The New Warren Commission
Witness the collision of yet another certifiably brilliant mind with the thick, dull wall of bureaucracy.
As TARP Watch Dog running the Congressional Oversight Panel, Harvard University Law professor Elizabeth Warren has been a perfect pick. She chooses her battles and is ferocious as a non-partisan taxpayers’ advocate.
Now, it looks as if she’s destined for a new role. The New York Times reports.
Elizabeth Warren pitches a Consumer Commission as part of financial rules overhaul.
Most notably, she laid out the argument for a new agency in the journal Democracy in summer 2007. Presumably taking a cue from Ralph Nader, the essay was titled, “Unsafe at Any Rate.”
Some excerpts:
Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products.
They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products — a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.
The story continues.
So, we must assume that Warren believes her commission would work as a safeguard for consumers against the reckless and chicanerous come-ons of financial services companies.
What it won’t safeguard against is consumers’ reckless and chicanerous behavior when it comes to financial market bubbles–real estate or otherwise.
The Corvair of 2002-2006 was not the NINJA no-downpayment option-ARM. It was, more often than not, the person who took the loan to get rich quick.
Pollster Bolster
From BUILDER, by Boyce Thompson: For many a U.S. resident, at least part of their American Dream is owning a home. That hasn’t changed, according to John Zogby, a noted political and cultural trends pollster who keynoted the Pacific Coast Builders Conference this week.
What has changed, per Zogby–author of a new book “The Way We’ll Be,” are the motivations driving people toward attaining their personalized version of the American Dream. Builder editor Boyce Thompson offers an analysis of Zogby’s remarks, with an eye toward connecting the dots between the pollster’s macro observations and specific opportunities and challenges for those trying to win new home buying and remodeling customers in the most dreadful of times.
Zogby outlined four pools of people who share this spiritual connection. A sizable portion of the population, he said, is now working for less. They have de-emphasized what they own or where they live to define themselves. “They are the new American consumer,” he said, adding that these are smart consumers who will shop for bargains but save money to buy something nice they really want. It’s a mistake to try to reach this group by marketing fantasy; reality is what appeals to them.
The blinding conclusion? Less is not only more; it’s all there is to bank on.
In Zogby’s own words:
Consumers May Fake it to Make it
You gotta hand it to us consumers. Per Flow of Funds data, we’re about $14 trillion in the hole on household net worth from where we were before this whole thing came undone, starting in 2007.
Caculated Risk also observes, homeowner net equity is “Cliff Diving,” far below 41% when you account for the fact that 31% of homeowners have no mortgage to pay.
Still, consumer sentiment, according to the University of Michigan’s monthly survey, is inching up.
Not to where anyone should get excited, but up vs. the other direction.
Here’s a video clip from CNBC, with experts on the latest consumer sentiment data.
Calculated Risk says take it with a grain of salt.
Consumer sentiment is a coincident indicator – it tells you what you pretty much already know.
Statistics, More Statistics, and Damned Lies
“They’re lying.” This is what Yale economics icon Robert Shiller told Builder 100 Conference executives about experts who claim they know how the housing economy will behave in the months ahead. “It’s impossible to know.”
This would suggest that a positive outlook and a negative one are equally viable. So why not believe the more optimistic take?
Shiller is one of the smartest people today commenting on what makes the housing economy tick, and he’s the first to say he doesn’t know when it comes to predicting where it’s going to go. Mind his phrasing in an op-ed piece from the New York Times this past Saturday. He carefully uses the word “may” to say, “hey, it could go the other way, too.”
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
We’re ever concerned about predictions. We heard a lot of anecdotal good numbers for April, and have gotten word from a number of builders that May was just as good or even better. We heard of one home builder in the D.C. metro market who closed on 55 homes in May, a good 20% ahead of plan. In Phoenix, monthly sales in some communities are better than they’ve been dating back almost two years.
At the same time, the gathering financial storms of nonperforming commercial mortgage back securities and unrepayable credit card debt coupled with an expanding black hole of unemployment remain abstractions whose risks to forward planning may be too hard to calculate.
