Housing Crisis’s Mainstream Media Lead of the Day
For all the [deserved] grief journalists on the business/real estate beat are getting for not “getting” how to read the monthly and seasonal data correctly, there has to be some consolation.
We’ve joked over the years about hiring many reporters who “couldn’t do the math” but know how to report and write.
Well, this lead-in to an article in the Fort Meyers, Fla. News Press suggests that what they lack in data analysis skills sometimes is offset by really clever writing. We’ll take note of this sort of thing; and if an analyst/blogger writes something clever as well, it will qualify. Calculated Risk made note of this call-out.
Victor Vangelakos lives in a luxury condominium tower on the Caloosahatchee River. He never has to worry about the neighbors making too much noise.
There are no neighbors.
The Time Calls for More Focus at Home Builders’ Trade Group
A document dated June 22, 2009 from National Association of Home Builders vice chairman Bob Jones to the trade group’s executive board outlines six broad issue areas.
- Builder Liability (including the Chinese drywall issue)
- Construction codes and standards (including green building)
- Environment (the climate cap & trade issues)
- Federal tax and trade policy
- Housing finance
- Labor/Safety & Health
Around page 80 of the 95 pages of the memorandum comes a series of Amicus briefs that state the association’s position in litigation for everything ranging from “takings,” to endangered species, to fair housing, to effluent limitation guidelines.
Which is to say that housing’s worst stretch since the Great Depression hasn’t slowed down the onslaught of advocacy issues, battles, and policy challenges the NAHB and many of its trade association peers have had to deal with these days.
As a dramatic overhaul of the nation’s health care complex begins to reel under its own weight even as President Barack Obama pushes to bring a revolutionary new plan home, Obama has begun to have to reckon with America’s capacity to adapt in so many ways at once.
Were the economy not so afflicted, focus on the health care system, energy sourcing and economics, regulation of finance, and rebuilding the country’s infrastructure could get a fair shake. Despite high levels of urgency around each of these issues and challenges, neither exected representatives, agency officials, nor the public at large have the capacity to reinvent everything about everything.
Maybe each of these matters is a high priority. But, for the moment, we’re dealing emergently with events and consequences that put us in triage mode, which trumps or at least disrupts prioritization.
We believe the same goes with the NAHB. The question is how many of the initiatives and endeavors the trade group is allocating its resources to will wind up being academic if the vicious circle of home price deflation, foreclosures, bank losses, profitability declines, job losses, and more foreclosures keeps up at a significant pace?
How many home builders will there be to represent in Washington, D.C., if the focus here doesn’t lead somehow to a stabilization of the value of what consumers pay their life’s earnings to come by. Even as more and more sound and disciplined economic analysis posits that at least a few of housing’s multiple bottoms are coming into plump view.
Here’s Tim Iocono’s well-argued and well-illustrated case for green shoots mixed with grains of salt.
Even Bill at Calculated Risk–who holds that we haven’t seen nearly the end on home price declines–has had positive observations creep into his analysis over the past several months.
As policy and free enterprise do their double-helix thing in the next six to 24 months, the NAHB’s mission walks an increasingly delicate line. Look at one of the lines in Iacono’s piece:
Don’t feel too sorry for the homebuilders – they had a few very good years.
This is a widely held view.
Home builders’ representation of their industry’s interests on Capitol Hill need to drive for what will structurally help economic recovery: jobs, jobs, jobs. At this point, reality looks as if the government and free enterprise are forced bedfellows and they’re going to have to get used to it fast if they want to ward off years of less than anemic economic activity.
We understand that–like home building and home builders–the association is facing one of its biggest survival challenges ever.
Some of the executive committee members Jones’ memo addresses believe that that the seriousness of the challenges call for measures more drastic than prioritization.
Very likely, by the trade group’s Fall Board meeting in Chicago, a dramatic restructuring of the NAHB may surface. Just as some of the big home builders have had to relook at how they rationalize operations in markets–and in many cases, have chosen to exit some–the NAHB may have to look at all of its resource allocation with a sharp eye toward making the best with less.
