Home building, its industry leaders believe in their heart of hearts, is the engine of the United States economy. When new rooftops multiply, GDP steams merrily along, and when housing starts decelerate and thin to a trickle, they take the economy down for a harrowing ride.
Well, the economy’s engine has been up on blocks for going on 36 months now, because Americans are generally paralyzed and aghast at having $12 trillion in home value and stock market equity vanish into thin air in the past four calendar quarters. Not to mention 3 million jobs eliminated in what seems like a heartbeat. Perhaps as horrific for people who are suddenly faced with having no choice left except to fix their household balance sheets or suffer for it is the prospect that losing that $12 trillion and the possible doubling of unemployment rolls will cost another $12 trillion in new taxes in the years ahead.
Wall Street, Main Street, and Washington, meanwhile, are embroiled in a comedy of finger-pointing errors, the lender blaming the borrower, the borrower blaming the broker, the investor blaming the lender, everyone blaming AIG, and Capitol Hill trying to figure out who to blame and who to try to rescue from the great sucking sound of economic Dooms Day. Face it, few of us really had to deal with the significance of the term “trillion” until we watched Bear Sterns’ white collar workers file out to the streets of Manhattan with a box of their desk belongings and a look of “what just happened?” in their eyes.
Many things happened, many are to blame, and many of us will be paying the price of both idiocy, deceit, and sheer miscalculation for years and years to come, and one of the few illuminating notions we can take away from it all might well have been perfectly evident all the time: Homeownership gets is reputation as the American Dream for a reason. It’s not an entitlement for all or even the majority of citizens, although policymakers and profiteers banked heavily on a theory that quantum-leap homeownership rate expansion could be engineered along the economic and social lines of quantitative easing.
Instead of an ownership society we’ve got a classic monster that eats its own young. The instant in the past six or seven years it didn’t take above-and-beyond planning, sweat equity, a parent’s helping hand, an inheritance windfall, and commitment to own a dwelling that would return value by providing shelter and safety and the feeling of home, everything changed. The house became a paper asset to be leveraged and margin-managed, and after that it became a financial component that begot financial products that in turn begot breeder-reactors of pooled, sliced, diced, and tranched global investment vehicles.
Which brings us back to the engine of the economy: America needs new home building. New home building will get its start off the blocks of paralysis first and foremost when a dozen or so public home building companies leverage their capital structures, gut their costs, and tug home buyers who are capable off the sidelines into their American Dream.
In this issue, we focus on the financial performance of those public companies. The key take-away from the analysis is that a few of them excelled not only in managing their balance sheets in 2008, but managed their company for more stress tests in the months and years ahead. Given the hard choice between shareholder value and thousands of talented associates, most companies took their medicine and chose survival.
This year and next will go far to clarify whether the engine of the economy is ready or not to come off the blocks. What’s more, as various stimulus programs and tax relief measures take effect in the months ahead, each new initiative will deliver a telling indicator about which measure motivates people to buy a home or not.
The very nanosecond there is evidence of a solid floor under the V in loan-to-value, borrowers, lenders, investors, policymakers, and taxpayers will all know where they stand, and they’ll work with it.
Are you ready for some Stimulus? The government spending programs are coming with almost the frequency of Monday Night Football.
House Speaker Nancy Pelosi is said to have begun outlining the principles and framework for yet another federal economic spending program that would presumably run in tandem with the $787 billion stimulus plan that is just making its way to the starting gate.
As a program that represents 2% of the U.S. Gross Domestic Product gets under way, why is there talk of yet another one on its heels?
It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference.
Unfortunately, what he is doing is not enough. The stimulus package appears big — more than 2 percent of gross domestic product (GDP) per year — but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries) and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger — indeed, California alone faces a shortfall of $40 billion.
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In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.(more)
Many others agree, as formidable as the policy and spending initiatives seem in the headlines, that the actual “stimulus” parts of the economic recovery program rolling out are only about a third or less of the dollars that will get spent.
Most critics of the design of the program say that the economy won’t get the jolt it needs to shake itself out of its malaise.
So, another stimulus package will come up for debate in a Congress that has shown itself to revert to self-interest politics rather than answering the call to urgent, cohesive, united action in an emergency.
As talk of the new stimulus program arises, so too will talk of making a new go at a more compelling home-purchasing stimulus, a la, Fix Housing First.