Have investors who’ve restored more than 40% of value to stocks from their low-point and gotten the Dow Jones in positive territory for the year factored in these forces already? Have government and Fed policies actually begun to find traction in the financial system that have started to slow the bleeding?
Here’s what we think. For most privately held home builders, especially the ones on life support who are one letter from the bank short of doom, there’s no gain whatsoever from a negative scenario. These companies are beyond scenarios altogether, and just pumping to get another sale done to keep working their way through their bank obligations for another month.
Housing prices–especially national ones–bear little relationship to the realities of these companies. They’re focused on the small ball. Build quick. Beat existing, distressed, and foreclosed properties to the punch somehow, and make it so that the monthly payments make sense to a home buyer exactly the way these companies’ own monthly payments to their lenders stay on course.
More macro financial shocks are coming. More job loss will put a drag on local economies. More household deleveraging will take money out of circulation as consumers curb their spending.
Even so, Shiller says, what happens time and time again in the history of economics is that people’s behavior frequently defies logical supply and demand behavior.
All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.
Can the 87% or more of people who may stay employed offset the negative feedback of those who’ll continue to swell the ranks of those involuntarily out of work during the next 12 months as the economy grapples for recovery?
Will those who are able to hang onto their jobs be confident enough in their income stability to strike while the pricing, interest rate, and Federal tax credit incentive irons are hot?
The expression one real estate/housing player uses to offer an answer to these questions is this: “You’ve got to fake it to make it.” There’s no upside to believing the downside outlook.
For the moment, getting to ”the other side” of this mess means staying in business through tomorrow.
The Dash for Cash
We are still on our uncertainty kick, as it’s the only lasting phenomenon we both be certain of and need to plan around.
Consider a comment from investment guru Jeremy Grantham in an analysis The Big Picture blog’s Barry Ritholz is raving about for its keen guidance on “what we should expect over the next few years.”
“The uncertainties of the economy are so great that when the uncertainties of the stock market’s anticipation are laid on top of them, you simply must have big ranges of outcomes and hedge your bets.”
In home building, we see parallels to this principle.
The first quarter of 2009 has now made it clear that, by violently turning the screws on their gross margins, public home builders can at least stir the pot on home sale volumes, especially if it’s the right time of year and there are a couple of “x” factors like a California home buyer tax credit around to help.
Here’s how Citigroup’s home building sector equity analyst Josh Levin puts it.
While most investors entered [the just-concluded] earnings season focused on y-o-y (year-on-year) net orders, we think many were surprised by the q-o-q (quarter-on-quarter) gross margin deterioration reported by most home builders.
In the next three quarters of 2009–especially after there are no more $10,000 tax credits to hand out to Californians who step up to buy now–home building companies will be left even more to their own devices to get the job done moving inventory.
Seasonal forces, rock-bottom prices, record-low interest rates, and money back on income taxes for a home purchase have been working.
Take away seasonality, and add back the toll of continued economic weakness leading to a weak recovery, big layoff numbers, another wave–maybe two–of credit meltdown shocks in the form of widening credit card defaults and commercial real estate implosions, and one can get a sense of genuine challenges to the kind of consumer confidence it takes to make that largest of consumer purchases.
Home building companies that have made it to this point with a truck load of cash need a plan to try to expand their “range of outcomes,” even as they hedge their bets.
A truck load of cash, a delevered balance sheet, a skeleton-crew cost structure, a few tax-carryback induced inventory turns, and few if any false moves, serve as Part I of the plan–the part that has gotten the stronger companies to where they feel they still have cards left to play.
Part II is where a broader ”range of outcomes” comes clear, because even the stronger companies can’t sit around for the next three quarters waiting for the home buyer market to suddenly tilt their way. Both public and private companies with cash will in the next several months begin to try to slide in unobserved to pick of lots that pencil to new hurdle rates. Those lots, and the business plan around them, and the product on them, will all have one mission. Generate cash from sales.
