Very Few in Ivy’s League
In housing and real estate insight, the name Zelman has few equals.
Here, CNBC’s Diana Olick taps into commentary from Ivy Zelman on how to read into starts, permits, and foreclosures data releases that have streamed through the past couple of days.
Good News du Jour Department
Real estate is local.
Real estate trends occur one local market at a time.
Here’s two upbeat notes from opposite coasts. A third would make a trend.
Mark J. Perry’s Carpe Diem blog reports the following: NoVa Home Sales Increase for 12th Straight Month.
Here’s the graphic he’s supplied, an oh-so-rare look at measurably higher sales volume year-on-year.
Click on image for Northern Virginia Association of Realtors site.
Here’s what Perry’s comment is:
The data suggest that the Northern Virginia real estate market is way past its bottom, and has been making a solid recovery and strong comeback for many months. And yet doesn’t much of the national news suggest that real estate markets in most parts of the country are still years away from a recovery?
It’s a different story on the Left Coast. A story of foreclosure sales. The question is, can foreclosure sales (and 60% sales of other existing for-sale homes) keep up with the pace of foreclosures?
Calculated Risk quotes this report from DataQuick.
The number of homes sold in the Bay Area rose for the seventh month in a row in March, the result of continued bargain hunting in the East Bay and other foreclosure-discounted communities. The past year’s steep drop in the median price slowed significantly, indicating that the market might be near its price bottom, a real estate information service reported.
Speaking of recovery, Builder magazine asked five real estate analysts to offer their take on which five markets might make it across the gulch soonest. Here’s their response.
One way or another, it’ll be a market at a time. With fewer local newspapers around, we can only hope that there’ll be headlines enough to take note when it begins to happen.
Housing Starts and Fits
Single family housing starts scratched out a 2,000-home improvement in March from January’s adjusted record low of 356,000.
Here’s Calculated Risk’s picture of the current total starts and one-family data.
Click image for access to Calculated Risk's "Housing Starts: Near Record Low" post.
Calculated Risk’s take-away comment:
Total starts and single family starts declined in March (compared to February), and are both just above the record low set in January. This is the second month in a row with starts slightly above the record low – this is just a slight increase in total starts and single family starts are essentially flat with the record low.
It is still too early to call the bottom in January, however I do expect housing starts to bottom sometime in 2009.
Starts data reflects the mayhem in the credit markets dating back to late September ’08, which shut down construction and project lending, and seized up residential construction mid-hammer blow.
- The Wall Street Journal report on housing starts.
- The WSJ’s panel of economists debate “the bottom.”
- The Census Bureau’s release on Starts, Permits, and Completions.
- The New York Times reports on surging foreclosures and plunging starts.
It’s made it a toughest-ever winter for home builders of all sizes and stripes.
Builders say they’re reduced to two positions: Cash and fetal.
Weekends they like to work, but with no one coming through the model homes over the weekends, a good number of them have nothing better to do than to sit on the couch, remote in hand. After the drama at Augusta this past weekend, one home building executive writes:
I watched the final holes of the Masters but my sports highlight this weekend was the final game of the Frozen Four NCAA Hockey Championship from the Verizon Center on Saturday night. Boston University beat Miami of Ohio in overtime after scoring 2 goals in the final minute of the game to tie the score.The game and result was further proof that nothing good is happening in Ohio and that some cosmic power is either staring down with the stink eye or sticking needles in a voodoo dollish map of the United States.
One Blip at at Time
Debate among economists about whether the February new-home sales release from the U.S. Census Bureau, the Commerce Department and the Department of Housing and Urban Development was postive or negative is a glass-is-half-broken (yes, not half-empty nor half-full) argument.
Anyone who claims that the gist 120-word summary for Febuary 2009 one-family new residential sales fits his or her predictive model for how housing is behaving is not mortal, or lying.
Sure, if you’re applying disciplined economic analysis, there’s no other way to look at data for Febuary 2009 vs. data for February 2009, (notwithstanding the one-day difference due to 2008 being a leap year).
But those who are raising a ruckus about the media numbskulls who are getting it wrong by noting that the month-to-month upward swing is a positive miss at least part of the point: The barrage of adverse headlines contribute to negative sentiment which feed negative trends. Barry Ritholtz’s The Big Picture blog is on a withering tear against print and TV media for inaccurately reporting on the new-home sales data.
