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.
Price Vice Grips Lumber and Building Materials Suppliers as Commodity Costs Surge
As Q1 earnings season progresses, we note home builders crow about improved gross margins they’ve achieved. They’re cutting SG&A, land base costs, and directs, but not without pushback on a couple of those fronts.
Competitive bidding for lots, particularly in markets where publics need to restock lot supply to justify their operational footprints, exerts margin-eroding pressure on the land-base expense. Commodity price increases we see starting to flow through the pipeline have not quite hit home builders’ directs yet, but that’s because they lag expiration of contracts in place.
Lumber and building supply distribution expert Craig Webb, who edits ProSales and prosalesmagazine.com theorizes that upward pressure on materials will hit home builders before too long.
Here he reports on the impact 60- and 90-day contracts to hold prices for home builders had on Builders FirstSource first-quarter financial performance, a loss of $31.4 million.
His take on the vice-grip suppliers find themselves in as commodity prices go up while builders continue to enjoy contracts for their end-user prices to stay low: something’s got to give. Here Webb comments.
This is the first case I’ve seen in which a dealer has said it’s been squeezed between, on one side, the recent run-up in prices for lumber and other construction commodities, and on the other side, the guarantees it has given to builders to hold prices for up to 90 days.The issue of holding prices has generated a lot of comments recently in the LBM community. My guess is that BFS’ experience is going to inspire other dealers to be even more cautious about guaranteeing prices and/or to set extremely high prices if they’re asked to provide long-term guarantees.
We’ll likely see the effect of this pricing squeeze play out as other lumber and building materials supply organizations report their Q1 earnings, or lack thereof.
Mish Calls Double Sticks–2011–Housing’s Pricing Bottom
It is Mike “Mish” Shedlock’s theory that as regards housing, all parabolas are created equal.
His post yesterday – “Housing Update: How Far to the Bottom?” — is a latter-day, chart-candied manifesto that says among other things, no matter what title Ben Bernanke has, he shouldn’t be trusted. Another takeaway from the post is this conclusion: Mish has been spot-on in every way since March 2005, whereas much more vaunted “experts” were speaking in self-interest, self-delusion, and self-service as they pronounced that fundamental positives would outweigh pesky negatives in the housing economy.
Click to enlarge. Courtesy of "Mish" blog.
At any rate, what you might care most about is that the fellow who’s been right all along is saying that 2011 is where home prices should bottom out.
His lead chart is Japan’s “lost decade” of the 1990s, which actually extends to 14 years. To give us a back-pat of encouragement, Mish grants that the pace of the U.S. meltdown is double that of Japan’s, which would mean we’ll ”cross the zero line” by 2011.
That’s roughly what a fair number of other folks are saying about home prices (nationally), although what many in real estate care about more right now are sales transactions.
A greater volume means a shift in two big areas that will preceed a home price bottom by several months to a year: 1) The doability factor, which means that prospective buyers can get financing in what will continue to be a risk-averse lending environment and consider the moment opportune to act on a home purchase; and 2) The psychology factor, which will indicate that a some level (unknown as yet) people won’t feel as if it’s an idiotic thing to do to buy the biggest ticket item of their current life and go on to regret it within 60 days.
Those are important differences that need to occur well before a house price bottom. “The bid,” if it’s in earnest will negotiate hard. “The ask,” will have fewer and fewer options but to cede.
The good news about more volume is an eventual stabilization in comps and a reduction in volatility indices, which are part of what make people so scared. Would you rather comp to one of two real estate deals, or one of 100?
The other good news is that we can all look forward to another year of quotes Mish will extract to illustrate just how wrong others can be, while he can plot new red arrows on the fever chart to show how he has predicted precisely what would happen all along. It’s reassuring to know that this ol’ world can fool some of the people all of the time, and all of the people some of the time…
S&P Downgrades Take Wind out of Housing’s Sails
CNBC’s interview with Alpine analyst Stephen Kim typifies Wall Street sentiment about a next leg downward for housing. Standard & Poor’s yesterday raised the bar for expected losses from risky loans underarching mortgage backed securities, signaling anticipation for a new wave of irrecoverable dollars invested in residential real estate bonds.
