Four for Fighting
From CONSTRUCTION PULSE, by John McManus: A sobering quatrofecta on the data front this morning–consumer spending, durables orders, jobless claims, and new homes orders–has four leading economic indicators all leading backwards to months and years past for the date when each hit a similar low point.
- The Wall Street Journal reports “Data Indicate Faltering Demand,” mapping out how both households’ and businesses’ spending has fallen off a cliff.
- CNBC flashes: “New-home sales Tumble to 18-year Low in October,” with new-home median price now at $218,000, a 7% slip from year ago levels.
- Bloomberg reports “U.S. Durables Orders Fall Twice as Much as Forecast.”
- Weekly job-loss claims data are coming in consistently above the half-million mark.
The direction of these indicators would only be news to a proverbial Sherlock. They’ve been heading south for more than a year since many of their mid-2006 peaks, and will do so until well into the second half of next year, or later. The magnitude of the negative momentum, though, keeps exceeding The Street expectations. This is what astonishes us.
For a good preliminary look at the devil in the new-home sales details, best stop in with Calculated Risk, which pulls Census Bureau new-home sales data across several cycles for comparison, and charts out both months-supply and absolute inventory for analysis. The obligatory reminder–Census Bureau numbers don’t account for cancellations, for which there are reasons galore these days. The following is analysis from Calculated Risk.
The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.
Sales of new one-family houses in October 2008 were at a seasonally adjusted annual rate of 433,000, according to
estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.This is 5.3 percent below the revised September of 457,000 and is 40.1 percent below the October 2007 estimate of 723,000.
Over the last year, we’ve cheered some dismal NHS statistics as the market booed. Today, while we are not booing the results, we are not particularly cheering like the market is. So why are we more subdued? Well, when we look at the revisions to last month’s data, it is all sharply higher on inventories, the mix of inventory has changed for the worse and total sales were revised down a bit. All of these revisions combined with the economic malaise makes for a continued struggle for builders (ignoring the long overdue government help yesterday). We believe next month will witness Sales revisions down, inventories up and the mix to be more unfavorable, skewed toward finished homes.
After all’s said and done, we’re preoccupied with where housing prices new and existing will correct to and when that will be.
- The WSJ posts S&P/Case-Shiller’s latest home price analysis by metro area on this link.
Many of us are trying to do the math on where the least-worst fix is, given the $8 trillion-and-counting in rescue spending already in play–consumer spending, corporate stimulus, home purchase inducement, etc. Imagining a scenario where 36% home-price drops necessarily mean that residential investment would erode by trillions, and where real estate owned vacancies proliferate like dandelions, leaving many communities with a scorched-earth future even more compromised than their present, the domino-effect consumer spending decline, earnings evaporation, and job loss stretching beyond 2009 should shape prioritization at the policy level.
Meanwhile, even as the Federal Reserve and other government finance agencies take action to grease the wheels of the consumer credit engine, it’s the other side of banks’ business–the commercial real estate side that does construction, acquisition, and development lending that has a death-squeeze on the jugulars of housing’s rapidly shrinking band of mostly regional and local free-market stalwarts, privately-run home builders.
The rock-and-the-hard-place for many of these private home building companies is that finishing out their projects is their last best hope at not slipping into a capital-deprived coma. Even to liquidate at a loss, they need to get done with what’s started and sold, The FDIC’s scorecard on the viability of a project unfortunately may not incorporate consideration of a grim prognosis for the project builder-developer if credit on the project freezes.
The whirlygig of de-risk can make an enemy of someone who seemed like a friend, and will likely work to make a good number of new fast-friends from among longtime rivals in the housing market.
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