Creative License
On one of our trips to the venue for residency activities, I even saw a lady, outside one of these developments, dressed as an ostrich and shouting entreaties to passers-by: “Come on in! Have a look! This is your new dream home!”
This quote, backed up with a bit of foto candy, is a slice of life take from the traveling wind and string ensemble that’s named itself from a Wallace Stevens poem of all things, Thirteen Ways.
Click on image for access to Thirteen Ways post.
Buffetted
Here’s what they’re saying about Oracle of Omaha’s most rueful accounting yet of he and his companies’ financial performance.
Click image for CNBC's coverage of Berkshire Hathaway's financial performance.
Here’s a link to Warren Buffett’s annual letter to shareholders.
Calculated Risk points out the critical references to housing in Mr. Buffett’s remarks. CR highlights this excerpt from the letter.
Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.
…
The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.
Must See Jobs Infographics
Acknowledgement to The Big Picture’s Barry Ritholz on this big picture of the U.S. jobs landscape, mapped by USA Today. Click on the map to see an expanded version from the newspaper.
Total U.S. Jobs per USA Today
A forecast for job growth in 2010 is the good news. Today’s reality is different, though. Data on claims for unemployment insurance came in this morning, and it’s not good news. The pros in financial analytics call what follows chart porn.
As quick as the data can come in, Calculated Risk has got the fever chart to map it. What he’s got here will likely do some explaining for Wall Street volatility today. As grim and uncertain as the present is, the immediate outlook, particularly as regards jobs, looks tougher yet.
Here’s the key take-away from CR:
Click on graph for access to orginal CR post.
The first graph shows weekly claims and continued claims since 1971.
The four week moving average is at 607,500, the highest since 1982.
Continued claims are now at 4.81 million – another new record – above the previous all time peak of 4.71 million in 1982.
Waiting for Sideways
There’s trouble in the Capitol Hill methadone clinic, or what was apparently masquerading as one for $350 billion and six or seven weeks or so. Leverage, and lots of it, has been an addiction for years and accounted for such heights of euphoria that we collectively began to take it all for granted. Now we all have to get off it, but doing that instantly puts us at our peril. Shrunken balance sheets–both granularly in the home, micro-economically in companies, and macro-economically in nations–are now where it’s at. All the norms of lifestyle, market position, and GDP contribution have now been exposed as grandiose. They must be reset. What do we pick when we can only pick two things to retain in our lives for every five?
Now, the line-up for a fix has suddenly stalled in lame-duck limbo; withdrawal symptoms don’t look or sound pretty, so get ready for agony incarnate in all its gory forms.
De-levering is deflating, and record amounts of wealth and worth and wherewithal vaporize in flashfloods of sell-offs. Lower and falling prices look mighty attractive on goods and services we might be interested in buying but when they cross the line and whack the market value of our own goods (i.e. home prices) then deflation becomes a scourge. There’s so much about deflation we like that it has to tell us something about ourselves–such as, we often like what’s not good for us.
- See The Wall Street Journal report: “Congress Postpones Stimulus Plan to ‘09” for more insight into the transition timewarp that indicates elected officials are calling a time-out in dealing with a series of crises that worsen each day.
As the course of the economic cycle gobbles up corporate earnings and jobs sector by sector, the viability of stimulating home purchase demand even with the lovely inducements of hefty tax credits and seductive mortgage rate buy downs pencils with more futility with each passing day and each large-scale layoff. A rate of 250,000 job losses a month easily trumps even a $22,000 tax credit and a 2.99% temporary rate on buying a home.
Duration and depth of this thing hang in the balance of what’s done both at the policy level, the household level, and the company level. Each has its say in whether we’re looking at a “U” shape or an “L” shape for the recession–we’ve already probably gone beyond the possibility of the preferred “V”-shaped snap back. If we take our medicine willingly, will it make things move more quickly? It’s the safest bet.
Since psychology–fear, greed, confidence, and trust–is playing a co-lead role in the debacle of asset-revaluation, leadership at every turn needs to put all its conviction behind restoring trust as an anchor stone to eventual recovery.
In the high-volume home building business, restoring trust will need to occur across several plains, each essential, and each probably indicative of transformational business restructuring during the consolidation phase that will occur over the next 18 months. Trust among home buyers that their homes will carry every bit the value they promise across the parabolic swings of the market will be the first job. Trust among capital providers that equity positions, loans, credit lines, etc. are a sound solid means of gaining a return on capital is another. Trust among associates at all levels of the enterprise that strategy will steer clear of the Kool-Aid of lot appreciation as a growth hormone. Trust among trades, materials and products suppliers that the goal of true business partnership rule each relationship.
