Fewer Jobs, More Work
Highlights of ADP’s report this a.m.
Nonfarm Private Employment Highlights – August Report:
• Total employment: -298,000
• Small businesses* -122,000
• Medium businesses** -116,000
• Large businesses*** -60,000
• Goods-producing sector: -152,000
• Service-providing sector: -146,000
Addendum:
• Manufacturing industry: -74,000
* Small businesses represent payrolls with 1-49 employees
** Medium businesses represent payrolls with 50-499 employees
*** Large businesses represent payrolls with more than 499 employees
The X factor for the balance of 2009 will be consumer spending, which has gotten hit by jobs, income, household wealth, credit, and stock market erosion. If consumers lead the way out of this great recession, they’d better learn to trailblaze the path of a W.
Humbled by the Numbers
It’s September, but not really, because it’s pre-Labor Day weekend, before the experts come in droves back to their desks from their late summer’s respite and normalize market activity.
Still, we can’t help the white knuckles, not after last September and October, and not after this past summer’s rally tapered into talk simply of protecting some of the year’s gains.
Every measure of growth, stagnation, or decline gets hyper scrutiny. This morning we have data out on jobs from ADP, which serves as a proxy for government employment data, with a particular sensitivity to the payrolls of small to medium-sized businesses. That report sent futures for U.S. stock markets from flat to negative.
What struck us this morning, though, was a moment CNBC Squawk Box co-host Becky Quick experienced as she was talking with RBS analyst Michelle Girard. In a split second, it revealed how daunting it is for most semi-intelligent business journalists to get our heads around the maelstrom of technical data and trends as we cover the financial and housing crisis.
About five or six minutes into this eight-minute video, it all comes undone for Becky as she tries to make a point. To paraphrase her observation, she mentions that an analyst commenting yesterday on encouraging news from the Institute of Supply Management focused attention on one of the ISM measures as significant. “There was a number; I forget what he called it, [but it had to do with] orders going out faster than they could refill them, which means these factories might need to hire people…”
In other words, she was saying, “I know there’s this smart thing somebody said that I should be referring to as an indicator, but I can’t think of it right now, but it really could be important.”
We have to say, we empathize. This downturn has brought us face to face with business finance, economics, and psychological phenomena that are utterly over our heads as we try to fix order to our reporting.
Things start to look good, and we report that things are starting to look good, especially if smart people add their blessing to their improvement. But still, we haven’t known how to look beyond immediate upticks and down drafts in the trends.
We have begun to understand that both to the positive and the negative, collective psychology trumps fundamentals, which is why markets are driving lower even as positive economic news flows into the headlines.
So we’ll go back to trying to understand that number that we know is important that has to do with consumers in households having money to spend on big, medium-sized, and little ticket items. Two out of every three dollars of GDP, and all the ability to pay back all the bills for the programs we’ve got to keep the trains running these days, comes from consumer household spending.
Take more than one in 10 households out of the mix because of lost jobs or lowered income, and the nine other households somehow need to make it up. That’s the number we’ll be looking at closely as we move through the next couple of months, watching the markets try to protect some of the gains it picked up from its March lows.
Job Losses: A Dragging Indicator
The topline: The U.S. economy lost 467,000 (more) jobs in June 2009, which means that since the recession started in December 2007, 6.7 million jobs have disappeared.
Total job loss exceeded Wall Street economists’ estimates by 30% or so, and eclipsed revised May job losses by 45%.
Total unemployment is at 9.5%, a quarter-century record.
The jobs numbers for construction are mind-blowing. In a year, the official count on the unemployed in construction has risen by 816,000 jobs. Unemployment (officially) for construction has gone from 8.2% to 17.4% in 12 months. In 30 days, from May to June, construction lost 79,000 jobs.
Reports the New York Times:
The latest figures highlight a somber new reality for workers, economists said. As the recession enters its 20th month, private wages and salaries are falling, working hours are dwindling and more people are without work. In essence, economists say, months of deep, broad job losses are effectively making unemployment a way of life for millions.
The number of people who have been unemployed for more than 27 weeks has more than tripled since the recession began, to 4 million. The median time people go without a job has increased to nearly four months, from slightly more than two months at the outset of the recession in December 2007.
Job losses, and gains, lag the economy. It takes a pretty good economic lift to turn job loss rates into employment gains. Here’s the Wall Street Journal take:
When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers hit 16.5% last month, up slightly from May.
