Time Out! Rethinking Homeownership? Or Rethinking Newsweeklies?
The people that bring you People have too much spare Time on their hands, or so it seems. Maybe it’s just the month of August, but it strikes us that the editors at the nation’s remaining significant and viable newsweekly go off their rockers each summer as they pick their dog days issue cover topics.
This one, for instance.
This cover ran August 17, 2009. The story tells Time’s audience of millions that the widely held belief, or myth, that exercise and cupcakes lead to weight loss is untrue. “It’s what you eat that really counts” is the contrarian, myth-busting revelation of this story. This really goes to prove that hell hath no fury–for an editorial staff of a news weekly–like a slow news month in an off election year.
This year, of course, it’s not an off election year. It’s a big-time mid-term election year, when every seat in the House is up for election, and important Senate seats are in play, and very likely, a politically unbalanced equation in Washington will wind up more balanced after the first week in November.
Still, in August, here’s what Time’s editors came up with as their thought-leading cover idea for the month’s last week:
Now, it’s not exactly news that 1) people who should not have bought houses bought them, 2) bankers who should not have lent money to those people who should not have bought houses lent it, 3) GSEs that should not have securitized those mortgages securitized them, and 4) Wall Street firms that should not have structured investment vehicles full of those securitizations did that, and 5) AIG should probably have not insured credit default swaps at such huge profits either.
What we’re missing here, is the same thing we’re missing when Time informs us that cupcakes, exercise, and weight loss don’t go together. The editors suggest that lots of exercisers are getting fat because they don’t know they can’t overeat, and in the same way, they implicate Americans’ long-held dream of homeownership in the monstrous mess that our economy is in. That’s logic befitting the people who bring us People, so we can hardly blame them.
We have been reporting for months now that home building company managements were really nervous in anticipation of the end of the tax credit’s run on April 30, but they are mostly in favor now of a clear and definitive statement from our elected officials that there will be no further federal tax credits for home buyers.
As a raft of negative headlines that ended August gives way to a sputtering smattering of positive tidings this week–PMI, weekly unemployment claims, retailers same-store sales, existing home inventory decline, and signs of stabilization in pending home sales–some building managements remain nervous about two key drivers.
One–which will get clearer tomorrow after the Bureau of Labor Statistics releases its month of August jobs report–is the most important factor affecting those who might want to join the ranks of homeownership. The other is access to credit, which will remain in the thrall of considerations and deliberations on the fate of the government sponsored enterprises and their role in home finance.
We don’t believe–despite the rhetoric of lobbyists who are out to debunk the myth of homeownership the way some folks feel they need to destroy the myth that exercising and eating dessert with impunity should still result in weight loss–that people will ever heed the people that bring them People when it comes to suppressing their desire for the benefits of owning their own home.
The trillion-plus-dollar problem with household finance gone amuck that sits on our collective balance sheets did not occur during the slow news month of August. It was a decade in the making.
The big question for all of us is how to get people, as in the people who People goes to, to save money and spend money in ways that don’t come back at them in the form of new taxes. That balance–saving and spending–needs to occur even as so many Americans repair their household balance sheets, and the U.S. repairs its own.
Clearly, as the behavior of households increasingly mirrors that of companies, we’re going to go through a limbo period for home buying trends that will last through the mid-term elections. Yale economist Robert Shiller explains this as can’t-help-it psychologically driven behavior when elections are imminent. “People just like to know” before they commit to a big-ticket item like a home, he says.
So, when the re-balancing of the political spectrum occurs, and corporations stop parrying on whether to reinvest their troves of cash into their businesses, we may begin to see home buying demand enter its next phase.
So far in 2010, we’ve seen “surprising” turn to “choppy” turn to “sluggish.” What comes next will queue up what may be the long-awaited return of housing’s prodigal child, a Spring Selling Season in 2011, and better yet, unabetted by Uncle Sam.
So, what’s the over under on what Time will have as its cover story in August 2011?
Home Builders Eye the Gap Between New and Existing Sales
It’s one of the things that makes home building executives lose sleep these days (or nights). It’s what no home building company executive alive ever had to contend with in all of his or her downturns past. It’s the yawning divide between existing home sales and new home sales.
Bill, the rock-star economics and housing analysis blogger formally known as Calculated Risk, calls the widening spread between resales and new sales The Distressing Gap. In fact, he traces the ratio of new to existing home sales going back to the 1960s, and finds that for most of that time, the relationship between new and existing has been pretty steady, “until recently.”
So, you can see that no matter how many cycles any active home building executive tells you he or she has been through, none has been through one whose plot line has run like this one.
SAI Consulting principal Fletcher Groves plots the ratio a slightly different way. It looks this way.
An interesting way to state the ‘distressing gap’ is the ratio of new home
sales to sales of existing houses.EOY Approx. Ratio
1994 1:7.0
1995 1:5.8
1996 1:5.3
1997 1:4.8
1998 1:5.5
1999 1:5.0
2000 1:5.9
2001 1:5.6
2002 1:5.7
2003 1:5.5
2004 1:5.2
2005 1:5.7
2006 1:5.4
2007 1:7.4
2008 1:7.9
2009 1:12.5
2010 1:13.1The ratio was in a narrow range of 1:5 to 1:6 for about 12 years, starting
in about 1995, until 2006. In 2007, the ratio widened by about 40%, from
1:5.4 to 1:7.4, and has since widened by almost 80%, from 1:7.4 to 1:13.The ratio has widened by almost 150% since 2006. If homebuilders didn’t
know it before, they know it now; they don’t just compete with other new
home builders.
We know that Calculated Risk says that sales of distressed and foreclosure homes are the cause of the gaping gap, and that’s fairly evident. His concern is that until–many, many months from now, the inventory of troubled-loan homes finally gets cleared–new homes, and their contribution to GDP via the residential investment component will be a non-starter.
We asked Fletcher about whether he sees a return to the norm in the ratio anytime soon, as we have a hunch that younger buyers hitting the market in the next two to five years will begin to bias the trend back toward new.
Here’s his reply.