Home building’s leaders, in addition to petitioning Congress for action that would redound directly to their business fortunes, would best send a message to their customers, stakeholders, and workforce that maps a high-road willingness to work through the painful consequence of all of our addiction to leverage.
The Wall Street Journal names names among corporate titans, including home builder CEOs, whose compensation draws conspicuous attention as shareholders lose their shirts in “Before the Bust, these CEOs Took Money off the Table.”
As companies in housing battle with the dilemma over how to shrink their balance sheets and at the same time retain talent, they might look at the work of Big Builder ‘08 keynote speaker, Dan Ariely, who writes in today’s New York Times, “What’s the Value of a Big Bonus?”
Ariely at BB'08
“It turns out that social pressure has the same effect that money has. It motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.
When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.) But I suspect that they were too quick to discount our results. For most bankers, a multimillion-dollar compensation package could easily be counterproductive. Maybe that will be some comfort to the boards at UBS and Goldman Sachs.
Once trust and confidence peek in from the recesses of the gloom, what we’ll see is less vertical change and volatility in the markets, be they for real or paper assets. We’ll see sideways trades, slow moves up or slight moves down. That will be a welcome harbinger of better times to come.
Best Practice Reporting
No one person, no one moment, no single initiative will right what’s gone haywire in the complex that is called the economy right now. Where social conviction, political and religious ideology, behavioral psychology intersect with the math and science of financial markets, solutions will surface from a multitude of minds offering an abundance of intelligence and inspiration sustained across a continuum of days and weeks and months. Here’s a better way of phrasing this from the Wall Street Journal’s Peggy Noonan in a piece entitled “America Throws Long,” about the need for president-elect Obama to connect.
I believe renewal and reform will come from the states. There will be, in Washington and New York, a million symposia, think-tank confabs, op-ed pieces, columns and cruises; there will be epiphanies on the Amtrak Acela while delayed at Wilmington; there will be polls and books, and pollsters’ books. All fine and good, and a contribution. But the new emerging Republicans are likely to come in the end from the states, because that is where “this is what works” will come from. It is governance in the states that will yield the things that win—better handling of teachers’ unions, better management, more effective, just and therefore desirable tax systems. And, of course, more clean lines of accountability.
Here’s one factor that might get taken for granted, particularly amid the cacaphony of know-it-alls who are stepping up on whatever looks like a soapbox as if it were open-mike night for wannabe economics experts. We need strong reporters, strong editorial voices, right now, more than ever. Their first job is to work on phrasing the questions. Second, they’ve got to have the trust of their human sources and reliability and precision in the data they draw on. Finally, they have to take the mayhem of information bits and bites and carry it across to intelligible, critically understandable briefings so that we on Main Street, Wall Street, and Pennsylvania Avenue can get it.
Crises make good reporting and analysis one of free society’s treasures–a mirror, a meeting place, a well of hope in strengths that will lead to redemption.
One such reporter/analyst works for the New York Times, Joe Nocera. In his work, there’s more clarity and less reductionism. Something doesn’t need to be over-simplified to get an adequate drill-down, even within the limitations of a 1,200 word essay. Have a look at today’s piece, “Facing Crisis, Congress Makes Sense.”
Congressman Frank
At first, I couldn’t understand why Mr. Frank wouldn’t want a foil like Mr. Frey on the panel of witnesses. Instead, he had invited four milquetoasts, including representatives from Bank of America and JPMorgan Chase, whose primary goal was to present their institutions as the homeowners’ best friends. (To give them their due, both institutions have mortgage modification efforts under way that are better than anything the government has going.) A third witness was a lobbyist for the hedge fund industry who said things like, “Bold, proactive steps need to be taken.” (Zzzzzz.)
And then there was Tom Deutsch, a lobbyist for the securitization industry. His job, not surprisingly, was to play down the problem. There were eight times more securitized mortgages being modified today than there were a year ago, he said. The fear of lawsuits was wildly overblown, he insisted. “Industry participants have been and will continue to deploy aggressive and streamlined efforts to prevent as many avoidable foreclosures as possible,” he said.
Mr. Frank wasn’t buying it. Nor should he have been. Yes, some securitization contracts allow for mortgage modifications, but most do not. At IndyMac, for instance, which the Federal Deposit Insurance Corporation has taken over, the agency has sent letters to 9,000 people who hold securitized mortgages it believes it can modify. But it has also found another 20,000 it can’t touch.
