Countdown to December 1 Boosts Housing Starts
Some regard housing and real estate as a nice place to visit. A goodly number of those individuals used to have jobs in Wall Street’s extended dysfunctional family of traders, analysts, ne’er-do-wells, hangers-on. They’ve left, but they won’t go away.
Oh well. They can be ignored.
They don’t report the news, because that would require more work and different disciplines than they’re accustomed to or capable of. Instead, they consider it their calling to take potshots on a free-for-all basis at both newsmakers and news reporters alike. They’re the business and politics world’s Greek Chorus; they always have something smart to say.
They weighed in Friday about June housing starts data from the Census Bureau. The Wall Street Journal–known among the know-it-all bloggers as the leader of the MSM (mainstream media)–reported the story as follows:
Construction of new homes rose in June by 3.6% from the prior month to a seasonally adjusted annual rate of 582,000, the Commerce Department said Friday. It was the third consecutive monthly gain, leaving the level of new-home construction at its highest since November, although the pace remains well below the 1.1 million rate seen in June 2008.
Wrong, the Greek Chorus said. Not up 3.6%, but down 46%, because the right way to look at the data is year on year, not sequential. Here’s the Barry Ritholtz The Big Picture retort to a positive reading of June’s starts data.
Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.
For those who eat, sleep, and breathe housing, June housing starts and permits data cheered rather than disheartened.
The smarter of housing’s blogger analysts, Calculated Risk, took up consideration of how to view the latest data from Census and the Commerce Department. This one is readable and credible:
For the last few years, whenever housing starts increased, I wrote that was bad news because there was already too much inventory.
Now, even though there is still too much existing home inventory, and too much new home inventory in some areas, it appears that new home sales have stabilized. Since single family housing starts (built for sale) have been below new home sales for six consecutive quarters (through Q1), this suggests single family housing starts should also bottom soon. There is a good chance that has already happened.
Those who are in the trenches can be cheered because they know the difference between themselves and national data. They know that the battle is on the submarket front. They know the war is with financial duress on the commercial and home mortgage front.
The question we’ve been asking, and will continue to, is if home builders beyond the publics are able to put starts in the ground, how are they putting their hands on money to do it? Is it rainy day cash reserves knifed out of the mattress? Is it newfound friends-and-family investors? Is it local private equity? The biggest question of all is: At what risk?
We can imagine that at least in some areas, there’s some betting going on with some of these starts, and we can only hope that the bets pay off.
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.
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?
Unbelievably Great Starts Data May be Just That: Unbelievable
Starts rose sequentially by 17.2%, per the U.S. Census’s latest release, which no one can decipher. Big Builder’s report on the release is here. At 532,000, seasonally adjusted, starts beat the Street by 47,000, or 10%. Permits, at 518,000, also eclipsed Wall Street analysts’ expectations by 10,000, or about 2%.
Evidently, the Street–and its gaggle of “consensus” economists–have neither visibility nor acumen into what to expect from new residential construction.
Or it means that government data culling is suspect. As Raymond James VP for equity research Buck Horne notes in his comment on May starts, permits, and completions data, the margins for error in the government data are all important. “Material downward revisions to the May housing starts estimates are more likely than not,” he says.
Here, from HousingWire, is the nub of the starts and permits data:
The good month for housing starts comes after the volume dived 12.9% the month before. A 62% increase in new multifamily construction drove the month-over-month gain, while single-family home starts rose 7.5% to an annual rate of 401,000 units. Single-family building permits — an indicator of future starts — rose 7.9% in the month to an annual rate of 408,000 permits.
Which do you believe? The Street’s analysts are full of it or the government’s math is off.
Either could be the case, and both are true. Economists are quick to say that a big difference between The Great Depression and now is that President Franklin Roosevelt lacked a good economist to advise him on ways to steer toward a quicker recovery during the 1930s. Still, as smart as a lot of those guys are, how much are they helping us know anything before it actually goes down, and even when it does, how helpful is their commentary?
On the other hand, it could be that in this case, economists’s estimates are smarter than the data flow from the Census. But once the headlines get a hold of the data, it’s really too late to worry about what’s really correct or not.
RaymondJames’ Horne dives into the government release and turns up a number of self-cancelling and contradictory figures that lead him to his conclusion that, when we see adjusted numbers in 30 days, may vindicate The Street’s more guarded estimates after all.
Here’s a doozy of a finding from the Buck Horne analysis.
