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.
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.
Residence Economist
National Association of Home Builders economics guru talks on Bloomberg about signs of life in the housing market… or signs of the after life.
Hat tip: Barry Ritholtz’s The Big Picture
HUD Taps Carol Galante for Key Multifamily Role
From MULTIFAMILY EXECUTIVE, by Chris Wood: The Department of Housing and Urban Development was a morale morass, and still needs attention internally it probably won’t get until its chief Shaun Donovan chalks up some wins on the foreclosure front… So, we’re talking 12 months minimum.
Click image for access to Multifamily Executive Q&A with Galante.
Every bit of new blood in the department sends a critical message, and clearly, with the hire of BRIDGE Housing Corporation president Carol Galante, Donovan’s playing from strength and resolve to change what has chronically ailed the organization for almost a decade.
Multifamily Executive, which last fall named Galante its executive of the year, assigned senior editor Chris Wood to chat at the end of last week with the new appointee, for her perspective on overseeing $58 billion in development and preservation of privately-owned rental housing as well as a key role in sustainable residential development initiatives.
A Q&A with Galante reveals she intends to serve as an important counterpoint voice to Donovan as priority focus remains on single-family–foreclosures and duress–issues.
There is definitely a role for multifamily, and I think this administration gets that. The administration understands that rejuvenating and refinancing our nation’s multifamily housing stock is critical. Equally important is keeping that housing stock healthy. Greening it, and building more of it in the right places is important as well as economic stimulus.
Read more of Chris Wood’s interview here.
Local Intel–Update 3/26 with Fixed SlideShow ;-)
People don’t buy nor do they sell homes pegged to national real estate trends. Nor even do potential investors or sellers of land make their decisions based on Case-Shiller or any broad stroke metric. Real estate is as local as the next door neighbor’s property line and the length of the drive or walk to necessary destinations like the school, or transportation, or shops, or healthcare.
Especially since job markets are in convulsion–real estate analyst John Burns calls for employment to retreat to 88% of adults who seek full-time work in the next couple of years–waves of local recesssions, lowpoints, and recoveries will occur in different locales at different moments.
The Concord Group, a land use and real estate consultancy, has plotted a recovery timeline for a number of geographies based on job and household formation dynamics that economic drivers have set in motion. No secret to the formula is that land prices, notoriously sticky, will exhibit give first and come closer to “bid” prices as soon as clarity emerges on the latest Geithner plan for banks’ toxic assets.
Once land truly resets and trades resume at some volume, the lot cost-base of new homes will firm up, and a corrected normalized level of volume and pricing will take shape.
Big Builder editor Sarah Yaussi has produced this brief drill-down of the Concord Group analysis, with commentary from Concord principal Andrew Borsanyi.
The Redemption: Geithner Plan a Wall Street Hit
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
– William Shakespeare, English dramatist & poet (1564 – 1616)
–”Hamlet”, Act 1 scene 3
Click image for access to Geithner's Wall Street Journal Op-Ed piece today.
The pipeline of trillion-dollar federal policy programs today offers the latest one that has made U.S. Treasury Secretary Timothy Geithner the sudden darling of Wall Street. Odd that several weeks ago–two weeks into his new job description–many of those same Wall Street denizens declared Geithner worse than useless, and as recently as last week, there were over-unders on when he would be headed out Treasury’s revolving door in ignominy.
Back those few weeks, the appetite for a groundwork of principles that would support a plan was not there, but now that the plan has been filled-out and articulated, critics are shutting up long enough for Geithner to appear to know what he’s talking about when he refers to the global financial complex and the trouble that it’s in.
Now that Wall Street investors appear to have bought-in to the details, the credibility capital Geithner seems to have lost when he opened his mouth in amid the crawl of stock tickers in mid-February now is back within his grasp.
The question remains though. What does the program fix? Borrower? Lender? Anyone?
Economics Nobelist, Princeton professor and New York Times columnist, Paul Krugman spells out the administration’s and Geithner’s theory underlying the current plan to wrest toxic assets from the banking system, a theory he disagrees with.