“I would like to believe what you are saying,” a skeptical Mr. Frank told Mr. Deutsch. “But as Chico said to Groucho, ‘Who are you going to believe, me or your own eyes?’ ”
Lots of people report on housing right now. Who does it well? Who adds to the knowledge base? We find many not to be reporting at all, but rather merely voicing their envy, dismay, and desperate lack of trust and comprehension about who’s doing what to whom. That’s why we need reporters to help us get it. Who does a good job?
Gloves Come off on Fix Housing First
From PROSALES, by Craig Webb: When home builders get stuck not being able to build homes, alliances might wind up being the next best thing to build. In a sweeping effort to reel in comrades at arms in an all out war with economic and financial system stresses that have all but paralyzed residential construction amid home value destruction, the Fix Housing First coalition of home builders, manufacturers, materials suppliers and their Capitol Hill persuaders (i.e. lobbyists) seems to be making progress at expanding its ranks.
Craig Webb, editor of ProSales, reports on a National Lumber and Building Material Dealers Association announcement in support of Fix Housing First’s proposed tax-credit-cum-mortgage-rate-buydown shock treatment to get consumer confidence, spending, and home buying to finally put a floor on home prices. Webb reports:
NLBMDA chief O'Brien
The National Lumber and Building Material Dealers Association (NLBMDA) today added its voice to a coalition of builders and construction suppliers urging Congress to approve a housing stimulus plan this year.
NLBMDA called on Congress to enhance and extend the Home Buyer Tax Credit for primary residences purchased between April 2008 and December 2009, to up to 10% of the home price up to a maximum of $22,000, depending on geography. In addition, buyers should have access to discounted 30-year fixed-rate mortgage financing that would encourage eligible home buyers to enter the market.
Of no surprise, not all housing organizations want to see a lot of Congressional focus on stimuli that could rekindle home buying. The National Multi Housing Council, which practically blames for-sale new-home builders for the global economic crisis, has come out in vocal opposition to a Fix Housing First extra-enzyme program.
Says NMHC president Doug Bibby:
NMHC's Doug Bibby
“We understand the desire of lawmakers to bolster the economy and stem the tide of foreclosures, but new homebuyer tax credits, seller-financed downpayments and interest rate buydowns will not stimulate the economy or stop house prices from falling further. They are simply bailouts for the for-sale housing market, the very sector of our economy that helped trigger the global economic crisis.
“The only issue a homebuyer tax credit addresses is the oversupply of single-family houses, which is something best left to the marketplace–not taxpayers–to correct. Oversupply situations happen in every industry, and the housing industry will recover with or without Congressional action, just as it has in past oversupply situations. Moreover, why should taxpayers help out an industry that recognized a downturn was coming and still kept overproducing?”
Guessing who’s fighting to fix and who’s fixing to fight might be just the antidote to another day of bleak economic and financial reports from all your usual sources.
Here’s some links to orient yourself to the dots-connected housing and construction news of the moment:
- From HousingWire.com: Foreclosures Drop in California, as Lenders Boost Workout Attempts
- From Builderonline.com: Louisville, Colo.-based McStain Neighborhoods will shut its headquarters offices.
- From Inmannews.com: Housing hints for president-elect Barack Obama
- From The New York Times: Columnist Floyd Norris writes about accountability and bailouts.
- The Wall Street Journal reports on Fed Chairman Ben Bernanke’s latest pronouncements as to the initiatives taken and those that may still be taken amid the crisis.
Gentle Ben says:
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain.” (Read the full remarks.) For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant.”
Hence, Friday’s market will proceed as it will proceed across the dark abyss to eventual recovery in the months down the road.
A Week that Will Be and The Week that Was
One HousingCrisis.com correspondent has an in-law who’s shared an issue you might find familiar.
“We’ve got a guy in the office who’s got about $250 invested in stocks, who all day, every half hour, says, ’the market’s down another 300, the market’s up a thousand, the market’s down 450,’” the in-law says. “It’s infuriating! You just want to tape up his mouth, so you can put your head down an do your job without the distraction. I can’t control this stuff, so I just want to forget about it for a while and work.” This in-law’s livelihood is about as far afield of the machinations of Wall Street financial services companies as you can get, but the noise level from the Asia Pacific to the European financial markets, to the U.S. futures gets deafening just about the time people on East Coast time are having their first cup of coffee.