Whatever goes on by virtue of “the visible hand” of government, home building operators need just one more critical part of the downturn’s plot line to kick into effect. Capitulation. “Ask” prices need to succumb finally to new, uncertain, sustainedly weak realities. And they will, but first only discreetly.
So, what we’ll be observing, even as clouds of uncertainty continue to sit over residential construction’s landscape, is the beginning of chapter that will see home buyers pop in and buy land, hoping finally that it’s cheap enough that they can put a home on it with one of their existing or new products that will get them inventory turns at a greater than one-or-two-a-month pace by the end of 2009.
We invite you now to jam our comment box with questions and challenges for leading home building executives, either about their companies, about the markets they operate in, or about the business environment ahead. who’ll gather in Chicago over the next several days for the 2009 Builder 100 Conference.
We hope to see you there, but if not there, then let us know here what you want to have these folks address in the days ahead.
Dr. Shiller’s Animal Spirits
Yale economist Robert Shiller will keynote the proceedings of the Builder 100 conference for home building’s leading executives next Wednesday, May 13, in Chicago.
In this past Sunday’s New York Times, Shiller accentuates the positive as he takes on the question of whether the current economic crisis has begun slowly to subside, or whether we’re due for even heavier weather.
In his Depression Scares are Hardly New essay, it’s as if Dr. Shiller is giving a patient news that he’s very sick and the prognosis could go either way, but there’s plenty of cases that don’t wind up going to hell in a handbasket.
Shiller, these days, is preoccupied by psychological factors that impact human behavior in the financial and other markets–”Animal Spirits,” he calls them. He’s surprised, in fact, that people at large seem to be less daunted by economic conditions than experts with specific technical insight into what is so woefully wrong with things right now.
He writes in the Times:
This time, the reasons to fret about a possible depression may seem less concrete. For most people, the worries that consume economists and accountants, about things like bank stress-test results or the “OIS-Libor spread,” are rather hard to comprehend.
As Franklin D. Roosevelt famously said during the Great Depression, “the only thing we have to fear is fear itself.” Let’s hope that is true, and that the relative complacency in the general population is good news for the economy.
In a sense, the term “complacency” may serve as a kind of methadone treatment for an economy that seems bent on fixing its balance sheet cold turkey, from the household to the global economic complex.
In “Animal Spirits,” a book Dr. Shiller has written with George A. Akerlof, we get a take on economics and an explanation of what is going on now, in down to earth terms that anybody can grasp.
Dr. Shiller introduces us to his theory and where it applies in this video from The McKinsey Quarterly, taped last month.
We Won’t Get Fooled Again… Or Will We?
Conundrum on a gloomy, rainy afternoon.
Housing is more affordable. But for whom? Which makes the first statement questionable, if not untrue.
Whether the statement–Housing is more affordable–is valid or not is a big question. Many of housing’s economists say that the degree to which housing affordability reverts to longtime norms–such as house price-to-household income ratios and house price compared with market rate rents–will tell when the housing correction is complete. Once the house price correction is complete, and norms are restored, the assumption is the housing economy will have troughed out, and transactions, absorptions, and an efficient market will resume.
People will buy because it will be the time to buy. But is that asking too much of an economy whose consumer sector–the engine that could…once–is under such duress as it is?
We like Irvine, Calif.-based real estate consultant John Burns; he’s smart, and he can be a help to clients on both sides of the bid-ask chasm that has paralyzed the central nervous system of real estate in the United States.
We also like CNBC real estate correspondent Diana Olick for her standup job of reporting on the housing landscape from both Wall Street and Main Street.
What’s more, we like good news, just as much as the next guy.
These three stars aligned today, but we’re not comforted.
First, John Burns released data that backed up his lead assertion. “We have the best housing affordability in 38 years…” That’s 1971, folks.
Burns trots out chart porn to illustrate the drama of his assertion.
