Home Builders — Glass Half Full or Empty?
A daisychain of housing marketplace positives trails back to late Spring of this year. As home building companies business plan for 2010, do you think their leaders are more or less optimistic about the next stretch of real estate’s cycle?
Recently, we hear no end of the landrush for finished lots. Builder magazine senior editor John Caulfield yesterday reported on the phenomenon we caught wind of here in late May and early June.
Big Builder editor Sarah Yaussi wondered aloud about what real factors might be at work to account for such a rabid pursuit of finished lots right now, when housing demand drivers continue to be so challenging in these very markets.
Our guest guru Jamie Pirrello offered insight from a home building company executive’s viewpoint in his blog a couple of weeks ago.
Fact is, we need lots. We’ve depleted our finished lot supply in our best-selling communities. While we have access to land development financing, it is limited. Securing additional land development financing will be on terms we can’t justify. So while we can develop some lots, we need to buy finished lots to meet expected 2010 demand. If not, we will not be able to continue our year-over-year growth for a third year running. We could even see a volume decline.
Also, we’ve got lots of company, public and private. Everybody wants lots on “soft” terms with low deposits and a minimum takedown schedule. As long as buyers manage deposit and takedown risk, they’re actually willing to push prices higher. Lots that weren’t even in play are now gaining attention of multiple buyers. Yet, we have no pricing power with our customers; we can’t raise prices to cover increased lot prices. How much of our already limited margin can we afford to forfeit?
Still, even as the demand for finished lots surges, we believe it’s incorrect to conclude that home building executives believe that positive momentum is gaining much traction. It should be noted that the gold standard for measuring home builder executive sentiment, the National Association of Home Builders’ HMI last measured 17. Now 17 is high compared with where it was in January, but since any number below 50 means that the majority of executives are pessimistic about the outlook, 17 is still pretty darned negative.
On the contrary, we feel the motivation to buy land right now is the opposite. Home builders, deep in their natures, are glass-is-half-full types of people. But they’re not deluded, and they’ve lived with reality for a long enough stretch now that they’re not suddenly caving to visions of grandure about a snap-back.
Oversimplistically, we sense that the lion’s share of the action in the land market right now reflects a dash toward cash for the near term, and signals desperation on the part of more home builders than not.
As one knowledgeable industry observer put it yesterday, “the publics have been losing money [with the exception of NVR] quarter after quarter now, and they’re doing whatever they can to have a profitable earnings period, which probably won’t happen in 2010.”
So, what we believe is that as much as home building executives believe in the power of positive thinking, they’re, in fact, anticipating a really rough go of it in 2010. Cash, however it can be secured, is going to continue to mean life for death for those who drive value to stakeholders by building new homes for American Dreamers.
We linked above to Dan Ariely, whose “Predictably Irrational” remains a dependable source of sanity and insight in these challenging times. Here’s part of what he says about optimism that speaks to the plight of home builders.
It is interesting to ponder the utility of over-optimism. It’s not a simple matter, because it can both hurt and help us. Individuals often suffer because of an overly bright outlook. They wind up dead, or poor, or bankrupt because they underestimated the downside of taking a certain path. But society as a whole often benefits from behavior spurred by upbeat outlooks.
So, it’s a thin line between being upbeat and being realistic. Chief financial officers tend to demand realism foremost. So how will home builders budget for 2010, flat or up?
S&P Downgrades Take Wind out of Housing’s Sails
CNBC’s interview with Alpine analyst Stephen Kim typifies Wall Street sentiment about a next leg downward for housing. Standard & Poor’s yesterday raised the bar for expected losses from risky loans underarching mortgage backed securities, signaling anticipation for a new wave of irrecoverable dollars invested in residential real estate bonds.
Failing home loans that lead to a tidal wave of foreclosures depress home prices and cause the feeback loop to repeat in a worsening viscious circle. Despite tiny signs, anecdotal evidence, and great hopes that Spring 2009 marked the end of the worst times for housing, it’s clear the pain shall continue through the end of the current year, reaching into 2010.