The employment report is a sober reminder of the headwinds the U.S. faces even as other data suggest the recession may be nearing an end. The Institute for Supply Management manufacturing index increased in June from May, and though its level of 44.8 still signals a slight contraction in manufacturing, it is consistent with slight growth in the overall economy.
After plunging at rates near 6% at the end of 2008 and early 2009, at annual rates, economists think gross domestic product only fell around 1% or 2% in the second quarter, setting the stage for a resumption of tepid growth starting as soon as the current quarter.
Still, a jolt of consumption-driven adrenaline seems unlikely. Average hourly earnings were flat last month at $18.53. That was up just 2.7% from one year ago, a sign that inflation isn’t a risk for the Fed. However, stagnant wages could also weigh on consumer spending, especially with gasoline prices on the rise.
The pall of job loss, and continued threat to household income, opposes “Animal Spirits” collective behavior that could turn the Queen Mary 2 in the Upper Hudson River.
Policy needs to factor in real job loss numbers into its stimulus math, not hope. Clearly, the Wall Street consensus among economists is not the place to seek reality.
At What Price, Couch Time?
The Housing Crisis has its many forms.
- One in five employed American workers does at least some of their work at home.
- More than 30% of single jobholders work on weekends.
- More educated people are more likely to work at home than those with less than a high school diploma.
- On an average day, 22% more women than men do stuff for the household at home, and they spend 23% more time than men doing it.
- One out of five men do housework, whereas every other woman does.
- 96% of American adults enjoy “leisure” activities. Men average 5.7 hours; women 5.1 hours.
You can find this data and more in the American Time Use Survey, just released by the United States Bureau of Labor Statistics.
Housing Crisis’s takeaway. Males cede 90% + of household decisions to women for a little over a half hour of leisure? That’s just lazy.
Seriously, more people are working at home–employed and self-employed–so home office and work space should not be an extravagance or an afterthought for new home building.
Of course, the Wall Street Journal analysis was all about changes in the way we work.
People in professional, production and service jobs worked less in 2008 than a year earlier. People in management and sales jobs worked quite a bit more in 2008 than in 2007, an increase was much larger than for the general working population.
The BLS isn’t big on explanations, but you don’t need the federal government to tell you that workers at companies that have just had layoffs often end up doing more with less — and work harder for fear that they might be next in the unemployment line. Or that sales calls are a whole lot harder when nobody is spending money.
Average Weekday Hours Worked
| Class of Worker | 2008 | 2007 |
| All Wage and salary workers | 7.58 | 7.51 |
| Management, business, and financial operations | 7.85 | 7.66 |
| Professional and related | 7.16 | 7.27 |
| Services | 6.84 | 6.92 |
| Sales and related | 7.59 | 7.15 |
| Office and administrative support | 7.18 | 7.34 |
| Construction and extraction | 8.05 | 7.99 |
| Installation, maintenance, and repair | 8.38 | 8.11 |
| Production | 7.94 | 8.32 |
| Transportation and material moving | 8.19 | 7.81 |
The Dash for Cash
We are still on our uncertainty kick, as it’s the only lasting phenomenon we both be certain of and need to plan around.
Consider a comment from investment guru Jeremy Grantham in an analysis The Big Picture blog’s Barry Ritholz is raving about for its keen guidance on “what we should expect over the next few years.”
“The uncertainties of the economy are so great that when the uncertainties of the stock market’s anticipation are laid on top of them, you simply must have big ranges of outcomes and hedge your bets.”
In home building, we see parallels to this principle.
The first quarter of 2009 has now made it clear that, by violently turning the screws on their gross margins, public home builders can at least stir the pot on home sale volumes, especially if it’s the right time of year and there are a couple of “x” factors like a California home buyer tax credit around to help.
Here’s how Citigroup’s home building sector equity analyst Josh Levin puts it.
While most investors entered [the just-concluded] earnings season focused on y-o-y (year-on-year) net orders, we think many were surprised by the q-o-q (quarter-on-quarter) gross margin deterioration reported by most home builders.
In the next three quarters of 2009–especially after there are no more $10,000 tax credits to hand out to Californians who step up to buy now–home building companies will be left even more to their own devices to get the job done moving inventory.
Seasonal forces, rock-bottom prices, record-low interest rates, and money back on income taxes for a home purchase have been working.
Take away seasonality, and add back the toll of continued economic weakness leading to a weak recovery, big layoff numbers, another wave–maybe two–of credit meltdown shocks in the form of widening credit card defaults and commercial real estate implosions, and one can get a sense of genuine challenges to the kind of consumer confidence it takes to make that largest of consumer purchases.