Source: John Burns Real Estate Consulting
Here’s Burns’ commentary on the data.
The monthly cost of homeownership has fallen 43% from the peak in this cycle, with more than half of that due to the decline in price, and the remainder due to the decline in mortgage rates and increase in incomes. The median-income household, which earns $52,800 per year, only needs 25% of their income to buy the median-priced single-family home of $164,600. In July 2006, that ratio was 44%.
Those of us who are in the housing business know that the monthly payment is far more important than the price for entry-level buyers. Entry-level buyers compare the cost of homeownership to the cost of renting and have no idea what a Case-Shiller index means. Once the word gets out that homeownership is less expensive than renting, which is now also true in 54 of the 88 markets where we track this information, we expect buying activity to increase substantially (even in a horrible economy).
CNBC’s Diana Olick caught wind of Burns’ data and smelled a good news headline, which all of us wish for desperately. See earlier Wishful Sinful post. Here’s her take today in her blog: “Yes, You Can Afford A House.” Her evidence of the validity of that claim? John Burns, of course.
I know we’ve been saying over and over that home affordability is soaring to record levels, but a report today from John Burns Real Estate Consulting really puts it into hard numbers, which I thought I’d share.
Let’s start with the big number: the cost of homeownership has fallen 43 percent from the peak in this cycle, with more than half of that due to the decline in home prices and the rest due to lower mortgage rates and increases in income.
Still, realty reality is what it is, not some spin that gets a fleeting instant of attention and then goes away like so much in this throwaway society.
Affordability, by definition, is a real-world term, not a theoretical one.
For instance, what happens when you add home price depreciation rates to your mortgage rates to figure out your real monthly interest rate?
This is the real world way that Chris Flanagan, Asset Backed Securities Research chief at JP Morgan, advises us to look at affordability. Flanagan notes that that by adding the FHFA index’s current 7% YOY decline to a 5% mortgage rate, “real” mortgage rates are closer to 12%, which results in affordability being near the lowest level in the last 30 years.
The other issue is your cost-to-household income ratio. Just as the “V” in loan-to-value has been destabilized by deflationary forces, so too have household income data points been corrupted by galloping job loss trends, which also corrupt consumer confidence.
Fact is, the single most important data point for housing and real estate people to watch is industrial absorptions. This is where the rubber hits the road in non-cyclical job formation that will need to happen to turn the tide on real estate across the board.
All the jobs formed during the W Bush administration have been wiped out. Structural challenges with non-cyclicals that pre-dated the jobs and economic run up of the 2002-2007 period continue. We’re going to need to see non-cyclical industry sectors get well–and household incomes to normalize–before we’ll see the term “affordability” mean anything in the housing market.
We like Burns, Olick, and good news. But we don’t believe them here.
Multifamily’s Grip Versus The Single Family Sector
We’re out in Phoenix this next couple of days, hosting a conference for multifamily housing finance executives.
Like almost everything these days, the housing crisis and broader, deeper economic crisis have polarized people into opposing sides of an economically, politically, and emotionally charged issue. One one side, there are those whose businesses’ interests focus mainly on multifamily for-rent units, and on the other, those who make a living doing single family for-sale housing.
It’s popular among multifamily executives to lay blame for society’s ills at the feet of home builders and residential developers of for-sale communities. Here’s a multifamily executive’s oft-chanted refrain these days, referring to the damage single family for-sale companies have wrought upon the universe.
- They overbuilt
- They overcharged
- They took our customers by seducing them with false come-ons and fraudulent financial processes and procedures into a homeownership dream those customers could not afford
- They ran their companies poorly, and sapped perfectly good lending institutions of their ability to sustain good healthy capital investments in multifamily deals and projects
- They are part of a conspiracy to expand homeownership in America, which devalues our competitive offerings in responsible housing
From October 1, 2008 on, the volume of the antagonism aimed at home builders by the multifamily industry sector’s leaders and trade association leadership has increased. Here’s how the National Multi Housing Council promotes its 2008 Annual Report:
2008 will long be remembered as the year that the easy credit days of the first half of the decade came to a crashing halt.