But banks can also fail even if they haven’t been bad investors: if, for some reason, many of those they’ve borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank’s debts. And this opens up the possibility of a self-fulfilling panic: people may demand their money back, not because they think the bank has made bad investments, but simply because they think other people will demand their money back.
Bank runs can be contagious; partly that’s for psychological reasons, partly because banks tend to invest in similar assets, so one bank’s fire sale depresses another bank’s net worth.
So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?
Clearly, the assumptions underneath the administration’s plan embrace the latter of the two causes. So the program and the process, and the articulation, and the defiance that accompanies the roll-out of the Public-Private Investment Program rely extensively on a conviction that restoring calm and confidence–even a measure of greed–will get a flow of funds going.
But the base of the problem remains. Bad loans occurred. Lenders and investors took bad risks around those loans. People bought homes they should not have bought–20%-plus of them were investor purchases for flipping purposes during the final two or three years of the run-up–and now the reset on the value or lack thereof of those loans and the investments on top of the loans, will be deferred as a complex delay-the-pain mechanism kicks into action, aggregating what was bad into a toxic pool for a later day, and setting refurbished bank balance sheets back into business like an afternoon at the dog-groomers.
The wager here is twofold. One is that investors, lured by the virtual elimination of risk, will find that this is the place for all that pent-up liquidity that had been awaiting “the floor” for asset pricing before it moved in for the strike. Two is that borrowers will exhibit a more steadfast commitment to the obligations of their loans.
In our need for instant gratification and immediate solutions, we may have a blast of “good news,” that can bouy spirits and keep stocks on an upward trajectory for the month.
But we can see in our closer look beneath the headlines on existing home sales, starts, permits, etc., that there’s a lot of work to do, and much of that work is going to be a good, old-fashioned work-out between buyer and seller based on what a property is worth today, and tomorrow, and the day after, to someone who wants to live in that property.
Borrowing and lending are part of real estate in North America. So Shakespeare’s admonition could never be taken literally. But a great dramatist and poet of today would probably figure out a way to add to the phrase somehow. “Neither a borrower nor a lender be (unless there’s sufficient skin-in-the-game for the borrower and unleveraged capital on the part of the lender).”
An Economic Engine on Blocks
Home building, its industry leaders believe in their heart of hearts, is the engine of the United States economy. When new rooftops multiply, GDP steams merrily along, and when housing starts decelerate and thin to a trickle, they take the economy down for a harrowing ride.
Well, the economy’s engine has been up on blocks for going on 36 months now, because Americans are generally paralyzed and aghast at having $12 trillion in home value and stock market equity vanish into thin air in the past four calendar quarters. Not to mention 3 million jobs eliminated in what seems like a heartbeat. Perhaps as horrific for people who are suddenly faced with having no choice left except to fix their household balance sheets or suffer for it is the prospect that losing that $12 trillion and the possible doubling of unemployment rolls will cost another $12 trillion in new taxes in the years ahead.
Wall Street, Main Street, and Washington, meanwhile, are embroiled in a comedy of finger-pointing errors, the lender blaming the borrower, the borrower blaming the broker, the investor blaming the lender, everyone blaming AIG, and Capitol Hill trying to figure out who to blame and who to try to rescue from the great sucking sound of economic Dooms Day. Face it, few of us really had to deal with the significance of the term “trillion” until we watched Bear Sterns’ white collar workers file out to the streets of Manhattan with a box of their desk belongings and a look of “what just happened?” in their eyes.
Many things happened, many are to blame, and many of us will be paying the price of both idiocy, deceit, and sheer miscalculation for years and years to come, and one of the few illuminating notions we can take away from it all might well have been perfectly evident all the time: Homeownership gets is reputation as the American Dream for a reason. It’s not an entitlement for all or even the majority of citizens, although policymakers and profiteers banked heavily on a theory that quantum-leap homeownership rate expansion could be engineered along the economic and social lines of quantitative easing.