I think it is fundamentally about the relationship between supply and demand. I am not sure how the demand component works, but builders exercise more control over the supply of new homes than owners exercise over the supply of existing homes. And, to a degree, the control that builders exercise over supply is actually lenders exercising control over builders.
I think that factor has resulted in the declining percentage of new home sales to total sales. But, I also spoke with David McCain at MPKA this morning, and we both concluded that supply in the absence of demand is irrelevant.
Somewhere in all of this is the issue of how much capacity remains, or will remain, in the homebuilding industry, and – here is where my interest comes in – how productively that capacity will be utilized when demand finally returns.
I think you can say, for whatever reason, the ‘normal’ ratio (or maybe the historic ratio) of new homes sales to sales of existing homes has been about 1:5, and, right now, it is at 1:13. Where does it inflect? I don’t know. CR thinks the current ratio is a reflection of the current level of distressed sales. I don’t know if I agree or disagree.
I think you can also say – unless there is some kind of socio-economic plate shift going on in homeownership – that the demographics point to a much higher long-term level of demand for new housing than the level of demand that is present now.
We agree that builders can and do control supply right now and that the only thing missing from the low supply equation is a prevailing sense of scarcity. Aligning with folks like SAI, builders can use velocity to overcome some of the price and profitability hurdles they encounter in a market where value is still on a slippery slope.
It used to be that marketing and selling skills played a role in creating need and urgency where there once was none. But that was when banks were more willing to loan money for home mortgages.
We’ll conclude that certain home builders will find ways to exploit the wide gap between existing and new home sales as their opportunity–some have already begun to do that by widening the value margin in the total cost of home ownership with energy and water efficiency new homes. This is one area where existing home sellers can not gain an advantage over new home builders.
Does Rupert Murdoch’s US Flagship Have Something Against Home Building?
News flash. The Wall Street Journal is anti-home builder.
Or else why this cynical piece of snittishness in the Op-Ed pages of the WSJ today?
If a housing recovery is finally upon us, it will be no thanks to Washington’s serial interventions, nor to the home builders who have cheered so vigorously for them. Together with the Realtors and mortgage bankers, the home builders form a lobbying army of the Potomac. The mission is to secure ever higher federal subsidies for housing. The strategy is to convince politicians of both parties that a robust economic recovery can only occur if residential real estate is booming again. This is false.
With the exception of temporary bubbles caused by reckless monetary policy, rising home prices are merely a symptom of a vibrant economy, not a cause. The true cause of economic growth and higher living standards is rising productivity, which occurs when societies wisely invest in many things, such as new technologies and new ways of doing business. Housing is just one of those things. Setting as a goal the maintenance of high levels of investment in housing has obvious political appeal, but it’s junk economics for a nation that wants to innovate and grow.
Here, this afternoon, the Journal’s Developments blog features young Robbie Whelan writing about home building company woes seems to have some confusion about exactly what an annual rate or a run rate of new-home sales is, plus he mixes up new-home sales (orders) terminology with “closings,” then runs rough-shod with the industry implications with an illogical segue over to Toll Brothers’ earnings story.
To follow Whelan’s logic, the public builders, who represent more than one in five new homes sold in today’s market, wouldn’t regard the collapse in the market as very significant. At least, that’s the way his story reads:
….buyers were closing on between 350,000 and 400,000 new home a year in 2009, a doldrum year for the U.S. economy. For each month between April 2003 and June 2006, Americans were buying new homes at a rate of more than 1 million houses per year. From 1998-2001, perhaps a more normal time in the U.S. housing market, most months showed an annual sales pace of 850,000 to 950,000 homes.So what do these record lows mean for builders?
For the publics, maybe not much. Toll Brothers Inc., a standout in the sector because it’s a company that only builds high-end, luxury residences, posted its first quarterly profit since 2007, and stock analysts from Standard & Poor’s and Stifel Nicolaus maintained “buy” and “hold” ratings on the company’s stock, suggesting that its price could go north. Every public builder’s stock price was up on the New York Stock Exchange at 11:30, despite a slight decline in the Dow Jones Industrial Average.
Guess we’re to infer here that if public builders’ share prices are doing okay, their business is fine.
A string of analysts’ quotes on the outlook for public builders’ stocks devolves into an entirely incomprehensible, disconnected, and none-too-flattering series of quotes from NAHB CEO Jerry Howard, patched together with little context and no conclusion save the obligatory, “Obviously we have to be more prudent than we were, but no one knows how it’s going to play out.”
Glad we read that piece.
Don’t you agree, though, that the Wall Street Journal is progressively anti-home builder/developer?
Home Sales’ Eve–What a Slow News Week Can Do to Housing Analysis
“Buying a home is a willful act of optimism,” wrote the New York Times’ David Streitfeld in yesterday’s newspaper. This is Streitfeld’s own commentary, an amalgam of what he believes as a result of talking with a handful of brand name housing analysts and economists who forecast that pricing power will elude home sellers for anywhere from now until forever. Again, in the reporter’s editorial opinion, the epoch of trading on residential real estate ownership demand is ready to set in stone for the history books, as it offers only “a dismal present and a bleak future.”
All this, because it is such a slow news week that existing- and new-home sales data are likely to get front page and top story play over the next few days. Here’s what we say to that. Either take the week off, if you can, or look yourself in the mirror, strap ‘em on, and go out and sell a home, thumbing your nose at all of us media.
Appreciation, it would seem from reading many of those quoted in Streitfeld’s story, will amount simply to its strictest sense, expressing gratitude for something. No longer will the term ever come into play to describe the increase in dollars that one would have to pay to acquire a particular piece of real estate.
Streitfeld’s pocket seems to hold more than a few nails for the coffin of housing, and his stories keep hammering these nails in one by one.
Underlying the theory or angle of the “never again” story are two assumptions. One is correct, and one is, at best, a guess. So, while there is a fair amount of accuracy in the facts and data in the story, the conclusion, to us is dubious.
Let’s start with what the story gets entirely right. People believed–and, in fact, still believe that home prices defy the laws of gravity. They foolishly think, even to this day, that house prices must go up. Says, Robert Shiller:
“People think it’s a law of nature.”