The looming credit crisis quickly expanded into a global financial crisis and eventually into one of the worst economic downturns in decades. It is also the year that policymakers and consumers had to admit—as NMHC had been warning for years—that, yes, there is such a thing as too much homeownership.
Last year, homeownership rates posted their sharpest decline in 20 years, falling from a peak of 69.1 percent in 2005 to 67.5 percent in 2008, a level last seen in 2001 and erasing all of the much-touted homeownership gains of the last administration’s “ownership society” initiative. Meanwhile the number of renter households jumped from 30.9 percent to 32.2 percent.
Multifamily companies’ access to capital, their own balance sheet exposure, their redoubled challenge to cope with rising vacancy rates and deteriorating rent power amid a rising tide of unemployment in America, all got swept into the viscious-circle vortex of soaring foreclosures, declining home values, stress on mortgage lenders, and in turn stress on commercial real estate lenders… all impacting earnings, hiring, spending, and sentiment.
Still, we feel that it’s a red-herring and a misstep for multifamily strategists to pin responsibility for the enormous dislocation in the economy on their brethren and sistren from the single family side of the housing equation.
Multifamily operators, owners, developers, and builders have a long list of opportunities, challenges, caveats, missteps, and smart tactics for survival into the next up-cycle in housing whenever that might occur over the next couple of years. No need to paint home builders as part of an evil conspiracy to siphon away renters with a panacea about homeownership for all.
Housing’s crisis is, at the bottom, a household-by-household balance sheet correction that added up to global proportions. You can see this clearly in analyses such as the one Calculated Risk has done about how people–the you and I kind of people–save and spend.
In his post, Personal Saving and Mortgage Equity Withdrawal, Calculated Risk maps out the grim difference between where savings could and should have been as opposed to where it was and is. If people are spending the phantasmagoric appreciation on their owned homes as if it is income, then we get a glimpse of how far we need to correct to pay that back. People can buy a lot of things with play money if it’s accepted currency, but when everyone realizes it’s play money after all, the false economic bouyancy comes to a sudden end.
The aggregate saving rate captures the behavior of both savers (who probably didn’t change their behavior) and “dissavers” (who borrowed heavily). The saving rate declined to zero, probably because the dissavers were using MEW as income.
Now that the Home ATM is closed, the saving rate is rising because of less borrowing – as dissavers are forced to live within their incomes.
This is the current challenge. People, especially if they fear lost income or the lost ability to generate income, save cash. Banks act on similar fears, and so they’re stuck in the limbo of our current unemployment trends.
Savers and “dissavers” alike are saving all at once.
That’s not anyone’s fault, and it’s human nature, and it’s ultimately the source of opportunity for people in housing if they can get past blaming one another for what’s wrong. Housing has an over capacity problem. Too many companies can build and operate and develop housing, and that’s what our wacky market will correct.
Meanwhile, we’re seeing good examples lately of how pricing can be a lever to move inventory and close the huge gap between the number of vacant household units there are and the demand for them. The “V” for value is still hidden somewhere in that gap.
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.
Where the Most Houses Aren’t Homes
The “negative feedback loop” is a fancy new name business folks are giving to the Catch-22, vicious cycle, self-confirming prophecy that has foreclosures, home price declines, job loss, lower consumer spending, reduced earnings, and more job loss in Brian Eno hell …
A key factor in the negative feedback loop is absolute vacancies, the number of home units capable of housing people but aren’t. This factor erodes motivation to act on the part of consumers, and stands as the distance between the recovery of demand and the eerily silent inertia that reigns o’er the housing economy.
If there’s no fear that one will miss an opportunity of a lifetime by not buying now, then there’s little trigger to jump in off the sidelines.
CNBC has pulled together a U.S. Census-based ranking of the 10-metropolitan areas with the most homeowner vacancies, and cobbled a slideshow to highlight the markets.
Have a look-see.