communities, five are eligible for USDA loans; 15 out of Highland Homes’ 17 active Florida communities are eligible for the loans, and the builder is taking full advantage of the opportunity.
“This is the best kept secret [in the industry],” said David Kopec, Highland Homes vice president of sales and marketing. “There has been tremendous success for us.”
Now that so many trillions of dollars are tied up in rescues, billions’ stature may earn respectability once again. Who knows, maybe seven figures will be enough to cause a head to turn now and again in future simpler, poorer times?
At any rate, the Wall Street Journal determined that the USDA’s emergence as a significant home-loan player story was a significant enough trend in housing to give it ink in today’s issue.
Source: The Wall Street Journal
The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans.
That’s relatively small when compared with the volume of business handled by the Federal Housing Administration — which guaranteed $102 billion in new loans during fiscal 2008. But interest in the USDA’s development lending program is growing rapidly in response to the nation’s credit crunch and as most private lenders have stopped offering loans with no money down.
Home builders lost the benefit of seller funded down payment assistance programs as of Oct. 1, but have gained a minor windfall from the availability of USDA loan programs, which cover many of their communities.
It’s only billions, but hey, we’ll take it.
Housing Starts Records Broken, a Broken Record–Update
Starts, permits, consumer prices plummet in unprecedented degrees of magnitude. The housing data has nudged to its lowest level since 1959, when this stuff started getting tracked. Worsening data begets new efforts among Fed and Treasury officials to throw more policy at the problem. Fed rates too may go to record lows today.
- The Wall Street Journal reports, “Inflation Eases, Suggesting Fed Rate Cuts.”
- CNBC has an analysis of the grim housing numbers.
- Builderonline.com senior editor John Caulfield ties historical employment trends to housing cycles through recessions past to try to plot where we may be amidst our present travails.
- Calculated Risk puts the pictures and the words into perspective in his blog post: Housing Starts Decline to Record Low.
Calculated Risk’s professorial conclusion:
Notice that single-family completions are significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will probably continue to decline.
A VERY weak report …