We know it’s not. We know now that real demand, (caused by business expansion, household growth, and immigration), plus fake demand (caused by failed home finance regulation, and over-zealous homeownership bias) add up to a triple boom and a quadruple bust.
The most important trend to become dislocated in the early 2000s run-up was home affordability, which un-coupled people’s take home pay and savings from the American Dream. Main Street’s misery today is the multiplier affect of dollars misapplied as a result of this un-coupling. The fast-track to 70% homeownership, it turns out, doubled the speed on the nation’s way below 65%.
What this story misses, particularly where it strays into forecasts and assumptions about the mid-term and longer term futures of housing valuation, is a basic grasp of how demand–i.e. economics, household spending, and job growth–happens.
Just as we feel the biggest destabilizer in housing’s past was the de-coupling of household incomes and savings with home prices, we’re also of the conviction that predictions about house prices beyond the current economic cycle are entirely unfounded. Guessing that they’ll return to the mean–Shiller’s 100-year observation of 1.1% above inflation–is about as responsible one can get. Zillow’s Stan Humphries and the Center for Economics and Policy Research’s Dean Baker make reckless sensationalist comments for Streitfeld’s story that don’t add truth but instead merely cause fear and panic.
Why is it irresponsible and ludicrous to make remarks like this?
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
It’s irresponsible and ludicrous because Mr. Humphries’ expertise, for what it is, doesn’t extend to understanding two critical factors in why “demand doesn’t exist,” and why it may or may not exist within a handful of years. At least Big Picture blogger Barry Ritholtz applies economic discipline and thoughtfulness to his prognosis.
Still, one critical factor is this. Will the United States re-secure primacy in producing products and or services that people both here and elsewhere need? Some part of the nation’s economic hiccup appears to spring from the U.S.’s excess capacity to produce what people want versus what they need. It’s cheaper to produce what people need elsewhere. It’s more profitable–until now–to produce what people want or aspire to here.
Demand for homes will depend on the nation’s ability to reestablish a causal relationship between domestic production capability and need, and to figure out how to do that profitably. If that balance resurfaces, the preposterousness of Humphries’ and Dean Baker’s remarks becomes clear.
Also, Streitfeld fails to ask another key question, which can easily break many a “quant’s” new-normal models for housing demand, models formed in a vacuum of understanding what drives demand.
For after all, a fallacy in the past has been to assert that “housing is the engine of the economy.” That’s only true insofar as housing stood for providing safe, well-located, good school-proximate, quality shelter for married-with-children households, which dominated housing’s landscape for generations.
The married-with-children household, in fact, was the catalyst for the 50-year economic expansion that may or may not have ended with a housing bubble in the early 2000s.
The question–now that married-with-children households represent less than a quarter of all households–is What Will Generation Y Do About Kids? The married-with-children household, we’ve seen through thick and thin, behaves differently. If GenY young adults choose in significant numbers to be married couples with children, Dean Baker and Stan Humphries will have to eat their words, because demand for homeownership–which proves to be a preferred choice for those kinds of households–will surge.
It’s not Baker’s or Humphries’ fault that they don’t know the answer to the question. Nobody does. It is their fault that they pretend that their present assumptions give them insight into what demand will be like for years to come.
All we know presently is that the relationship between what households earn and save over an extended period of time and the cost of buying a home need to tie together. What we know nothing about is that, as the number of U.S. households increases by between 1 and 2 million per year, give or take, over the next several decades, the X factor will be how many of those new households will be married-couples-with-children homes.
For the next few years, or so, the nation will remain in the thrall of that unknown. What we should busy ourselves with is the answer to the other question, which is how the U.S. can resume profitably producing goods and services that many people need.
Producing what the world wants and what people desire is good business, but a counter-cyclical plan would include putting people to work producing necessities.
Where Housing Meets the Beach
Happily for our co-workers, we availed of four bona fide paid holidays to skip town on you last week, but promise that’s the last time off we’ll enjoy for the balance of this year. We won’t tell you precisely where on the Northern California coast we vacated, because it should remain a best-kept-secret.
Still, we will attest to feeling especially calmed, cheered, and comforted at clear evidence we were neither the laziest nor the one with the biggest gut on the beaches we visited–those distinctions claimed unreservedly by a host of lolling fish-fed denizens, lying glimmering in their sealy torpor as the foamy tides crashed upon their rock beds below.
Along the cliff trails were a slow motion thunder of waves, the silent sun that played hide and seek with the fog, the sweet smell of salt and distant campfires, a smart wind out of the northwest, and a vast bouquet of muted coastal flora that blanketed the upper ground and draped over the lichened cliffs that plunged to the sea.
92% Blackberry-free for a week, we kept email-induced bad moods to a tidy minimum, and tried our best to stoke the grown-local economy with dollars we felt were better meted out to add to our store of fond memories than on a yet-to-be needed big screen TV.
Still, perversely perhaps, the Housing Crisis and our infatuation with what lies beneath it [and, in turn, what the Housing Crisis lies beneath] was never entirely expunged from our thoughts, even during such a blissful retreat. California freeways glutted with bicycle-laden recreational traffic and tourist packed restaurants notwithstanding, we were struck equally by none-too-subtle evidence of swelling ranks of the displaced, from the streets of San Francisco to the streets of Guerneville.
With more than one in five work-capable souls unable to secure gainful employment, and another hefty bunch of folks not even hopeful enough to try to find it, northern California is like a super-sized You Tube home video of our economy not at work.
Clearly, the bygone tax credits for home buyers and their April 30 expiration, aside from a fleeting manic fillip, played little to no part in the state of the market straits that face housing’s developers and builders.
Our vacation thought was this, and it was even before we caught up on some financial pages reading that we’ll reference below:
Let’s hope China and India get a middle class in time so that we don’t lose ours.