All of the heated argument about what the amount of a home buyer tax credit would need to be, and whether that would put a false and unsustainable bottom under home prices, and who would benefit from such a program at whose expense.
Stimulus I was last July under George W. Bush, and we saw how much that did to stop the economic free fall. Stimulus II is just getting under way, and may be a step needed to get back to the starting line. Stimulus III may be the rally to arms the moment really calls for.
Will a home buyer tax credit — an effective one of $12,000 to $15,000 — make it for inclusion in the new design?
Will home builders of all shapes and sizes unite in their lobbying effort behind such a measure, and a mortgage buy-down program that would actually work?
Crossing the aisle should not just be rhetoric. It should get to be second nature.
The mistake we make, to listen to one of the more trusted individuals in American business today–the Oracle of Omaha–is to look back too much. Maybe because we’re out of practice, or maybe because there’s no such thing as being in practice, America and Americans aren’t getting it when it comes to reckoning that we’re in an economic state of war.
Warren Buffett may sit for hours on CNBC, and he may articulate in sweeping affirmatives what two million of the suddenly unemployed have been living–that the economy fell off a cliff since September 2008.
Our collective minds may gravitate back to the 1930s, or they may draw back to when this or that political party threw its weight behind policy that has come back to haunt us, or they drift back to when home prices de-coupled from the anchor economic trends that kept them sane until the early years of this millennium.
Importantly, and you can read it in the transcriptsas well as to view it on video, it’s Buffett’s belief that it’s a moment that we have little choice but to get along together better than we’ve got a history of doing.
People–when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they’re not going to be ready tomorrow, people join. The Army doesn’t blame the Navy because there were too many ships in Pearl Harbor, and it shouldn’t have happened. The Army doesn’t say, `Well, it was your fault, so we’re not going to send our troops.’ None of that sort of thing. We got united, and we really need that now.
It would be almost comical were it not so distressing, we have three forces at incredible odds with one another right now, locked in a no-win, no-win, no-win situation. Wall Street in one corner, Washington in another and Main Street in a third, with a cacaphony of economists trying to be heard in the din of it all.
If the housing crisis were but a housing correction, it would be a simpler world. But it’s not. As Michael Shedlock, a k a, Mish, says, we need to prepare to time tunnel backwards to an ear or a year when house prices were obedient asset values that never strayed from their mean relationships to incomes and rents.
Here’s the look and outlook posted on Mish’s site, an analysis of S&P Cash-Shiller data.
Click on image for enlarged view.
Here’s the commentary from Mish.
My take is unemployment is going to soar in 2009 along with foreclosures, credit card writeoffs, and bankruptcies. That will add to the inventory problems. Thus it is extremely unlikely that housing bottoms anytime soon.
And as much as housing prices have declined, take another look at the second chart in the news release above. Imagine where prices will be if they fall back to 2002 levels or worse yet 2000 levels. Moreover, why shouldn’t prices fall back that far? Finally, how many are prepared for it, if indeed that were that to happen?
Clearly, if you care to heed the Oracle of Omaha, being “prepared” is not simply an issue of “sizing” or “capacitizing” business to the level of some year in the earliest dawning of the 2000s. Being prepared will draw on resourcefulness and the opposite of “business-as-usual” behavior. It will involve working together creatively to get out of this thing, sometimes with the people one tends to want to trust the least. That’s what being at war means.
This article in the New York Timesdraws several conclusions. Unfortunately for readers of the story, the conclusions conflict, and negate insight.
The headline revelation is that spring selling season has officially been cancelled
So this March-to-June season, when most homes are bought and sold, will be bad, perhaps the worst since the market began to spiral down in 2006.
Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.
The story swings over to touch on President Obama’s housing policy initiatives, and the fact that they’ll play out in an environment so inimical that the housing plans will get eaten for lunch.
On Wednesday, the Obama administration announced details of a plan that will pay banks to lower monthly payments for troubled borrowers, hoping to avert millions of foreclosures and keep more homes occupied. Despite that effort, most analysts expect the outlook to worsen.
Next, the story asserts that even though it has cancelled the spring selling season due to consumer and commercial credit disruptions, homes are selling up a storm in markets where prices have corrected.
In inland areas of California, for instance, sales are surging now that prices have fallen sharply. But most of the sellers are not individuals but rather banks that foreclosed on homeowners who could not or would not pay their mortgages.