A parade of the mathematically innumerate business writers (and even worse headline writers!) continue to misread data. The latest evidence? New Home Sales.
After incorrectly reporting the Existing Home Sales, the mainstream media misread the Census department report of New Homes.
No, New Home Sales data did not improve. In fact, they were not only not positive, they were actually horrific. The year over year number was a terrible down 41%. Sales from this same period a year ago have nearly been halved.
Why did the media report this as positive? If you only read the headline number, you saw a positive datapoint: February was plus 4.7% over January.
To get the the facts, you need to read below the headline. In the present case, it wasn’t the seasonality factor that was confusing, it was the “90-percent confidence intervals” — or as it is more commonly known, the margin of error. (more from The Big Picture post)
There are several issues at work here, but for home builders and real estate professionals, the best advice might be this. Put your fingers in your ears and don’t listen to anyone who nay-says the little gains you’re making in your communities.
Economists–whether they’re positive or negative about the data–want an audience for their business and career interests. It seems as if some of them make a good living by telling people that the media has no credibility, and asking why anyone reads a newspaper or watches a news telecast.
Economists who profess that they’ve been right all along about what is going on in the economy are doing so because the marketability of their theories redound to their financial well-being.
Journalists, on the other hand, work for at least two bosses these days. One is their management, and the other is their audience. Always and forever, the audience is the toughest boss when it comes to the so-what? factor of relevance and accuracy of facts and perspective. Also, journalists, in more ways than ever, work collaboratively with their audiences on getting the whole story that matters, especially as citizen journalism surfaces as part of every media title and channel.
It’s illuminating to get corrected perspective and insight on the new-home data. Here’s how avuncular Calculated Risk steers people to understand how not to get too overjoyed at a blip up in new-home sales from January to February.
Click on image for access to Calculated Risk post.
This graph shows the February “rebound”.
You have to look closely – this is an eyesight test – and you will see the increase in sales (if you expand the graph).
Not only was this the worst February in the Census Bureau records, but this was the 2nd worst month ever on a seasonally adjusted annual rate basis (only January was worse).
Calculated Risk’s assertion–oft-repeated these days whether the media headline is positive or negative–is that a sales volume bottom for housing is likely in 2009.
It’s important to understand, however, the level that neither The Big Picture nor Calculated Risk matter when it comes to the viability and vitality or morbidity of home builders and real estate.
Their measures of correctness or error are on a national, macro level. They can be right, and still get it totally wrong when it comes to understanding what’s going on in home building and sales organizations in the first half and second half of 2009.
Even with the full measure of their economic skills, they’re not set up to catch the first flickers of recovery, just as they do not get the challenge of marketing and selling about 340,000 homes a year into the teeth of this environment.
Clearly, home builders are telling us that where they can get some traction with their prospective home buyers, they’re making some progress. In California, where a $10,000 tax credit jolt compliments the national $8,000 first time buyer tax credit, you’re starting to see home price correction and stimulus combine to pull people off their duffs on the sideline.
While home builders, manufacturers, and trade groups are willing to support the $8,000 tax credit initiative in the fledgling $787 billion economic stimulus program, their point organization, the Fix Housing First Coalition, is carefully watching the California front in hopes of renewing its case for a bigger one-time credit for all home buyers.
Yesterday, two House Republicans, Eric Cantor (R-Va.) and Mike Pence (R-Ind.) introduced a “Responsible Homeowners Act” measure that would bring back a $15,000 tax credit for buyers of primary residences who put a minimum of 5% down on their purchase.
Economics, being the dismal science that it is, has not solved the math problem of where home prices need to correct to and what policy pushes are necessary to wrench open the spiggot of real estate transaction.
Which means home building operators and their leadership need to keep turning a deaf ear to the blather about national data points–especially ones that dowse morale, confidence, and focus–and just keep selling so that one blip can turn into two, and 30 days later, maybe a third blip in a row.
Then, even the nay-saying-est economists around will have to admit that you’re creating a blip tide, otherwise known as an economic trend.
Bar Banter
The 800 pound gorilla is the complex fact that there’s still more than a year’s supply of places people have been trying to sell. And the question remaining is to which mean — comparisons to rents or relationships to household income or return to 50-year pricing norms — will home prices descend to get the free-flow of sales transactions and absorptions going again?
Whatever you believe, be careful of putting eight economists in a room with the same data and the same set of questions, because you’ll be thoroughly confused by the time they finish their answers to the questions.