WSJ Links Housing Crisis Duration and Economic Recovery
The Wall Street Journal maps the bond between the housing crisis and broader economic fortunes.
Lawrence Meyer, the seasoned economic forecaster and former Fed governor, says one of the most important differences between “people who are bearish on the economic outlook and those who are less bearish” is their prediction about home prices. Mr. Meyer is in the less-bearish camp. He sees a slowdown in the pace of home-price declines and expects the U.S. economy to be growing at better than a 2% pace by the fourth quarter, faster than many other forecasters.
Three things could prove Mr. Meyer and the like-minded wrong about their encouraging outlook: a sustained increase in the thriftiness of U.S. consumers, which would depress overall growth; a relapse of financial turbulence, which would do the same; and persistently steep declines in the price of houses.
Existing Home Sales Miss Street by a Nose
Looks like those who bet the “under” on exsiting home sales win.
Per the NAR May 2009 release (with guidance from Calculated Risk’s post):
- Existing home sales (SAAR) for May 2009 4.77 million, a 2.4% sequential increase
- Not seasonally adjusted, sales are 3.6% off May 2008 NAS levels
- Median price for an existing home fell 16.8% year-on-year to $173,000
- NAR says about one-third of sales were foreclosure sales or short sales
- Inventory of existing homes for sale decreased to 3.8 million, which for May is unusual
- Months’ supply of existing home inventory decresed to 9.6 months (normal is about 6 months)
Here’s a key observation from Calculated Risk on the NAR report today.
It is important to watch inventory levels very carefully. If you look at the 2005 inventory data, instead of staying flat for most of the year (like the previous bubble years), inventory continued to increase all year. That was one of the key signs that led me to call the top in the housing market!
Here’s the good-news, bad-news headline and report in the Wall Street Journal.
- Home Resales Up From Previous Month, as Prices Fall
Existing-home sales rose a second month in a row during May, but prices again fell sharply, threatening a delay to a housing sector recovery.
The Big Picture’s Barry Ritholz wants to set everybody straight on the proper headline.
In a note from Citi’s housing analyst Josh Levin, he focuses on an issue that has arisen in earlier posts by Big Builder editor Sarah Yaussi.
NAR Cites Appraisals as Growing Problem – In its press release the NAR notes that in the past month stories of appraisal problems have been “snowballing from across the country” with many contracts falling through at the last moment. We assume that such problems stem from the Home Valuation Code of Conduct, which went into effect 5/1. To the extent that this problem is in fact wide spread, we would expect that it may: (1) depress EHS going forward and (2) could cause the historical relationship between pending home sales and EHS to decouple.
Read to the end of Barry Ritholz’s post for the verbal hide-tanning of NAR economist Lawrence Yun. Barry may have been busy hawking his book lately, but this is the vitriol of Ritholz with which we’ve come to know and love.
Here’s a 6-minute CNBC video on existing home sales analysis from real estate correspondent Diana Olick and IHS Global Insight’s Patrick Newport.
Tomorrow, we get new home sales data. UBS is forecasting a 3.9% month-to-month increase over April 2009′s level, from 360,000 units to 370,000. A faint pulse, but a pulse nonetheless.
Housing Data Points Every Which Way
A good morning to litmus test your theory on where the housing juggernaut is heading.
This morning’s Wall Street Journal headline is limbo in 36-point type.
- Markets Await Housing Reports
Worries about the potential for an economic recovery dragged U.S. stocks to their worst one-day decline in two months Monday. The Dow Jones Industrial Average fell 201 points while the S&P 500 slid below the 900 level and turned negative for the year to date.
In addition to concern about the potential for an economic recovery, heavy stock selling by corporate insiders has also weighed on the markets. Insiders of S&P 500 companies have been net sellers for 14 consecutive weeks, according to InsiderScore.com, the longest stretch since June 2007.
At 10 a.m., the National Association of Realtors will report on May sales of existing homes and the Federal Housing Finance Agency will release home-price data for April.