Shrinking number of homes actively under construction directly contradicts starts data: However, the most strikingly peculiar aspect of this morning’s data was found in the little-noticed Table 4 of the full release, representing the Census Bureau’s estimate for housing units actively under construction. Under normal circumstances, we would think that if single-family starts had troughed and were actually rising materially – particularly in the seasonal low point for new home deliveries – there should be a coincident increase in the number of homes actively in construction. Oddly, however, the Census data here (which carries +/- 1.4% confidence interval) shows that homes under construction actually fell 3.9% versus April seasonally adjusted and dropped 1.3% month/month on an absolute basis. In the housing recovery of 1991, we note that this statistic indeed showed a sharply accelerating increase in the number of homes under construction beginning in April 1991 coincident with the recovery pattern.
Point is, at HousingCrisis.com, we do feel that bigger, well-capitalized companies may actually roll the dice on going vertical with more homes in the next couple of months. Why? Because, in this market environment, about a third-to-half of willing and able buyers want to settle and move in quickly. That makes specs almost inevitable.
Also, as deadlines approach on both state and federal tax credit programs for home buyers, builders who can grab capital to offer ready-to-move-in new homes are prepared to gamble on their ability to nail the shrunken, moving target of buyer demand.
As we posted yesterday, we believe that home builders are hormonally range-bound between unflappable and optimistic, and they’ll look at every mixed signal as a sure sign that it’s time to start moving the dirt and opening the new models.
Ultimately, It occurs to us that as the downturn sputters and runs out of gas, it’s likely will see a knifing up and down of starts before they settle on a conviction in their direction. Two months up, one month down; two months down, one month up, and so on.
Whatever the case, somebody’s wrong about today’s starts numbers. It looks for the moment like the The Street is, but stay tuned.
The takeaway: Clip the postive headline for the scrapbook, but wait a couple of months before you paste it in as a keeper.
Fix Housing Later
Unemployment is the chicken. Foreclosures are the egg. Swap their positions all you like. They’re each a self-fulfilling prophecy of the other, a negative feedback loop.
Housing leaders and housing-centric economists want to believe housing always leads the economy. Fix housing, they say, and you’re on your way to fixing the broader economy, because housing is an engine with a multiplier effect. Residential investment dollars–including construction costs for all kinds of housing–redouble and stream into many other markets and cause good things to happen in local, regional, and national economies.
This time though, a consensus is building that housing will not lead the way out of the downturn. Housing is not broken. Creation of demand is. Look at the latest unemployment data. Now, look at how foreclosures are working, i.e. 54% of new foreclosures are prime fixed and adjustable rate mortgages from among the lowest risk borrowers, per this analysis by Calculated Risk.
How about this for an argument? Housing, not only will not lead an economic recovery, it should not. Business Week economist Mike Mandel makes a case that a housing snapback would drain needed investment from other industry and service sectors that would put a more solid structure–including healthcare, education, and manufacturing–under the economy.
Here’s a few-minute video from Mandel on his Fix Housing Later theory.
Clearly, a more normalized level of demand for housing–existing, new, for-sale, and for-rent–would shape itself around less cyclical job growth in non-housing industry arenas. Businesses that got burnt badly as they met hyperbolic, investor-driven demand. In a real sense, housing’s 15 year run before 2006 used up a couple of the wild cards that would have jump started the economy, and pulled forward buyers into homeownership that it would be nice to have in the demand pool right now.
So, even as new residential construction business executives begin to populate their sound bites these days with flashes of wishful thinking, practically the only silver lining in today’s new one-family home sales data is that builders knocked 12 days of inventory off the books, reducing the ready supply of new homes nationally by 13,000 to 297,000.
In some markets, like Phoenix, home builder and developer sentiment has shifted from “you-have-to-fake-it-to-make-it” to that of genuine excitement. “They’ve turned the lights back on” in the land acquisition conference rooms, according to an executive with ties to investor and home builder land transactions.
What’s selling will have to continue to compete with foreclosures, super affordable to migrate renters across into homeownership. No contingencies. No funny business on the mortgage–it’s either FHA qualified, or at least 20% down. Delinquencies and defaults will pile up among prime and Alt-A borrowers for months and months to come, thanks to an unemployment rate expected to grow into the double digits before it starts to ease back by the end of 2010.
Get stocks to start parking in a promise of future growth, and a real economy GDP to inch back from its deep 6 to something around 0 this year, and by golly, consumer sentiment will start a real recovery.