Advocacy is the what home builders need most. That’s where the group should hunker down and do what it does best.
Florida Home Sales Show a Pulse
Buck Horne, vp for equity research covering home building at Raymond James & Associates writes this:
Florida existing home sales increased 28% y/y in June, accelerating sharply relative to May’s 16% y/y increase and an 18% rise in April. Across the state, June single-family existing home sales totaled 15,820 units, up from 12,333 units a year earlier. On a weighted average basis, sales in South Florida increased 70% y/y, driven by sales in Fort Myers-Cape Coral (+137%), Miami (+54%) and Ft. Lauderdale (+35%). Central Florida sales also improved 24% y/y on a weighted average basis, driven by sales in Orlando (+38%) and foreclosure ridden Fort Pierce-Port St. Lucie (+27%). North Florida sales also notably turned positive, rising 10% y/y after falling 2% in May and 6% in April.
Been down so long….
A Dose of Realty
If you’re like us, you could spit your coffee watching this one. Hat tip The Big Picture.
| The Daily Show With Jon Stewart | Mon – Thurs 11p / 10c | |||
| Home Crisis Investigation | ||||
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In Home Sales, Seasonality Matters, But Raw Numbers Pay the Bills
We still think the jury’s out on what this week’s new home sales data and Case-Shiller numbers mean.
- The bloggers/analysts have seized the high-ground on saying they’re interpreting the data precisely, and with discipline.
- The mainstream media is regarded by said bloggers/analysts as the gang who can’t shoot straight, but they’re making the bigger splashes with their headlines and news flashes.
There is no arguing two important facts, one of which Barry Ritholtz’s The Big Picture blog drums into our thickish skulls. That is that the Census Bureau’s data on new home sales comes each month with a margin of error, and almost invariably undergoes revision down or up. When the percentage margin of error exceeds the percentage gain or loss, then you have to assume that you’re learning approximately zero from the released figure.
Anyone who wants to argue this matter with Barry, be our guest.
So, before getting too thrilled by the new home sales data, factor in the margin of error.
Second, sheesh, remember this business is a seasonal business. God, or whomever, made residential construction a Seasonally Adjusted business. People, despite little more than one in five of them being married-with-children families, still tend to shop in the Spring and buy in the late Spring, early Summer timeframe.
Up, in other words, is only up if it compares with the same time last year, or for many of the previous years. If you can’t sell more houses after the Super Bowl than you can when the National Football League games are on all day Sunday for 20-or-so weeks, then this business is not for you.
Clearly, if a disciplined economic assessment of national housing numbers and what they foretell is what you rely on, then Calculated Risk and The Big Picture are where to look.
Why are the media so fixated on Sequential Ups, when it is year-on-year or seasonally adjusted figures that are the true telltales of the direction? Will calling the housing bottom sell more newspapers or generate higher TV ratings, resulting in more cash for the media? Doubtful. Will real estate advertisers flock back to the media upon word from the editorial side that recovery is no longer as far down the road? Perhaps.
Maybe it’s a case of reporters, editors, and producers not recognizing where the news is in the data, because they’re inexperienced, or obstinate, or overly busy, or maybe just dumb.
Still, by being wrong and undisciplined in their reporting about the data and its meaning, they may wind up being right enough to drive the bloggers crazy. All it will take is for “Animal Spirits” to flip-flop from paralysis to zeal, from fear of buying to fear of losing the opportunity of a lifetime, and the dumbest, most-undisciplined, stubborn, cub business reporter ever might correctly call a turn in the tide of the market.
Many folks who are slogging it out in the residential construction landscape with companies that develop or build homes do not have the luxury to rely much on the disciplined, economically precise sources of insight for their action plans. If they were to guide their companies based on the prognostications of these analysts, they would probably wind up just grabbing what little money there may be in their reserves and go far, far away for a while.
Many of them don’t behave that way. They’re in what they do, many of them, for reasons resembling a vocation. They believe in making new neighborhoods, and employing good people to do that, and building a legacy for their company’s name.