Click image for access to Wall Street Journal analysis of new-home sales data.
Imagine, this little picture causing such an array of conflicting, puzzling, almost bizarre observations from a veritable think-tank of specialists in the dismal science.
Here’s a snippet from the Wall Street Journal’s Real Time Economics brief today, citing Omair (not Omar) Sharif, RBS Greenwich Capital.
Overall, this report is better than we had anticipated, continuing a pattern of the February housing data exceeding expectations (recall that existing home sales bounced by 5% and housing starts climbed by 22%). To be sure, the improved data last month followed months of horrendous housing data, as activity fell off of a cliff following last fall’s financial upheaval. The pickup in February also came on the heels of an especially weak January performance, suggesting that the January-February swing may have reflected in part a weather effect. Still, the fact that starts, permits, and home sales rebounded in February despite still-challenging economic conditions suggests that, at the very least, the pace of decline in housing demand may be abating. It is clearly far too early to call a bottom in the housing market, especially given the deterioration in the labor market, but the February data have allayed some fears that the housing market would continue to freefall.
Sample Error Could Conceal Real Good News
Sustained record lows for the National Association of Home Builders/Wells-Fargo Housing Market Index hardly bring the tidings one hopes for in the middle of Spring Selling Season 2009.
Analysts’ chime-ins about the data today reflect an important point of confusion in the HMI data that may hide a glimmer of good news for housing and the economy as a whole, although not for all home builders.
For instance, here’s how Wachovia’s Carl Reichardt, equity research analyst for home building and building materials and supplies, read the “take-away” from today’s report.
Our field data survey suggested an improvement in selling conditions in January and February while several public builder calendar Q4 conference calls suggested orders improved sequentially in December and January. However, these HMI data indicate to us that the improvement may be merely seasonal and that conditions remain depressed. We were surprised to see the traffic component of the HMI index decline sequentially given finalization of the federal housing tax credit in February; previously we felt that uncertainty over the stimulus was keeping buyers on the sidelines.
Reichardt’s counterpart at JP Morgan, Michael Rehaut notes:
On a YOY basis, Traffic worsened, down 53% YOY vs. Feb.’s -42%. Overall, we believe this to be modestly disappointing as the market is still in the midst of the Spring selling season. Accordingly, we continue to believe these overall weak levels, combined with continued job losses, still tight credit conditions, depressed consumer confidence, and still highly elevated home inventory levels, should continue to result in depressed demand well into 2009.
Here’s a thought. From a broader economics standpoint, the numbers don’t tell the story. As a matter of fact, we know that “Builder Confidence” as represented in the HMI data is not “Builder Confidence” at all. It’s the confidence level of a sampling of the NAHB membership, which doesn’t reflect what’s going on among the extremely finite group of large home building organizations. We’ll come back to this point, but first, a relevant diversion.
Have a look now at “What Will Recovery Look Like?” from Caculated Risk. In it, he visually quotes from another analyst, Professor Hamilton, who offers a blackboard-type picture of key economic trends. Here’s the main picture.
Click on image for access to Caculated Risk analysis.
Now, here’s some commentary from Calculated Risk that speaks to what’s going on in this picture.
For recovery, we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.
Unfortunately there are reasons that RI (excess supply) and PCE (too much debt) won’t rebound quickly, but they are still the areas to watch.
And here is an excerpt from a research note by Jan Hatzius, Chief Economist at Goldman Sachs, sent out this afternoon:
“Although we still think real GDP will fall by about 7% annualized in Q1 and the labor market numbers remain awful, the good news is that the weakness is shifting from more leading to more lagging sectors.”
So, technically speaking, the leading indicators have to get as bad as they’re going to get, and then the lagging indicators have to do their inevitable me-too act, and then the leading indicators can start to track back toward improvement.
Now, let’s get back to home building. Thanks to Jonathan Smoke, who joined Hanley Wood Market Intelligence as senior VP for products and innovation, we can look at the HMI data with more insight.
Here’s today’s Big Builder take with a twist:
”Since the traffic subcomponent failed to show sustained improvement over February and instead revealed a decline, I am starting to believe that the HMI survey is weighted too heavily towards reflecting the sentiment of smaller builders,” said Jonathan Smoke, senior vp/products and innovation for Hanley Wood Market Intelligence, who is currently preparing an analysis of the methodology of the HMI in light of the increased market share of production home builders in recent years. “Anecdotally, we are hearing about improved traffic at big builders from promotions and marketing of the Home Buyer Tax Credit.”