That notion came of at least three or more years of hearing that jobs, jobs, jobs should be everybody’s priority No. 1, but also hearing no one much talk intelligibly about where and how jobs will get created in the United States economy. No shortage of smart people have spoken. Recently, Intel founder and former chief Andy Groves offered his view of America’s job creation deficiencies in a Business Week piece. Here’s a key indictment:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
Further, in today’s New York Times, Bill George, a Harvard Business School professor and former chairman and CEO of Medtronic, comes out blasting consumer targeted tax stimulus programs in favor of a series of business tax incentives and inducements that would encourage U.S. investment and hiring. No sooner does the government get lambasted for interference and heavy-handedness after its trillion-dollar American Recovery and Reinvestment Act than a new barrage of critics call for policy’s helping hand to move the dollars from the household to the business community.
To get the country growing and Americans back to work, the government must shift course to invest in America. Tax policies and incentives should stimulate private sector companies to invest domestically in research, innovation, manufacturing, infrastructure and exports
From vacation’s remove, the red v. blue fray over policy and the nation’s treasury seems only slightly more imbecilic than press tidings that America has yet, actually, to take its medicine for The Great Recession and that we’ve instead tried to glean the nobler parts of The Depression with a great deal less of the pain and agony of that earlier slump. Such a Puritanical manifesto seems to underlie the analysis Judith Warner offers in yesterday’s Sunday New York Times.
Our nostalgia for the Depression speaks volumes about how we feel not just about the past but also about our lives today. A creaving for a simpler, slower, more centered life, one less consumed by the soul-emptying crush of getting and spending, runs deep within our culture right now.
Warner’s theory–which seems to suggest someone is to blame for something but won’t say whom or what–is not so unlike another piece that published while we were lazing with the seals. It appeared July 30 in the Financial Times, and was highlighted in Barry Ritholz’s The Big Picture blog.
The FT piece reads as a stop-action report on the giant You Tube video we mentioned earlier. It does what newspapers do best and worst. It gets all or most of the facts right and gets the story at least somewhat wrong.
The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
If that’s not an editor saying, “find me story for why the rise of Tea Party America,” then we don’t know what would be.
Again, we lay out in the sun among the napping seals, but we couldn’t help but think that all the accusatory noise about one political party or the other being to blame for the present state of the economy is just that, noise.
At issue is that it’s currently cheaper to scale manufactured goods and a growing number of services in overseas lands than it is to do that here. Either until consumers in those overseas lands begin to buy enough of what the U.S. produces, or when workers in those places get powerful enough and scarce enough to charge more for their labors, there’ll be a natural shift by companies toward sourcing materials, products, and services from non-domestic markets.
If the industrial age made what people needed more attainable and the post-industrial age made what people wanted more attainable, the question is how we follow that act.
Assuming for a moment that we haven’t gotten things quite as wrong as Sunday Times writer Judith Warner would suggest, nor that the U.S. middle class simply will go by the boards, we’ll have to figure out a decade or so bridge to when the Indian and Chinese economies become true consumer-led economies that will demand U.S. produced goods, services, and talent.
Or so the sleepy seals would have us think.
New Home Economy Works Slowly from the Bottom Upward
The story behind new home sales data out today, we believe, is that home builders collectively are managing seriously adverse economic conditions about as well as one can imagine in the limbo of a thus-far jobless recovery.
Look, for three years, the outspoken veteran home building company executives said the housing market was the worst they’d seen in their lifetimes. It could hardly come as a surprise to see unstimulated new-home demand revert to historical lows.
Remember, the absolute number of people who are out of a job is the highest it’s ever been, and the absolute number of homes in or headed for default is the highest it’s ever been as well. The multiplier effect of both of those trends hammers consumer spending, and bruised consumer spending translates into more pink slips.
So how could the new-homes number have eluded the economy’s wrecking ball once the U.S. government removed its tax support for purchases?
One of the more negative headlines, from blogger Calculated Risk, cites an all-time record low for June 2010, vs. a prior non-seasonally adjusted June of 1982.
Again, we’ll say that if you’ve got some of the sales associates who actually took deposits in May, June, or this month on new homes, you’d better do what you can to hang on to those sellers in the months ahead.
In the teeth of this adversity, small, medium-sized, and larger home building organizations have gotten yeoman’s work from their many-hat wearing associates.
Collectively, they’re turning inventory faster and they’ve ratcheted down both the absolute supply number (to 210K, down from 213K), and months’ supply, from 9.6 months to 7.6 months.
What’s more, analysts have observed the beginnings of a return to the market of first time buyers, as well as those in higher price points, indicating that contingency sales have begun to pan out for a number of folks in the new-home arena.
Even in the unlikely event that the unseasonally adjusted number of 1,000 new-home sales a day were to continue at its slow pace, and if the absolute supply number falls at the current level of 1.4% a month, we’ll be inside of six months’ supply by the end of 2010.
That’s hard work. And that sets up better times in 2011.
The very big question to think about, even if there’s little home builders can do about it, is job growth. A true housing recovery remains a ludicrous notion in the vacuum of a consumer-driven economic and jobs recovery, even if there are positives in home builders’ collective management of the supply of their wares.
Too, home builders can spark demand–like rubbing sticks together–if they can buy land cheap enough, which is not, for the most part, what they did in 2009 and the first part of this year.
Many of the finished lots purchased in the past 18 months were at rates that may reconcile to divisional operational overheads, but hardly pencil to a reset in the cost of homeownership that one may still reasonably expect after the dislocation and financial trauma of late 2008.
Strategically, just as home builders need–as a group–to learn more about who their home buyers are and what makes them tick, they’ve got to make strides on the buy-side of the equation as well.
When it comes to land buying, too often home builders get played for chumps. They are too easily played against one another, and too often they get tricked into not playing their own game.
Right now, for private home builders anyway, the ones to beat are not other home builders; the ones to beat are the banks. The banks hold (or rather, they’re mired in) assets, real and paper, for which they have no clue about how to get dollars. What they will get for the REO properties they’ve taken over from builders and developers are fines, headaches, taxes, lawsuits, lost money as entitlements expire, and grief.