We’re supposed to glean intelligence from reporting that some markets’ delcine lagged that of the bellwether bubble markets’ fall. The interpretation and analysis is not of the local job dynamics and broader business dislocations that account for the way San Francisco and New York markets have taken a recent beating, but simply that they took longer to succumb.
New York is not alone. Real estate sales have also slumped in cities like San Francisco and Seattle, which previously seemed impervious. California’s recent experience might offer one roadmap of how the housing slump will play out in other places. But the process will be painful and slow.
One wonders which question Zelman & Associates CEO Ivy Zelman actually answered when she responded with her quote, “You are really looking at a very, very ugly outlook.”
If home sales are surging where house prices have corrected, and home sales have stalled where prices have not corrected, what is that saying?
Does it suggest that sellers of new and existing might take control of their own destiny in this dynamic? If foreclosure prices can move buyers off the sidelines, and if the second-tier foreclosure flip from investor to home purchaser can get buyers to move, why is the conclusion that there will be no spring selling season?
The conclusion could be that home builders and developers are going to have to short-sell a lot of their inventory and deal with a lot of red ink for the market to clear.
The limbo housing is in is largely self-induced, and will have to self-resolve.
The populace will be part of that resolution because the populace became part of the bubble. There’s a tax penalty for becoming part of the bubble and we’re going to learn how big the penalty is for what we began to take for granted when times boomed.
Meanwhile, April 2009 may be a low point for those who are trying to work through what they hold in assets to gain cash enough to work through more tomorrow. But it’s not because the NY Times has drawn attention to this issue. It’s because structural issues–prices, credit, job trends, household spending, household formations, etc.–have locked into a negative feedback loop or a “downward spiral” and this is part of a storyline that housing veterans have seen before.
They don’t call it “very, very ugly.” They call it a tough but inevitable part of doing business in new residential real estate.
Have a look at the Times’ ”very, very, ugly” infographic.
Click on image for larger NY Times version of the information.
This is a technical analysis. We don’t believe real estate markets obey technical analyses. We believe uncertainty clouds the bottom, but that price-correction will be the only solid floor for housing.
Atlanta Fed President Dennis Lockhart clocked in with a “we feel your pain” to multifamly players in his audience as he addressed the Greater Miami Chamber of Commerce yesterday . In the mess that is Miami’s multifamily market environment, Lockhart’s commentshit a nail on the head as he describes a softening business base as a result of massive dislocation in the supply of units, noting that vacancy rates had reached 7.5% by the end of 2008.
I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.2
Multifamily Executive senior editor Les Shaver reports on how demand destruction on the rent side is throwing apartment sale deal flowinto nuclear winter. Just as in so many other industries, the fundamental asset building block through which valuations are done by buyers and sellers has been undermined by the fallout of the credit and consumer spending cliff-dive.
The problem: Sellers still aren’t adjusting their prices for the market. “Despite placing so much product on the market, sellers appear to be in denial as asking cap rates have increased only slightly since September to 6.4 percent,” the report said. “Deals have spiked by 50 basis points over the same period, reaching 7 percent in January. Clearly, with so few closed deals, the bid/ask gap remains wide, and it is sellers who must become more realistic.”
Until the gap between buyers and sellers closes, David Schwartz, managing member for Waterton Associates, an apartment firm based in Chicago, doesn’t see things improving. “It will be sellers dropping their prices and then you’ll start seeing transactions clear,” he says.
The deals that did clear in January were generally small. The largest was $67.4 million for a three-property deal sold by Home Properties, a REIT based in Rochester, N.Y. Only one other deal sold for more than $30 million.
The report also highlighted another trend. “Default and foreclosure filings involving significant apartment properties grew by almost $1.8 billion,” the report said. “At present, distressed apartment assets total $9.2 billion [906 properties], a figure that continues to grow rapidly. Troubled properties are now found in nearly every market.”
Glut, which is at the core of the for-sale new residential meltdown, is putting a hurt on multifamily players as well. Here’s Calculated Risk’s phrasingof the causes:
Although Lockhart mentioned that houses are competing with apartments as rentals, he doesn’t mention that this is happening for two reasons: 1) homeowners who can’t sell their homes (or are “waiting for a better market”) are renting their homes, and 2) many REOs are being purchased by cash flow investors as rentals helping to increase rental supply and push down rents.
Multifamily trade association leadership has been quick to pin the blame for this shadow inventory on the excesses of home builders. Simply, it’s a more complicated matter than that.
It’s the wish of many a senior executive or policymaker that a reporter or news outlet get a little bit of its own medicine.