Interestingly, John Burns Real Estate Consulting may have touched on a similar observation in its analysis of its own home builder survey paired up with the NAHB HMI data.
John Burns noted, however, that “the NAHB’s Housing Market Index has not been showing the same improvement as we have, which is likely due to the fact that our survey participants are more inclined to still be building, while the typical NAHB member has shut down operations.”
So, what will recovery look like? It won’t show up first in the HMI Index. Why?
Consolidation. Jonathan Smoke observed that a big shift in the “pessimism” level of the HMI first occurred in about 2000, just as the largest home builders began a major market share move nationally. Now, the HMI may measure the same sample as it ever has, but the sample distorts reality, since 100 home building organizations account for more than 40% of home sales and closings.
Anecdotally, we’re hearing from a growing number of in-the-trenches representatives, that in January and February, sales and traffic have picked up. Now that the dust has settled for the moment on the first time home buyer tax credit of $8,000, home builders are making hay with that any way they can, adding in mortgage rate incentives and free upgrades, anything that can get that inventory turned and cash harvested.
They’re not out of the woods. Jobs and confidence will be the true tide turners, and it’s just a question of which will come first.
Still, you want some real good news here, and we’re saying all you have to do is look at the terrible HMI data and know it’s way off the mark to find the good news.
As a matter of fact, we’ll bet that this very housing recession will consolidate new residential construction to such a degree as to make the following analysis from Calculated Risk suspect.
Here is a comparison of the National Association of Home Builders (NAHB) Housing Market Index and new home sales from the Census Bureau. Since new home sales are released with a lag, the NAHB index provides a possible leading indicator for sales.
Click on image for access to Calculated Risk post.
We believe that as sales and closings consolidate further among larger players, we’ll see an initial de-coupling of NAHB home builder sentiment from sales trends. Sample error will be the cause.
Foreclosure Fluency the USA Today Way
35 U.S. counties are responsible for one out of two–or 1.5 million–foreclosure actions in 2008, per a USA Today analysis of RealtyTrak data. Great Flash infographic maps show the velocity of the foreclosure tsunami as it engulfed Rust Belt cities and bubble-market centers in the Southwest and Calilfornia in the two years from 2006 to 2008.
“This crisis was triggered by foreclosures, and a lot of those were in a very small number of areas,” says William Lucy, a University of Virginia professor who has studied the link between lenders and faltering home loans. Banks spread the risk and “it became like a car with no reverse gear. Once it starts to go over the cliff, it’s gone.”
In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.
Banks are at the nexus of the problem because their fully compromised investment in real estate has both a home mortgage and a commercial acquisition, construction and development dimension to the startling erosion of their capital base.
The weakening and ultimate failure of many banks burns housing on the non-for-sale side even though many of the multifamily for-rent companies interacting with lenders have maintained surer footing with their construction and development loans to date.
Multifamily Executive magazine senior editor Christopher Wood maps out two indirect but nasty impacts a pulverized lending and credit environment has on multifamily housing players in his article, “Bank Failures Expected to Continue: Multifamily is likely to suffer more indirect damage as financial stabilization efforts arrive too late to save lenders with high residential mortgage exposure.”
One indirect ramification is that–despite the fact that much of multifamily’s financing need is met from government sponsored entity and Wall Street funding–any curtailment in local bank funding pipelines through as a shrunken pool of capital to draw from. The other consequential effect of bank failures on multifamily is job loss, which whacks every part of every economy.
Here’s an excerpt from Wood’s analysis.
Matthew McManus: Click for access to bio. Note: No relation to Housingcrisis blog author.
“Notwithstanding those five- to 10-unit properties where a lot of local banks might have taken on deals, the vast majority of multifamily over the past 10 years has been financed through the agencies or through Wall Street,” says Matt McManus, chairman of NAI BlueStone Real Estate Capital, a Philadelphia-based commercial real estate investment banking and advisory firm that secures debt, mezzanine, equity, and sponsor equity financing for investors, operators, owners, and developers
“I don’t think that there is enough exposure to banks that the number of banks that are failing are going to really have any impact to the multifamily industry,” McManus continues. “But indirectly, whatever bank goes under, there are a few less dollars that can be loaned out to job-creating vehicles.”