A couple of home building companies–Lennar’s Rialto and Toll Brothers’ new Gibraltar unit–have set up to work with the FDIC at the bottom-dollar level to get value from holdings like this.
But, among banks who are still solvent, home builders may play at least a small role in their redemption from the hell of assets that can take on an evil life of their own if they’re not in the hands of someone who knows what to do with them.
Now that there’s beginning to be flashes of capital availability, home builders–particularly ones that can help banks work out of the myriad petty jams that some of their unintentionally acquired real estate holdings represent–may finally get their opportunity to buy low enough to sell something for a profit.
At least banks have staffed up their special services departments, and they’re said to be moving real estate deals to resolution, versus playing extend and pretend possum with the assets.
It figures home builders would have to take on yet even more risk as investors in recovery before they’ve got true visibility on its arrival. But that’s what it means when your industry sector is called the engine of the economy.
Somebody has to start spending money first, so hire a land expert who can get a bank out of a broken, messy, legally troublesome deal, and you’re on your way for dimes on a dollar.
FDIC Release on $1.8B AmTrust Deal with Toll’s Gibraltar and Oaktree May Come Tomorrow
The Federal Deposit Insurance Corp. could announce as soon as tomorrow its auction of a $1.8 billion portfolio of distressed loans under the now-defunct AmTrust Bank to a joint venture of Toll Brothers’ new Gibraltar Capital and Asset Management unit and Los Angeles-based private equity player Oaktree Capital Management, according to an executive familiar with the transaction.
“Normally, the FDIC would have put out an announcement by now, but they’ve been busy with a lot of issues these days,” said this executive, who asked to remain anonymous. “The press release may come as soon as Thursday this week. We think they’re paying about 30-plus cents on the dollar.”
Here’s an excerpt from an FDIC release on the award of another $898 million AmTrust pool of residential mortgages to a consortium of financial players led by Residential Credit Solutions, CarVal, and RBS Financial Products.
AmTrust bank failed on December 4, 2009, and the FDIC immediately entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all the deposits and approximately $9 billion of the assets. This transaction completes the sale of the majority of the remaining assets of AmTrust Bank.
- See related story from Big Builder’s Teresa Burney on Toll Brothers’ new Gibraltar unit.
Word is, the AmTrust 280 loan portfolio with an average of $6,000 per loan encompasses 1800 properties, primarily in the Nevada, Arizona, California, Florida, Georgia, and the D.C. Metro/Maryland markets.
The Oaktree-Gibraltar JV’s assumption is that, after combing through the 1800 properties, they–like Lennar’s Rialto–have an opportunity to profit at least three different ways on the financial disposition of the property assets covered under the loans.
- They earn management fees as they move some properties through to foreclosure and an ultimate sale;
- They can selectively sell properties to home builders or developers;
- They can rehab or develop the properties through the Toll Brothers operation and put more value on deals that may have failed sheerly due to lack of adequate capital access.
The Gibraltar-Oaktree JV, just like in the Rialto case, will have to cover its nut with the F.D.I.C. before it can write profits on to its balance sheet and flow them through to Toll Brothers’ Corp.
We hear that Oaktree’s deal with Toll Brothers taps into a different fund than the acquisitions joint venture it had formed last year with Ryland Homes. “Other home builders are not part of this AmTrust/FDIC deal,” according to the executive we spoke to.
Now that Lennar has triggered a financial skill-set it had developed during earlier downturns and Toll Brothers has established a captive unit to play in the distressed paper and hard asset arena, it may be a question as to whether other home builders explore adding such capabilities to their repertoire. This question surfaces especially as conventional home building operations continue to battle lack of visibility and low absorption rates.
No doubt public home building companies will explore all means possible to generate cash and write new profitable business onto their balance sheets, but most are set up with more limited financial resources and expertise than Lennar and Toll, and would have too much to learn too quickly to avail of the opportunities in so sophisticated a financial/legal game.
We’ve head KB Home is taking a look at partnering and that M.D.C. Holdings has had a conversation or two, but most companies will focus short term on opening stores and taking share, primarily from the nine out of 10 home buyers these days who are opting for a resale vs. a new home.
“Problem is, we’re competing with resales that were built in more and more cases in 2005 and 2006, so we have to do better than ever at getting our share,” said the CEO of one of the nation’s leading public home building companies.
Housing Data Tops the List of Economic Releases this Week
This week’s economic news calendar is chock full of housing data releases, some of which serve as important proxies for pre-sentiment around jobs stabilization and consumer confidence. At the same time, Week Two of earnings season features blue chip companies whose 2nd Quarter numbers may be strong, but whose visibility into 3rd and 4th Quarter visibility is opaque at best, menacing at worst.
Sound familiar for home building companies? They’d done just about all they can to shrink their balance sheets for the worst of the downturn periods, and now time is nigh to drive topline performance. Question is can they? As we listen to the earnings calls among home builders over the next two weeks, we’ll be keen to probe both the analysis and the plan each company puts in place to sustain their hard-won momentum.
Collectively, with a few exceptions, the public home builders behaved as if 2010 will ramp nicely into a fully-formed if modest demand cycle in 2011.
The economy, a little like the stubborn low-pressure weather system that has settled in for a petulant stay in the Atlantic off the Carolinas and has blanketed the mid-Atlantic coast with a several-week muggy heat-wave, seems to be challenged by inertial as well as dynamic forces.
The one manifest source of big demand for capacity globally is Asia, which is shifting from overheated to a more sustainable level of growth. Europe is day to day, given its debt and credit landmines, and the U.S. seems to be an equal mix of pluses and minuses, with the pluses losing steam even as the minuses seeming to find a more stable high ground.
Clearly too, debate over policy, action, or a decisive plan to cease interceding at the government level sharply, and antagonistically, devides those who are most outspoken about righting the what has gone off in the economy. The conversation in too many cases crosses the line of argument into ugly ideologue, unbecoming of the nation’s spirit of resilience, tolerance, and particular manner of blending disparate interests.
We’re with New York Times Op-Ed essayist Roger Altman in assessing the moment’s need for business and policy-makers to call a time-out on their dance of death, because together U.S. business and government have a few of the answers Main Street wants right now.