Failing home loans that lead to a tidal wave of foreclosures depress home prices and cause the feeback loop to repeat in a worsening viscious circle. Despite tiny signs, anecdotal evidence, and great hopes that Spring 2009 marked the end of the worst times for housing, it’s clear the pain shall continue through the end of the current year, reaching into 2010.
S&P Clouds Stock Resilience with Downgrades
It’s Monday in what feels eerily as if it should be a holiday-shortened week, but it’s not. Stocks eked out a show of resiliency by the end of the day, even as geopolitical violence shook China, and data points gave investors little to thrill about save a defensive play or two.
Then, to wind up the day, another salvo of bad news for residential real estate.
Per a post-market close post from investment blog Calculated Risk, this news from Reuters:
Standard & Poor’s on Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities to as much as 40 percent, suggesting a darkened outlook for the troubled housing market.
The more dire assessment will likely “significantly impact” bonds originally carrying AAA ratings, S&P said in a report.
Increased assumptions for total losses on subprime and Alt-A residential mortgage-backed securities come amid declines in market value of the debt and a surge in the inventory of bank-owned properties, S&P said.
It is another blow to investors who are already suffering from downgrades to their portfolios over the past two years as the housing market fell to the weakest levels since the 1930s. Many bonds are trading for cents on the dollar as investors value them based only on remaining interest payments that may be received.
We’ll post more on this tomorrow. It’s a reaction on the part of the ratings agency to a reality that is no surprise. But what it effectively means is that V for value is still MIA, an untradeable, given investors’ newly prescribed diets, which have no tolerance for risk.
Case-Shiller Price by Market Map–Flash Envy
The Wall Street Journal has an enviable Flash infographics group.
Here’s their latest treat, an interactive map of Case-Shiller price data by market.
Click image to access Wall Street Journal interactive map.
Will Home Prices Bottom Soon?
CNBC’s Diana Olick reports on today’s S&P/Case-Shiller home price data:
The Treasury Department’s stress test scenarios–both baseline and more adverse–call for continued but shallower declines through the end of 2010. Calculated Risk plots actual S&P/Case-Shiller data against the two Treasury Department scenarios.
His conclusion:
So far prices are tracking between the two stress test scenarios.
Position A for Case-Shiller Home Prices Story
It’s the lead story in the Wall Street Journal.
U.S. home prices continued their multiyear tumble in April, according to the S&P Case-Shiller home-price indexes, although the indexes showed their third-straight month of slightly smaller declines.
Seventeen of 20 major metropolitan areas posted price declines of more than 10% from a year earlier, with the Sun Belt continuing to be hit hardest. Nationally, home prices are at levels similar to the middle of 2003.
David M. Blitzer, chairman of S&P’s index committee, said the pace of residential real-estate decline slowed in April. “While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions.”
Here’s the Standard & Poors monthly release.
Calculated Risk charts up the data in three ways to get insight. Here’s a dramatic one on peak-to-date declines in the 20 Case-Shiller cities.
Click to access Calculated Risk post on Case-Shiller data.
Importantly for an understanding of the relationship between housing and the broader economy, Calculated Risk will show current home price declines in comparison to the Treasury Department’s stress test scenarios to gauge the relative health of the banks.
Since last month’s home price declines were already at or worse than the the “baseline” scenarios projected by the U.S. Treasury, this month’s will clearly show that the stress test was not stressful enough to reality check banks.
Still, second-derivative improvement may be as good news as we’ll get for some months to come, and we’ll have to learn to make the most of it. At any rate, it beats Madoff day two stories by a longshot.