Voila. It’s 8 minutes of Jon Stewart and The Daily Show taking it to business cable TV powerhouse CNBC, taking off from the Great Santelli’s “I’m mad and I’m not going to take it anymore” moment two weeks ago.
The point? Vitriolic blame can boomerang: i.e. we’re not laughing with you, we’re laughing at you. Hat tip The Big Picture.
Public home building companies keep on impairing the owned land pipeline that is on their books; privates battle the slippery slope of owing lenders more on land they own than what it’s worth today. Talk about distressed assets! And the thing is, even the bargain hunters with cash and capital horded up right now as “dry powder” have been paralyzed by the swan dive in land values.
For a glimpse into where potential distressed asset opportunists–the vultures–may be looking to embed their talons, have a look at this video from The Deal.Com.
At the TMA/The Deal’s Distressed Investing Conference in January, Rothchild’s David Resnick, Cerberus Capital Management LP’s Kevin Cross and KPS Capital Partners LP’s David Shapiro discussed the opportunities and challenges for strategics investing in distressed assets. – Maria Woehr
Next time you’re at the ATM, you might want to be on your guard. Living dead banks are on the prowl, both night and day.
Nobel prize-winner Paul Krugman, the Princeton economist and outspoken New York Times columnist who’s got enough credentials to tip over a two-wheeler, is getting depressed about the prospect of Zombie banks in a Lost Decade kind of way. Management and shareholders of banks, he believes, need to lose for America to gain. Government must step in, take banks into receivership–temporarily, zero out equity, secure debt, and find buyers for the banks who’ve been given revitalized liver, kidney, and pancreas function.
As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.
More and more, it looks as if we’re headed for the decade of the living dead.
A Zombie Bank is a financial institution whose liabilities outweighs it assets, making its net worth “less than zero.” ZBs continue to operate because of the implicit or explicit government guarantee — along with truckloadsof taxpayer monies.
Consider the two biggest Zombie banks — Citigroup, and Bank of America.They have each recieved $45 billion in capital from the US government — far more than either bank is worth. Additionally, the US had guaranteed up to 90% of the bad assets each zombie is holding — $250 billion and $306 billion respetively.
As you might already know, Ritholtz is a no-holds-barred source of opinion, whether he feels his is welcome or not. His view [and the views of a pantheon of economists] on nationalization–vs. IV-drip tax payer meds–is compelling, and what’s more you can bet that he won’t let go of the cuff of policy-makers with a casual flick of the leg.
The reason I favor nationalization is that I hope we here in the US avoid a lost Japan-like decade from September 08 forward. Keeping these banks propped up with more and more taxpayer monies — the Obama Administration has proposed another $750 billion more in bank-rescue aid — is not the way out of this mess.
One way another, a dreaded consequence of the economic intellectual pyrotechnics being brought to bear on why we should turn Swedish rather than Japanese is that we’ve stopped merely living–instead we’re living through what will be a textbook case in policymaking during a global economic crisis.
Before we elected a new president 113 days ago and expected him to reverse a 15-year tsunami of misjudgment, miscreance, and missteps, we stored up confidence and trust in economists.
Bullish or bearish, notwithstanding, they managed our disappointment in their pronouncements and forecasts with a dismissive flourish and a slight adjustment to their predictive models.
In a story that just appeared in The Atlantic, Gregory Clark, a professor of economics at the University of California at Davis, described some of his concerns with the profession of Academic Economists.
In this story he also used a paper on online dating (one of mine) to show how economists are working on irrelevant topics. And while I think that the dating market is an important topic to study, and even more to try and improve, I think that his overall criticism is worth paying attention to.
Here is the text:
Dismal scientists: how the crash is reshaping economics With the chattering classes consumed by concern for the devastated value of their 401K funds, and their suddenly precarious lifestyles, there has been much anger and scorn directed at those former masters of the universe, financiers.
But the shock to the world of finance has been echoed by a shock to the world of academic economics that is just as profound.
In the long post WWII boom, as free market ideology triumphed, economists have won for themselves a privileged place inside academia.
First there is the cash. It astonished some when Washington University, a school with an economics department of modest prestige, hired economists David Levine and Michele Boldrin by offering salaries well in excess of $500,000. But most high ranked economics departments have professors earning in excess of $300,000. Not much by the pornographic standards of finance, but a fat paycheck compared to your average English or Physics professor.
