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.
Freddie Mac’aganda
Freddie Mac doesn’t want the bad guys to get too many people. Somebody’s got to be left standing to pay the tax freight in the years ahead.
So, here’s what they’re doing to take one for the team: Making Home Affordable and Avoiding Foreclosure Rescue Scams.
Enjoy.
Fannie Kicked in Q1; Mission Position to Blame
Just about six of every $10 Fannie Mae suffered in credit losses in the first quarter of 2009 come from a four-state real estate cataclysm–Arizona, California, Florida, and Nevada.
The Wall Street Journal reports the reason for Fannie’s Q1 woes as follows:
Fannie’s loss was mainly due to a provision of $20.3 billion for future credit losses stemming from the biggest wave of foreclosures since the 1930s. The company also had $5.7 billion of write-downs on mortgage securities created by Wall Street firms and lenders during the housing boom. These securities are backed by subprime and Alt-A mortgages. Subprime mortgages are those to people with poor bill-paying records or high debt in relation to their income, while Alt-A loans typically allowed borrowers to avoid documenting their income or assets.
Subprime and Alt-A loans have been by far the worst performers. But Fannie said its entire loan-guarantee business, including prime loans, is suffering from rising defaults as house prices fall and unemployment climbs.
Fannie and Freddie, which buy home loans from banks and turn most of them into securities for sale to other investors, are suffering huge losses largely because their only businesses are investing in or guaranteeing mortgages. Big banks, even ones with large mortgage exposures, are more diversified and benefited in the first quarter from a surge in mortgage refinancing, which helped offset credit losses.
The Calculated Risk blog digs deeper into Fannie’s 10-Q filing with the SEC, which points up a maze of self-cancelling strategic objectives that would reduce even the most illuminated of organizations to paralysis.
CNBC’s David Faber got out ahead of Fannie Mae’s earnings reporting with this analysis this morning.
Freddie reports next week.
Bottom Dollars
The Second Derivative has spoken. Or has it?
Everywhere, smart and experienced people have begun to find their own words to say that the bad news may still be bad, but is growing worse at a slower rate. Toll Brothers CEO and Chairman Bob Toll says as much in his comments about 80% of the nation’s housing markets in a “first signs of light” interview with CNBC “Mad Money” host Jim Cramer.
The steepness of the deterioration is changing to a more gradual decline. Not everything is as bad as it was. Things have to shift from nightmarish, to horrible, to frightening, to bad, to concerning, before they can flip across the gulf to okay, no?
Bob Toll contends that if you’re out in the field, you’ve already started to get a sense that things are improving, and we hear that from a number of people in a number of markets. The traffic that fell off a cliff in September and October of last year when the financial crisis crescendo-ed began to respond to reset price levels, better interest rates, and government stimuli.
But there’s so far to go.
If you are a believer in the “green shoots” theory, then you’ve got to be thinking there’s something that’s going to cause consumer spending to regain a comfortable stride despite a widening sphere of dread about job and income loss. You’ve also got to believe that residential investment will reemerge as a positive in spite of home price deflationary forces that may be expected to continue.
Calculated Risk puts it this way in comments about the President’s top economic advisor Lawrence Summers’ assessment of where things are:
The “unremitting freefall” might be ending, but what will be the source of growth? Usually residential investment (RI) and personal consumption lead the economy out of a recession – and both remain severely impaired this time. There is too much excess inventory for any meaningful recovery in RI, and the process of repairing household balance sheets has just begun (I expect the savings rate to continue to rise for some time).
Meanwhile, too many banks can’t rise above their profound technical solvency issues to do much more than sit and wait for more deposits and more cash from U.S. taxpayers, via the Treasury. They’ve crimped investment in households, in communities, in companies, and in the future–existing only in cryogenic suspension as once-prized borrowers pick a number and get on line to wait for markets to reopen.