Home building companies that have made it to this point with a truck load of cash need a plan to try to expand their “range of outcomes,” even as they hedge their bets.
A truck load of cash, a delevered balance sheet, a skeleton-crew cost structure, a few tax-carryback induced inventory turns, and few if any false moves, serve as Part I of the plan–the part that has gotten the stronger companies to where they feel they still have cards left to play.
Part II is where a broader ”range of outcomes” comes clear, because even the stronger companies can’t sit around for the next three quarters waiting for the home buyer market to suddenly tilt their way. Both public and private companies with cash will in the next several months begin to try to slide in unobserved to pick of lots that pencil to new hurdle rates. Those lots, and the business plan around them, and the product on them, will all have one mission. Generate cash from sales.
Whatever goes on by virtue of “the visible hand” of government, home building operators need just one more critical part of the downturn’s plot line to kick into effect. Capitulation. “Ask” prices need to succumb finally to new, uncertain, sustainedly weak realities. And they will, but first only discreetly.
So, what we’ll be observing, even as clouds of uncertainty continue to sit over residential construction’s landscape, is the beginning of chapter that will see home buyers pop in and buy land, hoping finally that it’s cheap enough that they can put a home on it with one of their existing or new products that will get them inventory turns at a greater than one-or-two-a-month pace by the end of 2009.
We invite you now to jam our comment box with questions and challenges for leading home building executives, either about their companies, about the markets they operate in, or about the business environment ahead. who’ll gather in Chicago over the next several days for the 2009 Builder 100 Conference.
We hope to see you there, but if not there, then let us know here what you want to have these folks address in the days ahead.
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.
My New Kentucky Home
Bill Jagoe’s grandfather built and sold two homes during the painful latter years of the Great Depression in the late 1930s. Bill Jagoe and his brother Scott have been building and selling new homes in Kentucky and southern Indiana through the Great Recession. Bill Jagoe’s son, William Rush Jagoe V, is 21, and may–as it turns out–pick another profession altogether.
“I worked on job sites from the time I was 12,” Bill Jagoe tells us. “I didn’t raise home builders. I want my kids to think about other things to do. But we’ll see.”
click image to access Jagoe Homes site.
Bill and brother Scott qualify as a “how-the-hell-are-they-doing-it?” story right now, starting more specs and scoping out new lots from other builders and developers to keep up with demand that will probably take them to 440 homes and beyond this year. That would equal their best year ever.
“We’ve been going after a buyer we’ve seen in the market who wants a spec,” Jagoe says. “We’re seeing people who, once they’ve made their decision, they don’t want to wait.”
While other private home builders struggle to keep the lights on and the doors open, Jagoe’s outperforming its own expectations. “In traffice we’re 149% of budget, and we’re 148% of budget in sales. We’re finding that, even with foreclosures around, we can still talk to our customers about value. They’re still payment-driven and they still act on emotion when it comes to saying yes. You just have to get to that emotion, and they’ll suddenly want it now.”
The Jagoe family name backs up the relationship the company has with home buyers, trades, lenders, and suppliers, but the personal touch and the entrepreneurial fire-in-the-belly hasn’t stopped the firm from constant process improvement efforts. Over the past few years, the Jagoes have pulled in sales and marketing guru Bob Shultz, operations and lean construction specialist Scott Sedam, and management/technology advisor Noelle Tarabulski to remake every way the company operates and does business with its various stakeholders.
Other builders are reefing their sales and exiting markets, but not Jagoe. They’re new to the Bowling Green, KY, market thanks to a deal they picked up from a builder who wanted out. “They wouldn’t let me into Bowling Green when I tried to get in three years ago.” They, being municipal officials, planning board members, trades, and other builders. “Now,” says Jagoe, “they’re asking me if I want to buy their land.” Jagoe has his sights set on 20% of Bowling Green marketshare by next year. “That could be 100 homes or 200 homes for us alone, depending,” he says.
“I get to work each week, and I think, ‘what can I change about the way we do things today?,’” Jagoe muses. He’s taken 90% of marketing and sales dollars out of newspaper advertising and plowed in into relationships with Realtors and an improved Web effectiveness. “We used to sell one in four traffic customers, and now we’re at one in three. If you give me a go today, I can get you into a new home in 77 days, give or take on entitlements and permits.”
Building cycle time is huge these days. “Your not making profit on the land appreciation, so it’s going to be process management and speed that gets you your margin,” he says.
Bill’s son Rush may not go into home building, but he knows cycle time by heart. As of Sunday, he’ll set out pedalling with two of his friends from San Francisco to Charleston, S.C. Just another way to ride out the downturn.