Wall Street analyst consensus calls for a 2.6% month to month increase to 4.8 million home sales. UBS Homebuilding research analyst David Goldberg expects actuals to slightly eclipse the Street. He’s citing a gust of seasonal tailwinds, “still below year ago levels.”
Further, as defaults rise through the back half of 2009, we expec t further pressure on existing home prices.
Also at 10 this morning, the FHFA House Price Index is due. Covering home sales exclusively with conforming loan financing, the HPI has shown none of the volatility nor dramatic cliff diving that the S&P/Case-Shiller Index shows.
The Street consensus calls for a decline in HPI of -0.3% sequentially. UBS notches it down a bit worse, at -0.4%.
Also under lots of scrutiny among housing players will be the FOMC meeting for the Fed’s stance on interest rates and quantitative easing.
What’s your over under on existing homes data just minutes before the release?
Cover to Cover
Out with headline risk. In with headline bliss. See you on the flip side, maybe?
2009
2005
Business Week offers a happy scenario for “Where housing will be in 2012.”
Prices? While they’re likely to keep falling a while longer under the weight of foreclosures, the market is definitely closer to the bottom than the top. “We expect prices to drop for another year and then stabilize before starting to rise with incomes,” says Standard & Poor’s (MHP) Chief Economist David Wyss. Moody’s Economy.com (MCO) predicts the S&P/Case-Shiller U.S. National Home Price Index, maintained by data specialist Fiserv, will fall about 16% this year before regaining ground. Based on the National Association of Realtors national median home price of $180,000 for the fourth quarter of 2008, that would mean a median of $152,000 at the end of 2009 and then a rebound to $179,000 by the end of 2012.
Rich Ohmann, Live and Uncensored
On Ground Hog Day, 2009, we got word from one of our favorite characters in home building’s pantheon of bucaneers, engineers, imagineers, and minor magnates–Rich Ohmann–that his brother Bob’s Raleigh, N.C.-based company, St. Lawrence Homes, was filing for protection under Chapter 11.
The Ohmann’s company is not alone in its plight. The way they’re handling it is what may set them apart from peers.
Click for St. Lawrence Homes' Web site. Bob Ohmann (left) and his brother Rich.
Since they entered bankruptcy, they’ve been working their way out of it. St. Lawrence’s emergence from this state is not happening as swiftly as, say, Chrysler’s, but hey, Fiat’s not planning inroads into U.S. home building anytime soon, so the company’s principals are working their way through the hard way. They’re selling houses, generating cash flow, paying bills, and trying to keep the lights on every day.
We’d received a few choice missives from Rich (who’s head of marketing and chief cook and bottle washer at St. Lawrence Homes) about society, big business, policy, and how it all affects trying to be a home builder in today’s tough market conditions. We asked him to write for readers, because we think his candor, insight, and values as part of the home building community reflect how more than a few colleagues feel.
Here’s Rich’s first post, which he entitled “Blah, Blah, Blah, Blah.”
I have to tell you that I’m not a fan of funny t-shirts with smirky messages. ‘I’m with stupid’ with an arrow pointed to the left or right isn’t for me. ‘My Mom and Dad went to Hawaii and all I got was this lousy t-shirt’ isn’t cute to me. The list is endless. This is not a recent issue for me so you can’t pin the economic malaise on my disdain for message t-shirts.
What’s this got to do with my need for screed? Last night, after a mind-numbing, rotten, catastrophe of a day I walked into my home, greeted by my wife and kids. Smiling and happy, full of the news of a couple of idyllic summer days with an order from my wife to start up the grill and handle my end of dinner.
I was struck with how wrong the old t-shirt was, the one that could easily be worn as uniform for most of us in homebuilding these, ‘Life sucks, then you die.’ Contemporize the message: ‘Confidence plummets, then you go bust.’ ‘You default on your loans, then they take your truck’. I’m not willing to accept it though and I’ll try and tell you why.
First, you gain your worth from who you are not what you are. If your material possessions and self important position defines your lot in life you have nothing. As a home builder things are tough. But I’m just a home builder and nobody else is either. For me, as a Dad, as a husband life is grand. Regardless of what comes my way I’ll have success if I keep my eye on the important things in my life. Am I by necessity having to make tough decisions about what I can provide for my family? Certainly. The material things aren’t as important to them as I thought they would be. It turns out that they just want our family, and everything else is optional.