Meanwhile, another year of trying to figure out how to do things with less people than you really need. What we all need though is an economy that can sustainably grow again, not one heated back up by housing. Fix Demand First, housing later.
Bottom Fishy
Are you the glass-is-half-full type, or a life-stinks-then-you-die kind?
A whiff of less-bad news here and there has bred with it a subtle change of expectations on the part of some economists, if not the eventualities themselves.
Clearly, though, economists are best at using two words to begin talking about even their strongest convicitons. Those two words? “It depends.”
Here’s a roll-up of economists’ opinions from the Orange Country Register’s “Lansner on Real Estate” that limbs out the Silver Liners from the Doom and Gloomers as to when that most-coveted of pieces of bottom might be in view.
Optimists
Fed Chair Bernanke:
- The worst of the recession has passed: “We continue to expect economic activity to bottom out, then to turn up later this year.”
Mark Zandi, chief economist, Moody’s Ecomomy.com:
- U.S. home prices will reach bottom by the end of 2009.
- “Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight.”
- U.S. home prices will fall another 11 percent on average before stabilizing.
- The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.
UCLA Anderson Forecast:
- Housing market to stabilize in late 2009, and “when it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy.”
- “As the housing market has completed most of its required adjustment prior to the downturn in general economic activity, it will not be as much of a drag on the recovery as experienced in previous recessions.”
- Orange County: Home prices stabilizing in 2009 and starting to rise in 2010. But appreciation rates remain in the single digits and prices will still be at 2004 levels in 2013.
- “This could well be the worst post-WWII downturn yet.”
- “If there is any good news in the picture it is that the correction in the housing market is almost complete.”
- “We are due for significant increases in unemployment through the 2nd quarter of 2010.”
- “Continued job loss in California is going to lead to more foreclosures and more uncertainty about the ultimate bottom in housing prices.”
California Association of Realtors:
- Recessionary conditions through the first half of 2009, “before we begin to see a turnaround in the second half of next year.”
- Prices down 28.4%. That’s revised from an earlier projection that prices would drop just 6% this year.
- Sales up 25%. CAR forecasts that 550,000 homes will sell in 2009, pretty good considering that the state was down to 347,000 sales a year in 2007. That’s revised from an earlier projection of 445,000 home sales.
Pessimists
Michael Carney, director, Real Estate Research Council of Southern California, Cal Poly Pomona:
- “I don’t see home prices leveling off in 2010. … The real reason we’re not going to see a recovery: The financing is not coming back for at least 5 years.”
Richard Green, director, USC Lusk Center for Real Estate:
- “I’d say we’re at bottom if it weren’t for the fact that the jobs picture is so dim.” … (Thinks market will turn around in 2010.)
Stan Humphries, VP of data and analytics, Zillow:
- “I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”
Construction Industry Research Board:
- 2009 is expected to be the worst year on record for new residential building permits.
- Just 63,400 units will be produced in 2009, down 3% from the 2008 record-low of 65,380 units.
- 2008 construction was 20% lower than the lowest point during either the 1980s or 1990s housing downturns.
- The low in the early ’90s recession was 84,656 units in ’93. The worst year during the early ’80s recession was 85,656 in 1982.
Multi Talented: News About Us
We’re proud of our colleagues this week.
They’ve toiled long and burnt the midnight oil to bring audiences something bright and new–a sign of their redoubled intent to be the first, best source of insight on the multifamily housing management, economics, and leadership.
Here’s the topline thought on the new multifamilyexecutive.com Web site from the brand’s primary steward, editor-in-chief Shabnam Mogharabi.
But first a look at the fresh new design of mfe.com. Have a visit.
Click image for access to Multifamilyexecutive.com
Here’s how Mogharabi describes the new features and functions.
>> Real-Time Data and Research As mentioned above, our senior editor Les Shaver leveraged MFE’s strong relationships with the industry’s leading research firms to provide something no other multifamily industry publication can offer: Up-to-the-minute, real-time national and regional market research. Throughout the site, you’ll find built-in widgets from Real Capital Analytics, M/PF Yieldstar, and others that provide customizable, searchable data on occupancy and vacancy levels, transaction volumes, rent trends, and more. In addition, the new site features a live stock ticker with continuously updating information on publicly traded multifamily real estate companies.