The tension between President Obama and the business community is hurting both sides and may hamper economic recovery. Closing that divide requires the business community to mute its criticism, and the administration to make personnel and policy adjustments. Neither should be hard.
The summer of 2010 may go down as the period–similar to many stock market crashes–that retests lowpoints of both consumer and business confidence that occurred as the financial system came unhinged in the Fall of 2008.
Robert Shiller, in the book “Animal Spirits” he co-wrote with George Akerlof, talks about a term that makes all the sense in the world right about now: “the confidence multiplier.” At the center of the word confidence, Shiller notes, there’s a Latin word root “fido,” which means “I trust.”
It’s the Summer of 2010. No one can make the 2009 Obama $790 billion stimulus package bigger now than it was. No one can make the George W. Bush 2008 $200 billion tax and spending stimulus package bigger now than that was.
The question of yet another stimulus plan comes now amid heightened rancor, fear, and suspicion in the ramp-up to November’s mid-term elections. Whether more stimulus would instill or asphyxiate a confidence multiplier is likely to get lost in the heat-wave debate between “Austerians” vs. the “Stimulites.”
That’s why, in looking this week at the latest data for housing starts, permits, and existing home sales, it would be a good BS meter to put them into a trailing three-month bucket, and compare the latest three months to the same three-month period in 2009.
This way, one can filter out some of the artificial timing moves that show up in the single-month release, and perform analysis based on reality. (HT to a reader Marvin Chosky for this recommendation).
Here, from blogger Econ Grapher, is a line-up of key data releases expected this week in the U.S. and global markets. And don’t forget the parade of 2nd Quarter earnings we’ll also be attuned to.
Day Time (GMT) Code Event/Release Forecast Previous MON 8:00 EUR Euro-Zone Current Account s.a. (euros) (MAY) -5.1B MON 14:00 USD NAHB Housing Market Index (JUL) 16 17 TUE 1:30 AUD Reserve Bank of Australia Meeting Minutes TUE 5:00 JPY Leading Index (MAY F) 98.7 TUE 6:15 CHF Trade Balance (Swiss franc) (JUN) 0.82B TUE 8:30 GBP Major Banks Mortgage Approvals (JUN) 52K 51K TUE 8:30 GBP Public Finances (PSNCR) (Pounds) (JUN) 16.0B 12.0B TUE 12:30 USD Housing Starts (MoM) (JUN) -2.8% -10.0% TUE 12:30 USD Housing Starts (JUN) 577K 593K TUE 12:30 USD Building Permits (MoM) (JUN) -0.7% -5.9% TUE 12:30 USD Building Permits (JUN) 570K 574K TUE 13:00 CAD Bank of Canada Interest Rate Decision 0.75% 0.50% TUE 22:45 NZD New Zealand Net Migration s.a. (JUN) 250 WED 3:00 NZD Credit Card Spending s.a. (MoM) (JUN) 1.9% WED 8:30 GBP Bank of England Meeting Minutes WED 14:00 AUD NAB Business Confidence (2Q) 17 WED 14:00 USD Ben Bernanke Testifies to Senate Banking Panel THU 3:00 NZD ANZ Consumer Confidence Index (JUL) 122 THU 4:30 JPY All Industry Activity Index (MoM) (MAY) -0.4% 1.8% THU 7:30 EUR German PMI Manufacturing (JUL A) 58.0 58.4 THU 7:30 EUR German PMI Services (JUL A) 54.5 54.8 THU 8:00 EUR Euro-Zone PMI Manufacturing (JUL A) 55.2 55.6 THU 8:00 EUR Euro-Zone PMI Services (JUL A) 55.0 55.5 THU 8:30 GBP Retail Sales ex Auto Fuel (YoY) (JUN) 2.4% 3.4% THU 9:00 EUR Euro-Zone Industrial New Orders s.a. (MoM) (MAY) -0.1% 0.9% THU 12:30 CAD Retail Sales (MoM) (MAY) 0.5% -2.0% THU 13:30 USD Ben Bernanke Testifies to House Financial Committee THU 14:00 USD Existing Home Sales (MoM) (JUN) -8.1% -2.2% THU 14:00 USD Existing Home Sales (JUN) 5.20M 5.66M THU 14:00 USD House Price Index (MoM) (MAY) -0.3% 0.8% THU 14:00 USD Leading Indicators (JUN) -0.3% 0.4% THU 14:00 EUR Euro-Zone Consumer Confidence (JUL A) -17 -17 FRI EUR EU European Bank Stress Test Results Due FRI 1:30 AUD Export Price Index (QoQ) (2Q) 12.0% 3.8% FRI 8:00 EUR German IFO – Business Climate (JUL) 101.5 101.8 FRI 8:00 EUR German IFO – Expectations (JUL) 101.5 102.4 FRI 8:30 GBP Gross Domestic Product (YoY) (2Q A) 1.1% -0.2% FRI 8:30 GBP Gross Domestic Product (QoQ) (2Q A) 0.6% 0.3% FRI 11:00 CAD Consumer Price Index (YoY) (JUN) 0.9% 1.4% FRI 11:00 CAD Bank Canada CPI Core (YoY) (JUN) 1.9% 1.8%
A Message to Capitol Hill from Housing Industry: Say You’re Done with Housing Stimulus
A couple of observations: 1. Americans procrastinate, and 2. the danse macabre that has gone on between Wall Street and Capitol Hill policy makers must stop, if for no other reason than this. Their ludicrous performance is another reason for Americans to procrastinate.
Washington needs to do one thing loud and clear right now in its mission to improve America’s jobs outlook, and home builders and developers would do well to demand it from anybody in Washington who seriously plans to keep his or her job after early November.
No more stimulus programs that contain federal tax credit programs for home buyers. Over. Done.
Especially now that financial regulation reform is about to go live, it is precisely the moment for housing’s industry leaders to insist that Congress, the Administration, and the Fed pipe down and allow the private sector to resume work to clear residential real estate values via the efficiency of market forces.