With Halloween ahead this week, there’s macro, micro, and scarecrow in the days and nights to come. On tap for release: new home sales, Case-Shiller home prices, homeownership rates and vacancies, FOMC, GDP, unemployment numbers will feed into the system, confirming that the global economy is not about to wake up pn Nov. 1 from 40% paper losses from year-ago peaks, as if it were a bad dream. The Fed can lower rates another notch to 1% before money’s free; the U.S. economy can show negative GDP and not surprise a whole hell of a lot of people, and unemployment can continue to reflect that companies’ scorecard these days measure how well they can shrink vs. what they can do to produce better. Shiller’s price readings may be gravity bound toward his own forecast 35% or 36% ultimate decline, and Q3 vacancies of for-sale and for-rent housing stock might blip over their current 1 in 50 level.
None of these metrics’ resets will surprise investor pros betting on their direction. Those pros have already acted, with prompts from what U.S. consumers were doing more than a year ago, and what was happening in housing starting almost three years ago. Those pros are not part of the furor we’re seeing in the broader stock markets and futures. Still they’re chastened and mystified, and wondering, like the rest of us, what can be next. But they do have cash, and once they’re happy that “the real economy” expectations and the big discounts on stock prices fall into harmony, they’ll come back in. Until then, about all that we can say for sure will be next is November.
On a micro basis for housing, we’ll hear from Centex, MDC, Meritage, M/I, Standard Pacific, among home builders and Masco, Owens Corning, and USG among public building materials companies as to their performance and expectations. Shrinking fast, preserving cash, and identifying a fresh capital base for even leaner times ahead will be the common thread in corporate earnings pronouncement. Strength in lower numbers is the virtue of the moment.
What’s happening in financials–consolidation–can be expected among the pantheon of names we know as the big builder community within the next 12 months. If Goldman Sachs and Morgan Stanley and Citigroup and every financial institution save, perhaps JP Morgan, needs to be talking with one another about possibly merging, HousingCrisis.com believes similar forces will drive home builders to step up and pare down.
A look at where cash flow from new-home closings will come in over the next 12 to 24 months will show there’s not enough of it expected to support overheads and operations and service debt for the 20 or so public home builders left in the universe. Needs to get access to a greater capital base, and capitulation on land assets will fuel more and more earnest M&A talk among home builders as 2009 wears on.
Picking two or three out of five of the strongest is not an easy drill, but it’ll likely characterize the magnitude of the correction underway.
That’s at least part of what’s on the docket for HousingCrisis.com for coverage in the week ahead.
But we’d be remiss if we didn’t revisit a couple of moments from last week in light of their significance, present and future.
One is this… if you haven’t seen former Fed chief Alan Greenspan’s remarks in Senate Committee from last week, have a look. This particular perspective, offered by Calculated Risk, is not to be missed.
Secondly, HousingCrisis.com has been meaning to ask someone who’d attended last week’s National Association of Home Builders forecast meeting in Washington, D.C…. Chief economist David Seiders’ forecast? Give us a break. Talking about how home prices have come down far enough now to begin driving sales strikes me as disingenuous, if not reckless.
The conclusion of economic forecasts that responsibly extract insight from the data would be simply, get ready for another brutal year in 2009, and a barely better year later.
Two home builder CEOs’ assertions last week reflect a more realistic appraisal and action plan to slog it out in 2009.
One is Ryland Homes CEO Chad Dreier’s wrap up on Q3 earnings last week:
I look forward to the day when the majority of our operational highlights no longer consist of our effectiveness in shrinking the company.
The other is Pulte Homes CEO Richard Dugas’ assertion that nothing Congress has done to date, including the $7500 tax credit program signed into law in July that the NAHB leadership told builders would be an effective catalyst, has done a lick to help home buyers get closer to their dream. A major league new home buyer tax credit is now going to make its way back onto Congressional agendas. Maybe this one will brighten the horizon just a little bit.
Foreclosures: The Cause Effect and the Effect Cause
Intensifying federal government focus on liquidity and easing credit so that lending and borrowing might possibly re-emerge as a viable business–whatever analogy suits you–are treatments of symptoms. Treatment of symptoms can be life-saving. It also may be necessary to take care of the symptoms before you can even see the root cause of the problems clearly.
And sometimes symptoms–home foreclosures for instance–become their own new primary root cause, potent enough to wreck all salutory effects and efforts of treating the other acute conditions that are whipsawing the world economy like a garden hose on full blast and nobody holding the nozzle.
Can we map the US increase in homeownership by 5 or 6 percentage points during the 1995 to 2005 period, quantify the dollar risk in light of diametrically opposite trends in easier money and higher home prices, put an ultimate price tag on that dollar risk and figure out how to pay up? If the gravity of home prices returns them–albeit after an overshoot to the lowside–to a 50-year trend, how does that map into what assets, paper or real, amount to in cents on a dollar? Where does the government and at least two administrations’ belief system that homeownership at any cost was a compelling goal meet with accountability?