So numbers that are better on a raw, month to month basis, are just that, better. The restrained optimism (remember, the NAHB builder sentiment reading HMI was up only insofar as two more home builders per 100–up to 17 now–see improving conditions in their markets) is by no means more than that. Many, many home builders are probably more bearish themselves about prospects than even the economic blog meisters we quote here so often.
However, to them, the absolute numbers are how they pay their bills. If a public home builder has standing new-home inventory in a community (their store) that is nearing a close-out threshold, it will sell those units at whatever it takes to generate cash, and zero out costs related to keeping that operation going. So, if June’s non-seasonally adjusted national sales number reflected a lift of 3,000-plus new home sales from a month earlier, then those home-sales represent both cash generation and cash preservation.
A lift in new-home sales, in absolute, is a lifeline to companies. Months’ supply of new homes finally encroached into the 8-plus months area for the first time since 2006 sometime.
Employment and the stability of home values are the only two ways there’ll be solid ground for recovery. The only random factor that could trump these forces could be a psychic shift of “Animal Spirts,” which by its nature would not be explained by the disciplined data analysis of the blogger econ gurus.
Meanwhile, there’ll be good reading when, after the Case-Shiller Index offers more “up” numbers for June, we start seeing seasonality and spreading distress kick-start the rate of price-declines to a renewed pace. Or maybe the MSM will have inadvertently gotten things right by bungling the business information but correctly reading consumer sentiment.
Time will tell.
Jump Jive An’ New Home Sales
Seasonally adjusted, new home sales were up 11%, or 39,000 units compared with month earlier figures. The Census Bureau, which reports the numbers, says there’s a 13.2% plus or minus margin for error, and they frequently revise their figures.
Should you feel a gust of encouragement or not from the numbers? The answer seems to depend strongly on whether you’re trying to drive traffic to your Web log, or whether you’re in the actual business of new home sales or reporting on companies that are.
If you’re among the ranks of the former, your take is probably excessively pessimistic. You see the same data everybody else sees, but choose a different take on it. i.e. The Big Picture blog’s Barry Ritholz.
we in fact know that Sales fell from last year. They were down 21.3%, a number greater than the margin of error.
The monthly data, on the other hand, is not statistically significant. Therefore we DO NOT KNOW what the change was from last month, as the margin of error is greater than the reported data point.
The usual suspects got it wrong, as they do every month.
If New Home Sales are so strong, then can anyone explain why prices are still plummeting? Median home prices dropped 12% year-over-year, and 5.8% from the prior month.
Well, Barry, no one’s really saying they are so strong, they’re just comparing them to the figures around to compare them with. Arguably, you only properly reflect seasonality in new home data by comparing year over year.
In this cycle, anomales like the global credit crunch set in motion as Lehman Brothers imploded have disrupted seasonal trends. Every month that is not worse is like a two-stroke swing in match play golf.
Here’s Citi’s Josh Levin’s read on today’s data:
In our opinion, one of the key takeaways from today’s report was that 6/09 NHS increased relative to prior months despite the fact that mortgage rates increased in 6/09. (Freddie Mac reports that the average 30-year mortgage rate was 5.42% in 6/09 versus 5/09’s 4.86%). We think today’s data may demonstrate that while rising rates are negative at the margin, a fifty basis point move does not dramatically impact home sales given the low absolute level of rates.
That is, as many issues exist that could have sent June numbers down as helped them go up.
The only question is is the lift sustainable? If sustainability relies on a steady upward swing, it’s probably not, because an ultimate gain may come with some zigs and zags.
Those from the home builder/developer camp might likely read too much hope into the June data. Rather than get dizzy, the answer would be to give July a big push and try to match the sales momentum for one more month, and one more month after that. After about 18 to 24 more months of pushing like that, things may start to feel like they’re turning for real.
Then some blogger’s web traffic will matter not much at all.