It is not just the stars. Journeyman assistant professors in economics routinely come in at $100,000 or more. And, unlike the hard sciences, they do this fresh from their PhDs, without a publication to their name and without years of low pay as post-docs.
The high salaries have been accompanied by dramatic declines in the teaching burden. The research demands of our advanced science leave little time for the classroom. In good universities faculty typically teach only two courses a year – one of which has to be a graduate seminar. The masses in the Econ 1 classes are often abandoned to the tender mercies of graduate students.
Then there is the economics “Nobel” Prize. Not a real Nobel, but a prize funded by the Bank of Sweden in honor of Alfred Nobel, with all the royal trappings of the Nobel. That makes economics star players really attractive to universities. When Edward Prescott of Arizona State won the Nobel he was paraded at half time at a football game. There is nothing like a Nobel for luster and fund-raising.
Why did academic economics generate so much prestige? Sure, modern economics is technically demanding. But so, for example, are theoretical physics and archeology, and physics and archeology professors are (relatively) dirt poor.
The technical demands helped limit the supply of economists. But what drove demand was the unquenchable thirst for economists by banks, government agencies, and business schools – the Feds, the Treasury, the IMF, the World Bank, the ECB. Economics had powerful insights to offer the world, insights worth a lot of treasure. Economics was powerful voodoo. Any major university or research institute wanted to arm itself with this potency.
The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power. This for two reasons:
(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of “The Great Moderation” in modern economies, the declining significance of business cycles.
Indeed as we have seen this year on the academic job market, macroeconomists had turned their considerable talents to a bizarre variety of rococo academic elaborations. With nothing of importance to explain, why not turn to the mysteries of online dating, for example.
I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line “Where is my money, idiot?” is her’s.
(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.
The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.
It has seen people like Brad De Long accuse distinguished macro-economists like Eugene Fama and John Cochrane of the University of Chicago of at least one “elementary, freshman mistake.”
It has seen Treasury Secretary Timothy Geithner, guided by Larry Summers, one of the most respected economists of our time, produce a bailout plan for the US financial system stunning in its faltering vagueness.
Bizarrely, suddenly everyone is interested in economics, but most academic economists are ill-equipped to address these issues.
Recently a group of economists affiliated with the Cato Institute ran an ad in the New York Times opposing the Obama’s stimulus plan. As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus — thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that “all I know on this issue I got from Greg Mankiw’s blog — I really am not equipped to debate this with anyone.”
Academic economics will no doubt survive this shock to its prestige.
Will we be as well paid? A recent article in the Wall Street Journal suggests the days of the $500,000 economics professor may have passed.
But more importantly, will the focus of academic economics change? That is hard to tell. But I would rate the chances of Chrysler producing once again a competitive US automobile at least as high as the chances of academic economics learning any lesson from this downturn. (What was the price of that Chrysler stock we bought, dear?)
Looks as if the asset value of economic analysis may be in flux, perhaps worth pennies on a 2006 dollar. We say, let’s learn more about dating.
Not that there’s really good money around to go after the bad. However, as the federal government eyes converting Citigroup preferred shares into common and taking a 40% stake in the behemoth, folks who eat, sleep, and breathe economics and policy talk as if nationalization is inevitable, whether or not that’s what one calls it.
This video, from Sunday morning television on ABC’s “This Week,”has become the flashpoint of debate.
The Big Picture’s Barry Ritholtz comes acrossas if he smells blood on this issue. There’s nothing so gratifying in the thankless world of blogging than to have been roundly excoriated for going out on a limb on a theory, only to be proven 100% correct on it.
He draws on Miller Tabak + Co. equity strategist Peter Boockvar’s strong assertion about calling a spade a spade to further his pro-nationalization argument.
“The raging debate over whether to nationalize C and/or BAC is semantics at this point. With politicians in DC dictating executive pay, marketing expenses, employee trips, dividend policy, etc… with their tens of billions of pfd stock (which may now be common with an amazing sleight of hand with no new money) and the guarantee of almost a half trillion $s worth of assets, both are already wards of the state.
But, whatever step the government may or may not take, healing the banks directly is still only dealing with the symptoms and not the disease.
That disease is ‘an overleveraged consumer and falling home prices‘ — when its cured, it will heal the symptoms that is a troubled bank sector. Shifting bad assets from the banks to the govt is just a shell game as we’ll pay for it one way or another. The $64k question is what will happen to bond holders . . .
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