Author and behavioral economist Dan Ariely discusses procrastination at length in his work. Our human and cultural nature seems to predispose us to need deadlines to act, including in such important decisions as buying a home.
Clearly, after two administrations’ housing stimulus policies and the better part of three years of witnessing their impact, here’s what we can best tell about where those programs have left us.
- Stimulating demand has–in combination with reduced home building activity–accelerated the reduction of the surplus of new homes. This is positive.
- By the same token, stimulus–in combination with bank bailouts, and NOL carryback extensions–stalled real estate markets from behaving as they should have.
- Also, by changing, extending, and expanding the inclusiveness of the home buyer tax credits a number of times, potential home buyers have begun to think that if they go ahead and buy a home with no hand-out from Uncle Sam, they’ll look like a fool when a few months later, Congress passes another round of tax credits they could have qualified for.
After all this, we’re left with the exact opposite of pulling-buyers forward. Home buyers are confused. They might buy now, but what if Congress concocts yet another tax credit, amounting to thousands of dollars in a handout on a purchase later in the year or next year. Expectation that the “Lost Our Lease Clearance!” sale signs will be plastered across the storefront windows over and over and over again has fed into Americans’ habit of procrastination.
What’s more, policy–since 2008 at least–has become a genuine barometer of officialized fear. The more policy, the more grim the indications are with respect to the focus of that policy. So we’ve come to connect policy with “holy moly, things are really much worse than we even knew, so we shoud probably just sit tight.”
Industry leaders should unify and raise their voices in a clear call to action for Capitol Hill and the Federal government agencies. That action is simply and forcefully to assert their confidence that the market may be far from strong, but it’s strong enough to stand on its own two feet and work as it should.
We only need to look back at how quickly, how badly things went from 2007 to 2008 to 2009 to begin to sense confidence that that kind of devastating destabilization has run its course.
But right now, as Americans procrastinate, the American domestic economic outlook dims. A sequence of events negative to property values, residential investment, consumer spending, corporate earnings, small business viability, and, ultimately, economic recovery goes into motion.
Why are Americans procrastinating now? Home mortgage rates, with a 4.6- handle on an 80% loan to value loan, are historically low. No, we mean historically historically low. Prices on new homes, a smidge over $200K median, are low too, especially for what you get in a new home these days.
Now too, supply–especially of new homes–is trending toward scarcity, an unheard of phenomenon for the better part of five years or so.
Let the battle of the theorists and economists rage on as to whether austerity or more stimulus is a better route with respect to influencing the direction of the GDP and its ability to create domestic jobs and ratchet down unemployment.
A third of the way through an earnings season that had been anticipated to be frought with doubt, uncertainty, and diminishing returns, we’ve seen resilience in materials with companies like Alcoa, in technology, with Intel, and in financial services, with JP Morgan.
We’re also seeing signs of stabilization and resolve in some of the more worrisome Eurozone states, and calmer heads are now prevailing, essentially as heads of those states do one thing: express confidence by piping down.
Global demand will continue to be a bright spot if not the juggernaut it’s been; but it won’t redound to enough significant effect in our domestic jobs situation.
Focus needs to be on American jobs. If both Wall Street and Capitol Hill would do what they’re supposed to do on job creation and stop their death dance, local market economies would begin to improve.
An issue we don’t hear much about is the number of industry sectors that are passing through both cyclical and structural secular shifts in demand.
America became the pilot nation for a society that shifted supply and demand dynamics from what people need to what they want. The economics of meeting needs were subsumed by the algorithmically more glorious economics of meeting people’s wants.
We called that our quality of life, which is relatively high if not the highest among nations.
After the insanity, the pricetag in real dollars, the capacity, and the demand for what we want is in question. How many things, beyond what we absolutely need, can we afford these days as we deleverage our household balance sheets?
As home builders and developers, the task will be to persuade a procrastinator to stop doing that. You’ll want some help from the government though, which would come in the form of a clear, simple statement that no more home buyer tax credits are in the pipeline.
Mid-Summer Notes for High Production Home Builders
Double-take du jour came with this morning’s first cup of cafe. An analysis from Citi home building and building materials sector analyst Josh Levin on “private homebuilder perspectives” reports that three out of five home builders in his monthly survey say June sales were either flat with May or up.
This note will graze across three themes that have cropped up and will recur here during the summer months: 1) limbo, 2) cash, and 3) demand.
Conclude what you may about the 40% of executives surveyed by Citi who say sales worsened, this albeit early reading tells us that the destabilizing impact of The Great Expiration of April 30 may have been overstated. And why not, if it generates higher TV news ratings and a few more newsstand sales of newspapers? Being right for an instant and then wrong forever doesn’t seem to carry the clout with the press that it once did.
So, let’s look first at limbo. Fact is, if 40% of folks in the field of Josh Levin’s universe say sales didn’t get worse and 20% say they got better, we believe it’s fair to look at June as month number one in a series that already has gone some distance to dispel home builders’ worst fears–instead of a brand new cliff-dive, it’s a stabilizing, bounce-along-the-bottom month that no one could be ecstatic over, but by the same token, people can’t be too unnerved by either.
May unnerved because with the April 30 tax credit sunset came fresh flashbacks to second-derivative deterioration and a free-fall mentality that tapped into broader depressives like the Eurozone meltdown and the Gulf oil tragedy. June began to restore calm and resolve because, when you worked out the math of the tax credit demand stimulus, the numbers rightly added up to a necessary correction period of a few months.
What remains is spec to sell, incentive codes to crack, the down-and-dirty of shutting out all the noise of ideological economic psychobabble crossfire in favor of identifying, reaching, and meeting the need of “my buyer.”
In a 300,000-to-400,000 seasonally-adjusted new-home sales environment, the macro term “home buyers” is one thing: death. The CEO of a public home building company told us this with certainty: “There are enough of our buyers; we’re going to either succeed or fail on whether we get our buyers, who are out there even today.”