Here’s S&P’s David Blitzer on CNBC with toplines on Case-Shiller’s April data:
Existing Home Sales Miss Street by a Nose
Looks like those who bet the “under” on exsiting home sales win.
Per the NAR May 2009 release (with guidance from Calculated Risk’s post):
- Existing home sales (SAAR) for May 2009 4.77 million, a 2.4% sequential increase
- Not seasonally adjusted, sales are 3.6% off May 2008 NAS levels
- Median price for an existing home fell 16.8% year-on-year to $173,000
- NAR says about one-third of sales were foreclosure sales or short sales
- Inventory of existing homes for sale decreased to 3.8 million, which for May is unusual
- Months’ supply of existing home inventory decresed to 9.6 months (normal is about 6 months)
Here’s a key observation from Calculated Risk on the NAR report today.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
Here’s the good-news, bad-news headline and report in the Wall Street Journal.
- Home Resales Up From Previous Month, as Prices Fall
Existing-home sales rose a second month in a row during May, but prices again fell sharply, threatening a delay to a housing sector recovery.
The Big Picture’s Barry Ritholz wants to set everybody straight on the proper headline.
In a note from Citi’s housing analyst Josh Levin, he focuses on an issue that has arisen in earlier posts by Big Builder editor Sarah Yaussi.
NAR Cites Appraisals as Growing Problem – In its press release the NAR notes that in the past month stories of appraisal problems have been “snowballing from across the country” with many contracts falling through at the last moment. We assume that such problems stem from the Home Valuation Code of Conduct, which went into effect 5/1. To the extent that this problem is in fact wide spread, we would expect that it may: (1) depress EHS going forward and (2) could cause the historical relationship between pending home sales and EHS to decouple.
Read to the end of Barry Ritholz’s post for the verbal hide-tanning of NAR economist Lawrence Yun. Barry may have been busy hawking his book lately, but this is the vitriol of Ritholz with which we’ve come to know and love.
Here’s a 6-minute CNBC video on existing home sales analysis from real estate correspondent Diana Olick and IHS Global Insight’s Patrick Newport.
Tomorrow, we get new home sales data. UBS is forecasting a 3.9% month-to-month increase over April 2009’s level, from 360,000 units to 370,000. A faint pulse, but a pulse nonetheless.
Housing Data Points Every Which Way
A good morning to litmus test your theory on where the housing juggernaut is heading.
This morning’s Wall Street Journal headline is limbo in 36-point type.
- Markets Await Housing Reports
Worries about the potential for an economic recovery dragged U.S. stocks to their worst one-day decline in two months Monday. The Dow Jones Industrial Average fell 201 points while the S&P 500 slid below the 900 level and turned negative for the year to date.
In addition to concern about the potential for an economic recovery, heavy stock selling by corporate insiders has also weighed on the markets. Insiders of S&P 500 companies have been net sellers for 14 consecutive weeks, according to InsiderScore.com, the longest stretch since June 2007.
At 10 a.m., the National Association of Realtors will report on May sales of existing homes and the Federal Housing Finance Agency will release home-price data for April.
Wall Street analyst consensus calls for a 2.6% month to month increase to 4.8 million home sales. UBS Homebuilding research analyst David Goldberg expects actuals to slightly eclipse the Street. He’s citing a gust of seasonal tailwinds, “still below year ago levels.”
Further, as defaults rise through the back half of 2009, we expec t further pressure on existing home prices.
Also at 10 this morning, the FHFA House Price Index is due. Covering home sales exclusively with conforming loan financing, the HPI has shown none of the volatility nor dramatic cliff diving that the S&P/Case-Shiller Index shows.
The Street consensus calls for a decline in HPI of -0.3% sequentially. UBS notches it down a bit worse, at -0.4%.
Also under lots of scrutiny among housing players will be the FOMC meeting for the Fed’s stance on interest rates and quantitative easing.
What’s your over under on existing homes data just minutes before the release?