It must be these questions that command focus among influencers of public policy of the moment.
We’re going to see a lot of Federal Deposit Insurance Corp. Chairman Sheila Bair, and Neel Kashkari, the US Treasury’s interim assistant for financial stability [that's quite a title for one's business card], as they attempt to accelerate action and flow of dollars into a fluid swirl of causes and effects.
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Bair and Kashkari
The Wall Street Journal reports on Bair’s and Kashkari’s discussion in a US Senate Banking Committee hearing of plans to zap currently inert programs to stop mounting foreclosures.
The latest plan being developed by Ms. Bair and Treasury officials would try to untangle the mess by offering a government guarantee of repayment for some part of the rewritten loan. That might demonstrate that struggling homeowners would be able to repay the new loan, experts say.
“If you throw a Treasury guarantee in, then the net present value [of the new loan] becomes luminously clear,” said Karen Petrou, managing partner of Federal Financial Analytics, a consulting firm. “Then it’s far easier to refinance.”
Here’s a report from HousingWire.com on the effectiveness some localities have in slowing the rate of foreclosures.- Here’s Builderonline.com’s topline on recent Federal Housing Finance Agency data on declining home prices.
- Here’s Realtytrac’s site for their data on foreclosures on a state-by-state basis.
- Have a look at fairly thoughtful musings from blogger Eric Ames on how this issue of troubled homeowners has people chasing their tails on what to do.
- Comments from readers bolted to more politic remarks from usual suspect housing analysts make this Wall Street Journal forum on the blip up in existing home sales announced today by the National Association of Realtors worth catching.
What’s the cause? What are the effects? What do you need to fix first, if anything? Or do you fix anything–causes or effects–at all?
Stock Staggers
From PROSALES, by Craig Webb: We’re getting calls from friends in the business. They’re shutting down plants; they’re facing workers, telling them the jobs are gone, at least for the time being; they’re exiting markets.
Stock Building Supply, which seemed as if it went through 2006 and even into 2007 with a new press announcement every other week on a course to acquire nearly every lumber yard in its path, is now fully retrenching. Backlogs of home sales that had buoyed lumber and building materials suppliers well beyond the mid-2006 peak in housing now have depleted to a mere trickle. Visibility into when demand may reappear is anybody’s guess.
ProSales editor Craig Webb provides the first details on Stock’s massive downsizing announcement– cutting 3000 of 18000 jobs –this morning amid its United Kingdom-based parent company Wolseley Plc.’s quarterly financial woes.
Stock gets more than 70% of its revenue from new residential construction, particularly by America’s biggest tract builders, so it is particularly sensitive to the severe slump in that part of the U.S. housing market.
The 86 as-yet-unnamed branches to be closed represent around 25% of Stock’s revenue and 28% of its headcount, Wolseley’s board said in a statement.
“The board believes that for the foreseeable future there is likely to remain significant overcapacity in the building materials distribution segment, in which Stock operates,” Wolseley said.
But Where are We?
From HOUSINGFINANCE.COM, by Jerry Ascierto: The federal policy blitz that’s pumped billions this way and that into a beleaguered and stimulus-fatigued financial arterial network keeps going. Authorization for the federal government to spend $950 billion to infuse banking and banks with wherewithal to reenter the business of lending, and to buy up collapsed financial assets is one thing. Doing it is another.
In an a new article, “Treasury’s Bailout Plan: More Tortoise Than Hare?” Housingfinance.com senior editor Jerry Ascierto reports on reasons for the time-warp between signing rescue measures into law and signing checks over to banks that so desperately need the funds.
While Fannie Mae and Freddie Mac are still providing short- and long-term debt, construction financing, which grew increasingly tougher to procure throughout 2008, will likely dry up further in 2009. “New projects are going to be halted nationwide, if not globally,” said Dan Fasulo, managing director of market research firm Real Capital Analytics. “Overall, I think next year is going to be a rough year for new development.
The bail-out plan originated practically as a back-of-the-envelope brainstorm from U.S. Treasury Secretary Henry Paulson, and evolved within two weeks into the 400-plus page “Emergency Economic Stabilization Act,” that took two goes to win Congressional approval. So far though, the triage system has yet to come clear, as banks battle conflicting self-interests in valuing their non-performing portfolios to channel them into the government program.
Further downward momentum, increasing defaults and foreclosures, and the inability to lay in a construct to support asset values closer to the asking price will likely increase voluntary participation by banks in the coming weeks and months.