“Green shoots” theorists have not only to believe in the resumption of consumer spending and residential investment, but the reignition of willing buyers and sellers of assets among people who’ve been paralyzed by fear to put a price tag on just about anything.
Like other things, housing downturns have phases and stages, whatever their duration or depth.
At this stage, when construction lending is for all intents and purposes shut down, and when banks are awaiting word of their fate from regulators and White Knights before they engage in the world of markets, and when buyers of homes are doing all they can to postpone the need to move before it’s absolutely necessary, one real estate player in the mid-Atlantic market describes survival this way.
“We’ve done all we can with our lenders, and all we can with our costs. Now it comes down to one thing, or we’re done. We’ve got to sell something. We know there’s not a lot selling in our market, but there is something. So our life depends on stealing a sale from somebody else–existing homes, or foreclosures, or another new-home builder. Either we’re going to steal the sale, or we’re not going to be here.”
This is what it’s like even as “green shoots” theorists talk about a “bottom” as if it were encouragement that next bank payment or two might be last ones to stress about.
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.
Notes from the Eight-is-Not-Enough File
The vicious circle of declining home prices, rising foreclosures, and further depressed home prices has created a parallel vicious circle of economic policy getting ripped apart by political self-interests, requiring an even heavier hand of economic policy.
By looking at where new-home sales have perked up, one can guess that California, which has added its state income tax credit of up to $10,000 to the first-time home buyer tax credit ante rolling out from the United States government, can serve as a poster child for more stimulus to jolt some virtue into those vicious cycles.
Movements in support of higher home buyer tax incentives are still operating at a state and national level.
Here’s an argument from yet another Ivy school economist about the shortcomings of the Obama plan to stabilize housing by stopping a slew of foreclosures from occurring. Yale economics professor John Geanakoplos stopped by Squawk Box to talk about foreclosures with Huffington Post diva Arianna Huffington, Becky Quick, Carl Quintanilla and Joe Kernen. Watch below to see why Geanakoplos thinks the Obama administration’s plan to prevent foreclosures will be ineffective.
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.
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.
Homer Vs. Homer
Where life in hell meets life in Springfield.
The world has always been according to Groening.
Hat tip: The Home Front
Bottom Dollar
We don’t believe Wall Street, Washington, Main Street, nor the Economists quite get it. They don’t get the velocity of the correction of errors. Here’s conventional wisdom on the housing price correction masquerading as “contrarian” thinking.
It’s from a blogger whose mantra and tagline are “you are either a contrarian or a victim.” Given the mainstreamish rationale here, we think dude’s a victim.
For example, in a post, “Where’s That Mythical Housing Bottom?” the logic for saying “we still have a ways to go” is laughable.
Click image to see enlarged chart on Contrarian Profits.
This is a chart of the S&P/Case-Shiller Home Price Index.
As you can see, it’s plummeted over the last 18 months or so.
It shows that U.S. house prices have been spanked harder than a disrespectful 5 year old.
And, unfortunately, it shows no sign of bottoming anytime soon.
This makes sense considering the flood of foreclosures hitting the market.
In my parents’ neighborhood in Fort Lauderdale, Florida, homes that were selling for $250,000 during the peak are now going for $70,000 in foreclosure.
Repeat this scenario across the country, and you’ll see that home prices still have further to go.
“Spanked harder than a disrespectful five year old.” Thing is, there’s no reasoning in the chart nor the post that says why “home prices still have a ways to go.” This has become conventional wisdom for many observers, and is the last thing from contrarian thinking.
What contrarian thinking might be really helpful to do right now is to help everybody understand the “cliff-dive” phenomenon of change–the velocity–that seems to have everybody stumped and everybody spooked. If stocks are supposed to be the great discounting mechanism to tell people where things are headed, how come stocks forgot to discount for so immediate a future as occurred in the past 12 months.
It’s anybody’s guess, but we’d suppose a true contrariant would be the best one to assist on this question of the velocity of change from good to bad.