Some Take-Aways from the LandSource Settlement
The great 2008-2009 LandSource bankruptcy marathon has drawn close to a finish line, for the moment. Here’s Big Builder’s Teresa Burney’s story on what looks like the resolution of many issues, many questions, and many shirts lost over 15,000 home lots in Valencia, Ca., 20-or-so miles north of downtown Los Angeles.
Although, last week’s LandSource deal as it stands today, like many, many matters financial and economic these days, shares an ever more widely current mantra of wistful consolation: “It could have been much, much worse.”
One executive close to the LandSource news last week noted that, thanks to the good-faith negotiations from most of the stakeholders, and thanks to the competence of restructuring advisors Lazard Freres, the worst-case scenario–liquidation–was avoided.
“This is the first big residential real estate entity that went into bankruptcy and came out,” said our friend, who’s been close to the LandSource machinations for more than a year. “Look at Neumann Homes, and Kimball Hill, and any number of the other larger bankruptcies that have occurred, and you got everybody losing everything. Settling the way they did saved a lot of jobs up there, and that’s just one thing you can say positively about this whole process.”
Residential real estate California style, you have to admit, adds a measure of panache and drama to the classic story of people agreeing to pay more than they could afford to pay for dirt, and then regreting it.
Out of the ruins of a landbank-community development caper on steroids, whose erstwhile $2.6 billion architecture in early 2007 rivaled that of any collateralized debt obligation structured investment, comes a new name for a new entity, Newhall Land Development.
And from the rumble of an army of creditors who held chits that would pay them pennies now for the dollars they put in 36 short months ago, versus the dozens of dollars [per dollar] they’d first envisioned they’d take away when they invested, comes a familiar face to run things, Emile Haddad.
Emile, 40% owner of a venture with Lennar, called Five Points Properties, which is the managing partner set to run Newhall Land Development.
Five Points, by the way, might be one big capital joint venture deal shy of providing Lennar the split-level strategy it has hinted at for a couple of years now. If he gets a big money dance partner, then he can serve as Lennar’s strategic land position and supply line, letting Lennar Homes hew to an asset-light home building and marketing operations model.
What’s not terribly clear from the LandSource bankruptcy settlement is what it means to the buying and selling of land in the rest of the country. LandSource watchers–and there are plenty of them–have been hoping for a valuation beacon to shine from the settlement last week.
That’s difficult to discern directly from the valuations and dispositions placed on the sundry assets that fell under the LandSource name. Clearly, the real estate once known as Newhall Farm and Ranch in Valencia, and all of the non-Valencia holdings, pencilled in the range of $300 million to $325 million, when once they tipped the scales at $2.6 billion.
“There’s no straight-line relationship between what it all was worth then vs. now, because the assets are so different,” said our executive source. “Plus, it almost doesn’t matter what it’s worth today. The money is all about what your assumptions are for what the next three or three and a half years are going to bring in the real estate market.”
With $140 million from Lennar, Lennar gets two big plusses. One, is they get 15% of the newly reorganized company–along with title to a slew of coveted home building lots. Two, they get off the hook on $1.4 billion they might have owed if stars hadn’t aligned as they wanted. The reset for them gives them both time–the full entitlements will take three to four years of haggling on the ground– and rights to lots they can turn into cash.
For Haddad, complexity is a norm. His deals today are not so much cost-value and internal rate of return transactions as they are belief systems. Whatever the pennies or dollars are for the dirt today matters little. The question is, will the next up cycle map to his–and Lennar’s–timeline, which looks to be about three or four years.
Even Risk Has Rewards
Calculated Risk is ever the cautionary analyst.
Whenever we’re apt to get too hopeful or unreasonably sanguine about events, we are grounded back to reality in the observations, longitudinal tracking, and disciplined analysis Calculated Risk provides.
Tonight, though, he’s either giving us one for free or taking one for the team. It’s a positive post about three substantive numeric benchmarks that he acknowledges ”harbinge” better times ahead. A year ago, one could not look at the data and find these shifts in outlook.
Have a look, and then try not to think about them. There is still much to do, and still much to try to avoid doing between now and recovery to make it so that these positives ward off a second dismal dip in economic trends after a feeble comeback next year.