Second, care for others more than you care for yourself. Self-worry, self-pity, self-loathing evaporate when you look for ways that you can help others. A family in my sons school has a gravely ill child. I pray for them and think about them often and what I might to do help them. My problems are small by comparison. I was in line at the grocery store and recognized a former employee a few customers back, a young father with a wife, 2 kids and another on the way. I knew that he was facing tough times, tougher than what I was facing on that day. I bought a gift card at the checkout counter and told the cashier to use it to help pay for his groceries. It kept me focused on the fact that no matter what I face I can always find someone who needs more help than I do and that feed my soul by helping others.
Third, cut the negative noise off. Les Brown is a motivational speaker. Very early in his career I hired him to speak at a small convention. He was a great speaker and so uplifting. I can still remember that he encouraged everyone to find unreasonable people and hang around with them. Reasonable people will logically tell you why you can’t do something, why the obstacles are too great. Unreasonable people walk on the moon.
Finally, find inspiration. Sure it’s a dark time but you can find things that inspire you if you keep your eyes wide open. Inspiration will lift the burden of impending doom from your shoulders. You’ll come to understand that you aren’t defeated by today but rather that you have opportunity around you. I like to think that I’ve taken the middle years of my life as a sort of vacation time and, because the market was grand, had my semi-retirement early.
Now? Back to work. Work is what we all did before mortgage money was easy, labor was cheap and the stock market lulled us to sleep. Work is what built this country and what my parents taught me. Mom and Dad told me to save where I could, spend what I could pay back and to look upon the future with great hope. Turns out that they knew what I realized last night standing in front of my Weber grill.
Time to close some houses.
Unbelievably Great Starts Data May be Just That: Unbelievable
Starts rose sequentially by 17.2%, per the U.S. Census’s latest release, which no one can decipher. Big Builder’s report on the release is here. At 532,000, seasonally adjusted, starts beat the Street by 47,000, or 10%. Permits, at 518,000, also eclipsed Wall Street analysts’ expectations by 10,000, or about 2%.
Evidently, the Street–and its gaggle of “consensus” economists–have neither visibility nor acumen into what to expect from new residential construction.
Or it means that government data culling is suspect. As Raymond James VP for equity research Buck Horne notes in his comment on May starts, permits, and completions data, the margins for error in the government data are all important. “Material downward revisions to the May housing starts estimates are more likely than not,” he says.
Here, from HousingWire, is the nub of the starts and permits data:
The good month for housing starts comes after the volume dived 12.9% the month before. A 62% increase in new multifamily construction drove the month-over-month gain, while single-family home starts rose 7.5% to an annual rate of 401,000 units. Single-family building permits — an indicator of future starts — rose 7.9% in the month to an annual rate of 408,000 permits.
Which do you believe? The Street’s analysts are full of it or the government’s math is off.
Either could be the case, and both are true. Economists are quick to say that a big difference between The Great Depression and now is that President Franklin Roosevelt lacked a good economist to advise him on ways to steer toward a quicker recovery during the 1930s. Still, as smart as a lot of those guys are, how much are they helping us know anything before it actually goes down, and even when it does, how helpful is their commentary?
On the other hand, it could be that in this case, economists’s estimates are smarter than the data flow from the Census. But once the headlines get a hold of the data, it’s really too late to worry about what’s really correct or not.
RaymondJames’ Horne dives into the government release and turns up a number of self-cancelling and contradictory figures that lead him to his conclusion that, when we see adjusted numbers in 30 days, may vindicate The Street’s more guarded estimates after all.
Here’s a doozy of a finding from the Buck Horne analysis.
