Brother Act — Say the Word, LUV
The smart one sees an L in Europe, a U in the U.S., and a V in Asia, plus bumpy.
One Tough OSB
84 Lumber founder Joe Hardy talked before dawn in Pittsburgh with CNBC Squawk Box co-anchor Carl Quintannia, offering a more than a half-century’s perspective on housing’s ups and downs.
He talks about how being a private company has allowed 84 Lumber to make adjustments for survival that will position it for strength in years to come.
Referring to lumber prices, Joe says they’re very low right now, in sync with the fact that home prices have fallen by as much as 40% or more in some locations. What’s more competition from SOBs, he says, are another source of pressure. He corrects himself later–acknowledging he meant to say OSBs (oriented strand board).
“Turnaround? … Not Yet” — Diana Olick
Amazing the way an entire eight months’ work to understand what’s happened in housing and what’s next can be summed up in two-minutes or less. But here you are.
CNBC’s Diana Olick’s “1 Year Later” segment probably would have been twice the number of minutes if they did the report in 2006, but hey, that’s what we’re talking about here, aren’t we?
Humbled by the Numbers
It’s September, but not really, because it’s pre-Labor Day weekend, before the experts come in droves back to their desks from their late summer’s respite and normalize market activity.
Still, we can’t help the white knuckles, not after last September and October, and not after this past summer’s rally tapered into talk simply of protecting some of the year’s gains.
Every measure of growth, stagnation, or decline gets hyper scrutiny. This morning we have data out on jobs from ADP, which serves as a proxy for government employment data, with a particular sensitivity to the payrolls of small to medium-sized businesses. That report sent futures for U.S. stock markets from flat to negative.
What struck us this morning, though, was a moment CNBC Squawk Box co-host Becky Quick experienced as she was talking with RBS analyst Michelle Girard. In a split second, it revealed how daunting it is for most semi-intelligent business journalists to get our heads around the maelstrom of technical data and trends as we cover the financial and housing crisis.
About five or six minutes into this eight-minute video, it all comes undone for Becky as she tries to make a point. To paraphrase her observation, she mentions that an analyst commenting yesterday on encouraging news from the Institute of Supply Management focused attention on one of the ISM measures as significant. “There was a number; I forget what he called it, [but it had to do with] orders going out faster than they could refill them, which means these factories might need to hire people…”
In other words, she was saying, “I know there’s this smart thing somebody said that I should be referring to as an indicator, but I can’t think of it right now, but it really could be important.”
We have to say, we empathize. This downturn has brought us face to face with business finance, economics, and psychological phenomena that are utterly over our heads as we try to fix order to our reporting.
Things start to look good, and we report that things are starting to look good, especially if smart people add their blessing to their improvement. But still, we haven’t known how to look beyond immediate upticks and down drafts in the trends.
We have begun to understand that both to the positive and the negative, collective psychology trumps fundamentals, which is why markets are driving lower even as positive economic news flows into the headlines.
So we’ll go back to trying to understand that number that we know is important that has to do with consumers in households having money to spend on big, medium-sized, and little ticket items. Two out of every three dollars of GDP, and all the ability to pay back all the bills for the programs we’ve got to keep the trains running these days, comes from consumer household spending.
Take more than one in 10 households out of the mix because of lost jobs or lowered income, and the nine other households somehow need to make it up. That’s the number we’ll be looking at closely as we move through the next couple of months, watching the markets try to protect some of the gains it picked up from its March lows.
Existing Home Sales Stir Good News Bad News Sparring
In the National Association of Realtors’ release of June existing homes sales numbers, most of the interest is in what’s happening at the low-end, and what’s not.
First-time home buyers, the data says, account for three of every 10 resale home purchases in June, down from 40% in April, and way down from fully half of all buyers in March. The inference here, per Buck Horne, housing analyst for Raymond James, is that first-time buyers were actually plentiful enough to cause some demand among mover ups…
This is likely due to a growing number of repeat buyers who are benefiting from sales to entry-level buyers.
Horne and other analysts note that the NAR’s count of inventory was down (by .7% or 28,000 units to 9.4 months of supply). Still, NAR’s count of inventory masks “shadow inventory”–houses that people or lenders will want to sell, but are waiting out the worst of times in hopes of more pennies for their dollar of real estate asset. Raymond James’ Horne reminds us, normal inventory level is 6.3 months’ supply, and during recession times past, an 8.6 month supply is normal.
Interesting to note, though, is that the supply for single-family homes in the $250,000 and below range is tightening. CNBC’s Diana Olick snags that observation as she reports on the lift in all geographies and all product types, especially condos.
Here’s The Big Picture analyst Peter Boockvar’s take on how foreclosure, distress and short sales among prime mortgage holders skew price trends.
Prices are down 15.4% but rose to $181,800 sequentially, the highest since Oct ‘08 as prime foreclosures rise and lead to higher priced homes for sale, thus skewing the median price higher.