It is beginning to look, though, that Calculated Risk believes basics may stabilize in a way that could preclude a W shaped economic trajectory.
For now, take heart in little mercies, and live to fight another day. Here’s his parting thought this evening:
1 From Longfellow …
The Rainy Day
The day is cold, and dark, and dreary
It rains, and the wind is never weary;
The vine still clings to the mouldering wall,
But at every gust the dead leaves fall,
And the day is dark and dreary.My life is cold, and dark, and dreary;
It rains, and the wind is never weary;
My thoughts still cling to the mouldering Past,
But the hopes of youth fall thick in the blast,
And the days are dark and dreary.Be still, sad heart! and cease repining;
Behind the clouds is the sun still shining;
Thy fate is the common fate of all,
Into each life some rain must fall,
Some days must be dark and dreary.
Henry Wadsworth Longfellow, 1842
For What It’s Worth
Myth or reality, it’s widely held that real estate–including developers, home builders, brokers, and, of course, lenders–hi-jacked home appraisals for a few years BHC [before the housing crisis]. Easy money and Ponzi-dynamics rewarded all comers, and punished almost no one.
That is, except those who may have felt they left money on the table rather than in their pockets.
Appraisals fell somewhere amid a keiretsu-like quid pro quo complex, train-linked to the juggernaut of home price appreciation. With each new phase of a subdivision, market demand driven prices escalated, and banks approved greater and greater loan amounts based on higher appraisal amounts, supported–in Catch-22 harmony–by higher comps… All for parity products in the same submarkets.
For as long a period of time as there were greater fools pouring into the homeownership pipeline, everybody collected. The rules were simple: Make more money.
In enough cases to keep NY State Attorney General Andrew Cuomo’s office busy for more than a year investigating mortgage frauds, home builder/developers’ preferred or owned lenders muscled appraisers into writing numbers that inflated home values, stretched home buyers into loan territory they never should have taken on, and, inevitably, stressed the financial system with debt no one will ever repay.
The truth of the story makes it a classic case of rotten apples, and what needs to be done about them immediately. There are always rotten apples. Just one or two will work like a contagion in a big basket of apples.
Here’s an investigative piece about real estate appraisers who are the bad apples, from The Center for Public Integrity’s Joe Eaton:
A Center for Public Integrity investigation of the appraisal industry in California and Florida, two of the states hardest hit by foreclosures, found that since 2005, one in six appraisers whose licenses were revoked or surrendered kept their real estate sales or broker’s licenses. The violations that led to these appraisers losing their licenses ranged from simple incompetence to fraud committed for personal financial interest. Yet they slipped through the cracks of a loosely maintained system of state oversight, which allowed them to continue working in the real estate industry negotiating sales to home buyers, who likely know little about their pasts.
Equally, bad apples showed up elsewhere in the lending pipeline. Sometimes, it was mortgage originator, sometimes it was a home builder sales manager under pressure to make a monthly bogey during the boom. They bend the rule, and then they bend it a little more.
Bad apples are inevitable. Our cautionary tales in business, however, have not only to do with bad apples, but with accountabililty around them. If there’s a bad apple in our midst, or more importantly, reporting through to our own management, who “owns” the consequences of his or her actions?
Big Builder editor Sarah Yaussi probes the impact of regulators’ new initiatives to right the wrongs in the home appraisal system in her “Appraisal Angst” cover story in the current issue of the magazine.
The code, which went into effect May 1, was borne from an agreement between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency (FHFA), and New York attorney general Andrew Cuomo. It forces lenders who want to sell their conforming loans to Fannie Mae and Freddie Mac to follow new rules designed to ensure greater appraiser independence and more honest home valuations.
However, home builders and other critics have complained that the code is overcorrecting for boom-time sins, turning home price inflation into deflation. Backlash from the new code has grown shrill enough to reach ears on Capitol Hill. On June 25, Reps. Gary G. Miller (R-Calif.) and Travis Childers (D-Miss.) introduced H.R. 3044, a bill that would place an 18-month moratorium on the new code.