Shrinking number of homes actively under construction directly contradicts starts data: However, the most strikingly peculiar aspect of this morning’s data was found in the little-noticed Table 4 of the full release, representing the Census Bureau’s estimate for housing units actively under construction. Under normal circumstances, we would think that if single-family starts had troughed and were actually rising materially – particularly in the seasonal low point for new home deliveries – there should be a coincident increase in the number of homes actively in construction. Oddly, however, the Census data here (which carries +/- 1.4% confidence interval) shows that homes under construction actually fell 3.9% versus April seasonally adjusted and dropped 1.3% month/month on an absolute basis. In the housing recovery of 1991, we note that this statistic indeed showed a sharply accelerating increase in the number of homes under construction beginning in April 1991 coincident with the recovery pattern.
Point is, at HousingCrisis.com, we do feel that bigger, well-capitalized companies may actually roll the dice on going vertical with more homes in the next couple of months. Why? Because, in this market environment, about a third-to-half of willing and able buyers want to settle and move in quickly. That makes specs almost inevitable.
Also, as deadlines approach on both state and federal tax credit programs for home buyers, builders who can grab capital to offer ready-to-move-in new homes are prepared to gamble on their ability to nail the shrunken, moving target of buyer demand.
As we posted yesterday, we believe that home builders are hormonally range-bound between unflappable and optimistic, and they’ll look at every mixed signal as a sure sign that it’s time to start moving the dirt and opening the new models.
Ultimately, It occurs to us that as the downturn sputters and runs out of gas, it’s likely will see a knifing up and down of starts before they settle on a conviction in their direction. Two months up, one month down; two months down, one month up, and so on.
Whatever the case, somebody’s wrong about today’s starts numbers. It looks for the moment like the The Street is, but stay tuned.
The takeaway: Clip the postive headline for the scrapbook, but wait a couple of months before you paste it in as a keeper.
Fix Housing Later
Unemployment is the chicken. Foreclosures are the egg. Swap their positions all you like. They’re each a self-fulfilling prophecy of the other, a negative feedback loop.
Housing leaders and housing-centric economists want to believe housing always leads the economy. Fix housing, they say, and you’re on your way to fixing the broader economy, because housing is an engine with a multiplier effect. Residential investment dollars–including construction costs for all kinds of housing–redouble and stream into many other markets and cause good things to happen in local, regional, and national economies.
This time though, a consensus is building that housing will not lead the way out of the downturn. Housing is not broken. Creation of demand is. Look at the latest unemployment data. Now, look at how foreclosures are working, i.e. 54% of new foreclosures are prime fixed and adjustable rate mortgages from among the lowest risk borrowers, per this analysis by Calculated Risk.
How about this for an argument? Housing, not only will not lead an economic recovery, it should not. Business Week economist Mike Mandel makes a case that a housing snapback would drain needed investment from other industry and service sectors that would put a more solid structure–including healthcare, education, and manufacturing–under the economy.
Here’s a few-minute video from Mandel on his Fix Housing Later theory.
Clearly, a more normalized level of demand for housing–existing, new, for-sale, and for-rent–would shape itself around less cyclical job growth in non-housing industry arenas. Businesses that got burnt badly as they met hyperbolic, investor-driven demand. In a real sense, housing’s 15 year run before 2006 used up a couple of the wild cards that would have jump started the economy, and pulled forward buyers into homeownership that it would be nice to have in the demand pool right now.
So, even as new residential construction business executives begin to populate their sound bites these days with flashes of wishful thinking, practically the only silver lining in today’s new one-family home sales data is that builders knocked 12 days of inventory off the books, reducing the ready supply of new homes nationally by 13,000 to 297,000.
In some markets, like Phoenix, home builder and developer sentiment has shifted from “you-have-to-fake-it-to-make-it” to that of genuine excitement. “They’ve turned the lights back on” in the land acquisition conference rooms, according to an executive with ties to investor and home builder land transactions.
What’s selling will have to continue to compete with foreclosures, super affordable to migrate renters across into homeownership. No contingencies. No funny business on the mortgage–it’s either FHA qualified, or at least 20% down. Delinquencies and defaults will pile up among prime and Alt-A borrowers for months and months to come, thanks to an unemployment rate expected to grow into the double digits before it starts to ease back by the end of 2010.