>> Multimedia-Rich Experience With the re-launch, we are now able to offer enhanced multimedia offerings and interactive features such as slideshows, polls, and Webinars. We also have, through our newly launched MFETV platform, four new videos up on the site, including a 20-minute sit-down interview with Henry Cisneros conducted at the AFT Conference last month.
>> Local and Regional Coverage Since multifamily real estate is very much a local game, it was important for us to be able to have some locally focused content. We were able to modify a Flash-based map created for Remodeling’s Web site and modify it to link to lists of MFE articles about specific markets, both at the local and state level. This was a temporary solution that I think works well for us until we are able to build more targeted local markets pages.
>> MFE Top 50 Rankings Our annual industry benchmark—the list of MFE’s Top 50 Owners, Managers, and Developers—is now viewable in a user-friendly table format that allows for a quick scan to find the company or information needed from any year in which the survey was conducted. And the data can be downloaded into an Excel spreadsheet for easy reference.
>> Daily Exclusive News / Content Aggregation Our vision for MFE.com was to be news-heavy and a destination site for the industry. To do so, we needed to be able to offer folks in the multifamily industry everything they would need in one place. The site is rich with daily Web-exclusive news, features, and stories from MFE, each with its own RSS feed. But in addition to that, we have made a point of offering more aggregated news coverage from around the Web and article feeds than any other publication in the industry. Stories from every industry resource on the Web—including our competitors, national trade associations, and commercial news vehicles such as the Wall Street Journal—can be found on MFE.com. In addition, we offer links to industry blogs, calculators, resource centers, lists, and more.
>> Expert Opinions We have begun to cultivate a blogroll that includes perspectives and opinions from the editors of Multifamily Executive as well as multifamily real estate experts. Over the course of the next few months, we will be bringing together more than a dozen multifamily experts, architects, and consultants to share their insights on the site.
>> Streamlined Design and Navigation With the re-launch of the site, we have updated our color scheme and style. The sleeker, streamlined design allows users to easily locate the right content. And we developed a topic-driven navigation structure that focuses on vital areas of the multifamily real estate business with less of a focus on the magazine product itself.
We congratulate the team that brings you this Site, and we wish them all good luck as they work to bring you the smartest, best, and first intelligence on multifamily housing business and management!
Rental Decay Eases a Bit
There’s about two ways to look at data points that reverse a downward or upward trend. One way is to say, “nyah, nyah, nyah, seasonality’s skewing the number,” and count it as a blip in an otherwise uninterrupted further plummet. That way is for those who are unable to get out of the fetal position.
The other way is to note the ever-so-slight upward hook at the tale end of the vertical deterioration picture, and imagine, if nothing else, you could catch a fish with it… or it could be the beginning of a reversal trend. It might not proceed on an upward trajectory uninterrupted by occasional ups and downs.
The NMHC has released its Tightness data for February, which cobbles vacancy and rent price info into a healthiness index. Calculated Risk has tracked the data and created this analysis.
Click on image for Calculated Risk analysis of NMHC release.
It is common in a recession for apartment vacancies to rise, as households double up by moving in with a friend or family member. However an added factor in this recession is all the single family homes being offered as rentals. This is possible additional competition for apartments:
In a special fifth question to NMHC’s Quarterly Survey, one-third (33 percent) said such competition [from condos and single-family rentals] was unchanged. Another four percent thought there was less competition, and 11 percent don’t consider condos and single-family rentals to be significant competition for apartments in their markets. A slightly majority, 52 percent, did report more competition from condos and single-family rentals than in previous years.
Competition from condos and single-family rentals probably depends on location.
Toll Talks Up “Expressions of Interest”
There are two reasons analysts and the media may continue to be overly focused on housing’s negative headlines, according to Toll Brothers CEO and Chairman Bob Toll.
One is they may not be close enough to the market to pick up the change in buyer behavior that’s happening in sales offices in about 80% of the country’s markets, he says. If you don’t see people turning up as traffic, then coming back with “expressions of interest,” backed by a non-refundable deposit, and finally returning to go to contract, then you’re focused on lagging permits and starts data.
The other reason analysts and journalists may be accentuating the negative, says Toll, is “They may not be doing their jobs.”
Toll is not going so far as to affirm CNBC’s Jim Cramer on a June 30, 2009 “housing bottom,” but he is relieved that things are better than they were worse.
Here’s a seven-minute blast of cautious optimism from one of home building’s most brutal realists.