Calculated Risk’s big take-away is keep an eye on inventory. Price stability is captive to months’ supply. Months’ supply is doubly affected–worsened and made less predictable–thanks to foreclosures. Foreclosures are now more a function of “underwater behavior” and job losses than shaky loan policies.
Here are two contrasting interpretations of today’s report from housing sector equity research analysts:
Michael Rehaut, senior VP at JP Morgan, believes the months’ supply, foreclosures, and job loss scenarios mean home builder stocks may be trading with significant exposure to upcoming business trends:
Specifically, given our outlook for higher unemployment, still tight credit, rising foreclosures, and elevated inventory levels, our estimate for impairment charges to represent another 30% hit to builders’ book values could easily prove conservative. As a result, we believe large impairments should continue to prevent investors from gaining confidence in asset values, resulting in depressed price-to-book multiples, as well as drive further erosion of book values.
Citi’s Josh Levin, on the other hand, sees resilience playing into how the home builders perform in the near-term future.
While we think the housing market faces numerous headwinds, we view today’s data as a positive headline for the homebuilder stocks in the context of a group that we think remains a trading group. At the very least, the empirical evidence that higher rates did not adversely impact sales should be welcomed by investors who are long.
Our own take is that we’ve entered a protracted period of mirror-month performance, i.e. one-month may be positive and the next negative by precisely the same degrees.
Seasonality proved that business could revive with lots of life support. The question is what will fundamentally support sustainable positive direction. Not alot out there to do that.
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.
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.
Hurry Up and Wait on HASP and HAMP Loan Modifications
The New York Times reports extensively today on the slow progress President Barack Obama’s $75-billion Homeowner Affordability & Stability Plan programs are making to forestall as many as 4 million foreclosures by allowing cash-stressed homeowners to get terms of their loans modified.
120 days into the weeds of the programs, it’s a slow go.
Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.
Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.
Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.
CNBC sought comment on assessment of the success or lack thereof of the initiatives from James Lockhart, director of the Federal Housing Finance Agency, whose remarks covered not just the mortgage modification efforts but housing’s outlook itself.
The issue is, it’s a large-scale problem without a one-stop-shop solution. The answer is as granular as each case by case loan modification applicant.
Appraisal Reprisal
The National Association of Realtors’ economist Lawrence Yun is anxious about the new appraisal rules.
He talks to CNBC’s Diana Olick about how appraisals are hurting home sales.
We can’t resist running the Barry Ritholz commentary on Yun’s appraisal assessment in a The Big Picture blog post referred to below.
Consider: The NAR remained notably silent during the appraisal corruption during the boom; Home sales based on loans to people who couldn’t afford them that drove prices higher were fair basis for appraisal comparables — but when these same homes are sold — inevitably through forclosure auctions, REOs or distressed sales — they should be ignored? Only up, not down?
Even worse, they seem to be calling for a return to “local” (i.e., friendlier) appraisals — like the good ole’ days. You remember the “friendlier” era of corrupt appraisals that were rife during the credit bubble?
Am I reading this correctly? It looks like code for USE APPRAISERS (i.e., CORRUPTIBLE) WHOM YOU KNOW.
I thought I was inured to the idiocy of the NAR and the fetid stank of corruption that their press releases come with, but even I am astonished by the filth emanating from their offices today. Shame on you . . .
Volatility Plus Uncertainty Equals Fools Abounding
The Mortgage Bankers Association says, like Gilda Radner used to, “Nevermind.”
They don’t say, we were wrong, we’re sorry. They say, we’re re-forecasting the year.
On The Big Picture blog, analyst Peter Boockvar offers this commentary. (We believe he’s inserted an unnecessary pair of quotation marks with his closing assertion.)
After the note I just sent on the Fed, the MBA said that after raising its forecast for mortgage originations by over $800b in March after the Fed’s QE plan and the subsequent decline in interest rates, they are cutting its ‘09 est by $700b. 88% of the cut is due to refi’s as the Fed “has not been successful in maintaining lower treasury yields.” In March when they raised their estimate they had this caveat, “with the billions in Treasury securities that would be issued to finance record budget deficits and with the Fed expected to purchase only a portion of those, how long rates stayed low would depend on whether other investors stayed in the market. If other investors shied away from Treasuries due to expectations of future inflation and the declining value of the $, the effect on rates would be more short-lived and our mortgage originations forecast would prove too optimistic.” “That has proven to be the case.”
Here’s CNBC’s Diana Olick reporting on the MBA reversal:
Here’s the question. If the threat of inflation is the cause for upward pressure on interest rates, why–with no reason to believe that at least wage inflation is in the offing–is there so much panic about imminent, momentum-crushing inflation?
We think the bigger concern to focus on is the weakness of the recovery itself, as Big Builder online editor Bill Gloede notes in his blog post today.
You know what? The MBA can reforecast again in three months and change it all back.