Surviving limbo is about your buyer. Your buyer will either lean toward continuing to rent, or toward a resale/distressed sale or not. He, she, or they, will have not just skin but flesh and bone to put in the game–see “Cash” segment below–and wants mostly to accomplish one goal with the purchase: Not to be taken for an idiot.
If you can make your buyer feel smart, you survive limbo. Operationally, of course, that means being very smart with the materials and services you pay for, which delivers your buyer more value for less. Broadly, shifting from the “funny money” to the “real money” era also means shifting from “something for nothing” expectations to a “more for less” mentality.
Private home building companies survive another day or go away based on whether they close on one or two homes regularly, vs. lots of homes across a longer time span. Public home building companies have created a lot of pre-recovery buzz in the past 14 months with cash down on finished lots wherever they operate, especially California.
That impulsive lot grab phase is done now, and things are going to work differently for a while. Plotlines that will grab headlines but wind up being less important in any real sense are comps with 2009 and mid-term elections in November. Remember, comps in September and October this year will be to year-earlier figures those months that lit up the charts in anticipation of the first home buyer tax credit deadline last November 30th. Again, the math of what got pulled forward last Fall versus baby steps toward a new-normal this September through November shouldn’t come as a shock to anyone, particularly with the kind of balance sheet work that occurred two years ago.
Strategically, what will go on will look a fair amount less dramatic than the testosterone-laced deal flow that characterized this past phase, which has now checked up. What occurred is that D.R. Horton, Meritage, M.D.C., Lennar, Toll Brothers, and to a lesser extent the other public companies availed of a generous moment in the debt markets and a generous windfall in tax-carry back refunds to build themselves a runway into the next upward run of housing’s sine curve.
Writing checks for lots at a dramatic discount to what one would have paid for them five years ago is all good. Now comes the interesting part, which is to see how what they all paid plays in the market. Each public builder, based on its overheads and leverage level has a bogie of an absorption rate to break even. Best of class is NVR, followed by Toll Brothers, who have to build and sell around one home per community per month to break even. Most of the other more competitive publics are clustered around an absorption rate of two-plus homes per community per month. The ones with the heaviest debt burden and highest SG&A need the highest rate of inventory turns to break even. Guess who: Hovnanian and Beazer.
Cash. Simply, cash is what separates those who can do something from those who have to wait. Waiting today may be tantamount to waiting for the grim reaper. Cash, cunning, and credibility are today what credit was yesterday. For a while, and probably a long while, cash will not only be king, but every other position of power and influence in the realm as well. With few exceptions–where cunning and credibility can stand in for hard cash for fleeting moments–cash at its present level, and the ability to generate more of it in the next 12 will shape the big builder landscape of 2012.
An X Factor under the heading of cash can cause some drama in the next few months, especially if public company share prices keep taking a beating. Call it idle cash, or cash that will expire and go back where it came from if it doesn’t get used. There’s a fair amount of that around right now, and insiders sense it could tip balances here or there in the next few months.
An example: Orleans Homebuilders’ assets might have been well on their way to becoming NVR’s but for the “idle cash” factor. Hedge funds, namely Strategic Value Partners heading up a trio that also includes Bank of America-Merrill Lynch and Anchorage Capital, bought up enough Orleans debt to take control of the company, and the hedge funds are willing parties to a restructuring plan that’s said to be gaining favor with the company’s Delaware-based bankruptcy court judge.
Strategic Value Partners is among hedge fund players, like MatlinPatterson, John Paulson, and Angelo, Gordon whose cash might work to significant effect in the next 12 months, before recovery solidly takes hold. We could see hedge funds buying up the debt of any number of public or private home builders and go so far as to precipitate combinations of some of them based on the prospective need for land assets once a rebound becomes manifest.
For private home builders, cash is what is already in their pockets or in the pockets of those with whom they enjoy a great deal of credibility. As Josh Levin’s note mentions, “the vast majority of survey participants reported that acquiring AC&D financing from banks remains difficult if not impossible to source.”
There are a few private builders around who can stomach “difficult” and are also cunning enough to take it on. Some, like WB Homes’ Bill Bonenberger, figured out a pretty solid runway for a private company to 2012 or so. He divvied up a land parcel with Richmond American, put the M.D.C. money toward what he owed his bank on the land deal, and thereby came back into within covenants to draw on vertical construction financing with other lenders. How many “wins” can you put in a row on that one, not to mention the bank’s not setting there with another REO deal to try to offload for a song?
For others, braving “difficult” is standing firm on personal guarantees, which banks have extracted mercilessly from longtime builder customers for the past few years.
Which is why cash–having it and having a way to generate it–is not optional as part of your runway to 2012.
Finally, demand. It’s amazing to us how blurred supply and demand have become. That’s nowhere clearer than in the fact that the number of jobs the economy’s shed since 2007 and the number of homes in the shadow inventory pipeline of delinquency is roughly the same, around 7.3 or 7.4 million.
Job losses and residential investment are inversely tied to one another, the economy’s dirty little chicken and egg. What the American Reinvestment and Recovery Act home buyer tax credit stimulus did accomplish was that it reduced months’ supply of existing and new homes by several months, almost down to what would be regarded as normal levels. The programs catalyzed enough sales to bring more scarcity to the market than an unstimulated environment.
Now, with industrial activity picking back up, and the global economy readjusting around who’ll buy and who’ll sell what, all the while continuing to create entire new populations of consumer classes, the biggest near-term question is this: what are the new family-supporting jobs in America, and how can this country get people in sufficient numbers to where those jobs crop up? Bureau of Labor Statistics forecasts for the next decade call for the US Economy to create 15 million new jobs, doubling the amount that it took out in since the downturn.
The biggest question is when that decade of job growth gets underway, and how many of those jobs are family supporting jobs. It’s those higher-paid workers who’ll funnel into the real demand universe of your buyer in the years ahead.
This is why home builders, if they do nothing else while recovery is still around the corner and over a bridge, need to learn as much as humanly possible about who your buyer is today. If you don’t, you risk no buyer tomorrow. That would wreck your runway.
2010 is that one more year to eke out, and 2011 will be a year you can get some of it back. But not if you don’t learn who your buyer is today.