Cuomo and the regulators are setting themselves up as the heroes. They would have us believe that all of residential real estate is a basket of infected apples, the villains indistinguishable from the perpetrators.
In correcting a deficiency, policy creates new problems, and those problems redound directly to those who are trying to sell homes, new and used.
The two big stumbling blocks now are, what else? time and money.
Money, because new homes are getting comped with used homes slogging through foreclosure absorptions. Appraisers take a square-foot-is-a-square-foot-is-a-square-foot attitude toward a submarket, whereas a seller will be quick to say his 2,200 sq. ft. place is night and day different from that of a 2,200 sq. ft. foreclosure sale that may have been damaged and vacant for six months.
Time, because these days, a fair number of deals hang in the balance of coming through when they’re expected to by the owners, or falling through altogether.
We’ve seen home builders hold the swimming pool, hold the granite counter tops, hold the “better” window set as they draw toward the finish line to deliver a new home. That’s because they don’t know until the appraisal comes through what the home in that location is going to get bank approval for.
Here’s wisdom from a friend on the issue:
The more I think about the whole appraisal issue the more I recognize that it is fundamentally flawed and needs to be completely rethought. It’s not merely an issue of whether or not foreclosure sales should be counted among comparable sales. The fact is that the intrinsic flaws were not really obvious or serious while the market was strong and growing for the last fifteen years or so. But now , using appraisals as they are presently conducted as the only basis for determining house value is totally inadequate. The analysis of the various comparable sales is far too simple and does not properly identify the components that create value, i.e. a kitchen can be worth $10k or $100k, but that level of detail is not part of an appraisal. Also, most appraisers’ qualifications are inadequate to complete the quality of appraisals that are required, not are they properly compensated. How much time and effort can somebody expend when the fee is less than $500.00. Replacement costs, propely discounted, have to play a bigger role, and the parties (sellers, banks etc.) have to have more transparent roles/opportunities to contibute to the valuation process. It’s going to be very difficult to change the system with all of the entrenched interests.
Difficult is right.
Still, one of the hardest things to change is what happens when there’s a bad apple in the basket.
That Empty Feeling: Vacant Houses That Could be Homes
In housing, demand and supply are not discrete buckets. Scarcity, it would seem, is more a matter of collective psyche than too-few places to hang our hats.
We have an excess of places to hang hats, and not enough householders to fill them. That’s been the case for years. Absolute vacancies reached their all-time historical highs even as existing and new-home unit sales were cresting in the mid-2006 months. More supply didn’t reduce demand then. But that was when we learned that demand and real demand were two different things.
Now we have four things conspiring against real demand–a tougher credit process, a household balance sheet correction, a double-jeopardy jobs picture, and a collective psyche in need of antidepressants. What could be worse for demand?
And if there’s little true demand, there’ll be no psyche-fed demand.
A widely held theory is that we need to “work through” existing supply, which would re-ignite demand. There are lots of ways to look at existing supply beyond multiple listing service listings.
One measure of existing supply–of rentals as well as for-sale housing units–comes from the U.S. Census Bureau’s report on “Residential Vacancies and Homeownership.”
The Calculated Risk blog did some analysis of this morning’s release.
- Counterintuitively, perhaps, homeownership has risen a tick from last month. CR observes that homeownership rates crested in 2005 for two reasons. Aging boomers buying houses, and silly loans offered to people who shouldn’t probably have gotten them.
- Absolute vacancies are down, way down from their peak. Still, though, he estimates there are 600,000 vacancies beyond the norm that must either be a) bulldozed, b) bought, or c) rented, before a “normalized” buyer-seller-renter market can resume.
- To further illustrate, rental vacancy rates are above normal, at 10.2% vs. a trend level of about 8%.
The two moving targets on predicting normal demand for these vacant units are immigration, which has slowed down to some yet-to-be quantified level, and household formations among young adults, which we know has also slowed down to the point where we’re hearing “30 is the new 20.”
Meanwhile, all those little boxes, empty boxes.