Instead of an ownership society we’ve got a classic monster that eats its own young. The instant in the past six or seven years it didn’t take above-and-beyond planning, sweat equity, a parent’s helping hand, an inheritance windfall, and commitment to own a dwelling that would return value by providing shelter and safety and the feeling of home, everything changed. The house became a paper asset to be leveraged and margin-managed, and after that it became a financial component that begot financial products that in turn begot breeder-reactors of pooled, sliced, diced, and tranched global investment vehicles.
Which brings us back to the engine of the economy: America needs new home building. New home building will get its start off the blocks of paralysis first and foremost when a dozen or so public home building companies leverage their capital structures, gut their costs, and tug home buyers who are capable off the sidelines into their American Dream.
In this issue, we focus on the financial performance of those public companies. The key take-away from the analysis is that a few of them excelled not only in managing their balance sheets in 2008, but managed their company for more stress tests in the months and years ahead. Given the hard choice between shareholder value and thousands of talented associates, most companies took their medicine and chose survival.
This year and next will go far to clarify whether the engine of the economy is ready or not to come off the blocks. What’s more, as various stimulus programs and tax relief measures take effect in the months ahead, each new initiative will deliver a telling indicator about which measure motivates people to buy a home or not.
The very nanosecond there is evidence of a solid floor under the V in loan-to-value, borrowers, lenders, investors, policymakers, and taxpayers will all know where they stand, and they’ll work with it.
Bottoms Fish
Here is a post from Calculated Risk that clearly explains the path housing recovery will take.
There will be two distinct bottoms for housing:
1) First single-family housing starts and new home sales will bottom.
and then followed some time later …
2) Prices for existing homes will bottom.
Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom.
It’s conventional real estate wisdom about the chronology of trends that occur when housing’s cycle runs its downward course and begins to flatten.
Stock market, sales volume, pricing power. The discounting mechanism of the stock market makes it a leading indicator. It’ll take a lot of patience to get to the point where home prices get their floor, and it may take a reversal of employment trends from declining to growing before home pricing power factors in.
What Calculated Risk does not address in his theory that home sales volume may hit its lowpoint this year, is that that point finally means that from a sector standpoint, some home builders will have reached their moment of opportunity.
Access to cash and capital will have a lot to do with who’s there to jump on the chance to thrive amid a wide landscape of distress–lowest direct costs per square foot will be a building company’s lever back into high volume business. Equally important, though, it will be who’ll nail the right product for the moment, emerging out of the most formidable economic scare in a century.
If the rental trend is doubled-up, will home builders figure out a way to offer household and community options that feed off the same consumer instinct? Will Baby Boomer parents have enough wherewithal to spot down payment assistance for their kids’ first house? And will that detract from those same Boomers’ desire to have a second home or evolving retirement home option?
The next two to five years should provide insight. Meanwhile, we think that as the Calculated Risk order of housing recovery plays out in the next 12 to 24 months, the very spotty anecdotal evidence of sales improving will, after fits and starts, gel into a trend.
Our guess is that by the time the trend becomes widely perceived, the 100 largest home building operations will be responsible for more than one of every two new homes built and sold in the U.S.
When the Dust-Up Settles
The Wall Street Journal caught up today with what we reported here yesterday.
Clearly, calmer heads prevailed as large home building company executives met with NAHB leadership in Chicago yesterday, after flare-ups over the trade association’s strategy and effectiveness in the battle for Congress’s attention to home builders’ interests.
The agreement to agree, at least for the moment, must mean there are high stakes ahead in a continued struggle for benefits to new residential construction as a united industry. We know that a number of the largest home building companies have executives who are at the end of their patience with how their interests have been represented in Washington.
It’s a testament to the diplomatic skills of Centex CEO and NAHB high production council chair Tim Eller to win alignment among at least a dozen other home builders for continued support of NAHB as their primary lobbyist.
We’ll hear more about this as new measures to deal with the economic crisis emerge for debate on Capitol Hill.