Regional unemployment figures catalyzed by bank failure are certain to hit multifamily operators already struggling with tough property fundamentals. “The broader impact is being felt very clearly in higher vacancy rates and falling rents,” says report author Anderson. “But the other 800-pound gorilla is what happens with commercial [and multifamily] real estate. So far, multifamily delinquencies and defaults have not been that bad, but they have spiked significantly upward. By our calculations, there is $210 million in multifamily mortgages coming due between now and 2011. Quite a bit of that will face some difficulty in getting funded, despite the activity of the GSEs.”
Indeed, McManus reports a wide disparity between Freddie Mac re-financing terms and what is readily available in the market for a Class A stabilized apartment property in Philadelphia. “We can’t find a bank that is within 80 percent of Freddie Mac’s proceeds,” McManus says. “That’s how conservative banks are being today. They underwrite to shorter amortizations, higher debt service ratios, and sometimes artificially high constants to make a 60 percent LTV-type loan versus a 75 percent or 80 percent LTV.”
Jobs Data Whoa-ful
ADP and Challenger, Gray & Christmas, Inc. jobs data surfaced today, in advance of the Bureau of Labor Statistics release on February jobs and unemployment trends on Friday.
The Wall Street Journal toplines the story this way.
Private sector jobs fell 697,000 in the U.S. in February, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.
That’s higher than the 630,000 loss forecast in a Dow Jones Newswires survey, and would be the largest number of jobs lost in one month during this recession. The figure for January was revised to show 614,000 jobs lost, compared with the initial figure of 522,000.
Here’s CNBC’s report, with commentary from Joel Prakken, CEO of Macroeconomic Advisors, on ADP’s overshoot of economists’ expectations on job losses.
Trust Calculated Risk for a take that will provoke rabid agreement, disagreement, and rat-a-tat gleeful distemper among the blog’s loyal hord of Riskalantes.
Then, again, for even more relevant take-away on the more direct implications of ADP numbers have in residential construction, remodeling, design, and real estate sales, etc., have a look at a Mish’s Global Economic Trend Analysis post on the issue.
Since ADP dwells as a payroll services provider in the world of small to medium-sized businesses, Mish rightly points out the advantages and flaws of the data as a benchmark.
Medium sized businesses, defined as 50-499 employees are now leading the decline in jobs lost as of summer 2008. Small sized companies (1-49) employees were hanging very tough until July 2008. That is no longer the case.
What are most of the companies in the residential and light commercial real estate space? Small to medium sized companies. This is where there’s a lot of hurt going on in the housing crisis landscape.
From Nest Egg to Neg Eq
One in five–a number you can actually count on your fingers–homes bought with a mortgage are under water on the loan.
The Wall Street Journal this morning has a report based on data just released from First American CoreLogic.
That’s more than 8.3 million mortgages that were upside down at the end of the year, compared with 7.6 million three months earlier. It’s a problem that is expected to get worse as home prices continue to fall.
“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, in a news release. First American CoreLogic is a Santa Ana, Calif.-based provider of real estate data and mortgage analytics.
“The worrisome issue is not just the severity of negative equity in the ‘sand’ states, but the geographic broadening of negative equity that is expected to occur throughout the year,” he added. “Sand” states include California, Nevada, Arizona and Florida.
What’s the line where correction crosses over to deflation? Will most adverse scenarios model for a contagion in home price declines unchecked?
Who seriously doubts that well-thought out policy needs to play a role in stopping the contagion?
CNBC’s Diana Olick on Pending Home Sales
Here’s the briefing on the National Association of Realtors data on pending home sales from CNBC’s Diana Olick.
Then, there’s what to make of the data. Calculated Risk always helps with the so-what perspective.
This suggests a further decline in existing home sales for the March report (January was the most recent report). Note: there still might be a slight increase in existing home sales in February based on the December Pending Home Sales report.
Note: Existing home sales are reported at the close of escrow, pending home sales are reported when contracts are signed. The Pending Home Sales index leads existing home sales by about 45 days, so the January report suggests existing home sales will decrease from February to March.Finally, ignore the “affordability index”. That really just tells us that interest rates are low – something we already know.
Still, “something we already know” may be overly dismissive.
What we’ll begin to see is a relationship between revert-to-mean home pricing and the psychological conviction among home buyers that they won’t lose money by buying. That’s the inflection point where private sector bid and ask behavior will trump government policy.