Get stocks to start parking in a promise of future growth, and a real economy GDP to inch back from its deep 6 to something around 0 this year, and by golly, consumer sentiment will start a real recovery.
Meanwhile, another year of trying to figure out how to do things with less people than you really need. What we all need though is an economy that can sustainably grow again, not one heated back up by housing. Fix Demand First, housing later.
Who’s Your Goliath?
My dad is and always was a fan of underdogs.
Before sports went berzerkly corporate, and all the New York team owners felt that it was their Manifest Destiny to use zillions of dollars to wrest championship rings from their wearers in other towns and bring them to the Big Apple, my father parked his loyalties solidly behind the longshots like the pre-Dave Debusschere Knicks against the Bill Russell-led Celtics, and the 1964 football Giants with a creaky Y.A. Tittle at the helm, and a new baseball team called the Mets.
So I got it from him.
Click for more info on Malcolm Gladwell
Which is why Malcolm Gladwell’s piece in the May 11, 2009 issue of The New Yorker was a must read. As is Gladwell’s typical article approach, blending historical research with a latter day examplar of a noteworthy phenomenon, it’s a scholarly deconstruction of a twist of fate, “How David Beats Goliath.”
For two reasons, the story should interest those of us whose fortunes or loss of them tie to the new residential construction market.
The first is that the central theme of the story relates to the plight of many organizations who make a living or not in the world of housing. They are David. Foremost, Goliath–the Philistine warrier whose defeat is almost inconceivable–is a real estate market and general economy withering in their effect on combatants large and small.
Gladwell’s yarn–backed by political science data on the number of wars won by undermanned, less powerful armies through history–tells how an underdog gets the upper hand. First thing they have to do is recognize they’re weaker and choose an unconventional strategy.
“When underdogs choose not to play by Goliath’s rules, they win.”
Think Lawrence of Arabia; think Rick Pitino, or if you’re my dad, think Digger Phelps’ Fordham University [no name] Rams against a U Mass team led by Julius “Dr. J.” Erving. The unconventional approach often involves surprise and speed, causing confusion in the ranks of a more potent foe.
Surprise and speed, for home builders, translates into cash. Let everyone else remain paralyzed in a market debatably still deteriorating [or as the Caculated Risk blog asserts, "correcting"], and girding for further waves of foreclosure hell. Don’t play by the rules of the game that you have to price a new home to market. What’s the equivalent for home builders of a full-court press? Is it an Open Series or any number of the other companies’ new, more affordable floorplans that break previously ironclad rules about replacement costs? How do you change your company’s culture so that it can adapt and change its structure?
The other reason to read the article might just be to come to a new understanding of who Goliath really is. Certainly, at the moment, the barbaric, dreaded enemy in most of our minds is a marketplace of still halting consumer confidence, corporate fear of investment, and massive government overcompensation for the ills of free enterprise.
Interestingly, though, a subplot of the article focuses on another kind of David. In this case, it’s Vivek Ranadive, a Silicon Valley software developer who revolutionized data analysis by moving from “batch” collection to real time collection.
What has led and will likely lead many a real estate and residential construction company down the road to ruin is the absence of reliable data to say what is actually going on in the market. There are too many lagging indicators and undependable metrics that allow analysts to assert “the fundamentals are strong” and the “subprime damage can be contained.”
So, in a sense, Goliath is not only an outside force in the marketplace, but an enemy within. Data that is as local as the Census tract you’re competiting in and as instructive as a clock with the correct time is something most real estate players haven’t gotten around to developing or developing a belief in.
Some times, rules that need breaking are ones we’ve made up for ourselves.
Until a megalomaniac named George Steinbrenner came along, my father’s one exception to pulling for the underdog was his love of the New York Yankees. He knew lifetime and year-to-date averages and ERAs of most of the Yankees from about 1935 through The Mick and Whitey Ford.
But even when they were dominant, the Yanks had kind of an underdog’s salt of the earth sense about them. After all, one of the best of them said this. “The future ain’t what it used to be.” Bet you’ll never guess who.