Brother Act: Chapter 11 won’t stop Raleigh-based St. Lawrence Homes from making a go for the other side
Dad was a vintage movie theater proprietor in upstate New York, whose six-day work weeks and 14 or 15-hour workdays in the 1960s and ’70s rub off directly on his daughter and sons, who consider work fun and laugh a lot on the job. The older brother starts out as an electrician working job sites for Ryan Homes’ Buffalo division in the 1970s; the younger goes into school teaching, but not for long.
They’re the Ohmanns, Bob Ohmann who founded and is the CEO of Raleigh, N.C.-based St. Lawrence Homes on a bank loan that allowed him to do exactly one spec and two pre-sales, and his kid brother Rich, who joined Bob as head of marketing after the venture got its footing.
Bob’s early experience with inhospitable housing cycles came when he’d shifted gears from doing electrical work on new houses to selling them for Ryan Homes in the Buffalo area.
“In the 1970s, they had a little thing called the gas crisis, and interest rates were up around 19%,” Bob Ohmann recalls. “Still, out on French Road [Buffalo] the Ryan Homes folks would set up a card table out in a field, and people would line up at the card table to buy a new home from them. No matter what, you got to stay in touch with what people need. Even today, a couple’s about to have their first kid, and my bet is they’re not thinking we need to move into a two bedroom rental apartment. More times than not, they’re thinking they need a new home.”
From one spec and two pre-sales in Raleigh in December 1989, the Ohmanns built their company into a $191 million powerhouse, closing 489 homes in 2006, peaking at about 600 in 2007. Then, time warp hit. The Carolinas, like Texas, withstood the worst of housing’s dislocation just about all the way through 2007 before the Carolinas market and their company succumbed to gravity.
“We started to feel it go a little soft around August ['07], but then we had a great November—sold about 50 houses that month—and we thought then that it was going to be a good snapback, but then everything collapsed,” says Bob Ohmann.
On Groundhog Day 2009, as most people began their vigil for the end of one of the grimmest winters in memory, Ohmann elder sought protection under Chapter 11 bankruptcy laws. Within five days after filing, the Ohmanns had secured Debtor-in-Possession financing from Raleigh-based community lender Capital Bank.
Their story with lenders is all too familiar. They started banking with a local bank called Pioneer, which was acquired by regional bank Centura, which was acquired by international financial company RBC. Their major lender today, SunTrust, bought the regional bank, Central Carolina Bank, they’d initially set up business with.
As their success trajectory steepened in the years 2003, ‘04, ‘05, and ‘06, they found themselves at the local and regional land dance with some new players with hugely deep pockets.
“They [the public home builders] were printing stock and printing money, and they’d come in and bid up the price of all the land,” says Rich. “We were thinking, we have to go get some land or we’ll run out, but we were paying prices that were way too high because the publics had bid it all up.”
Now, the publics are dumping that land, getting tax carryback money from the IRS, and then coming back into the land market to buy the land at enormously reduced prices. “They got their bail out,” Rich says. “They should be happy.”
Meanwhile, banks continue to exert pressure on builders who owe them land acquisition and development payments as well as construction loan project financing.
“We’re not blaming anyone for what’s happened, but the business just doesn’t work the way it used to when it comes to home building finance,” says Bob Ohmann. I.e., no one takes your call if you’re trying to get through to a big bank.
Today, their company has cut 75 percent of its staff, has turned to real estate brokers as its sales force, has renegotiated as many deals as it can with trades and materials suppliers, and has introduced new entry-level product under its BroadStreet Homes line. It’s doing its damnedest to build and sell 150 homes in 2009 to pay the bills, keep the lights on and the doors open.
Apart from the faceless, nameless big bank lenders where it’s well nigh impossible to get a returned phone call, the other big challenge they’ve had is with some of the subs that have been absorbed into big conglomerates, especially in the concrete business.
The Ohmann name’s not on the company signage, but the brothers Ohmann like to think of their name as backing the value of every St. Lawrence Home.
“Bankruptcy isn’t giving up,” says Rich. “It’s a way to get enough time to reorganize and save the business.”
As they fight each day for survival, two key “learnings” occur to Bob and Rich Ohmann, and they think other private home builders who may get sucked into the default vortex might benefit from knowing them. One is company data. The more straightforward and simple and correct all the company accounting is, the better the relationship will be with multiple creditors and lenders who’ll have to agree on modified terms and cuts. So, keep all accounts in good order and be able to understand and explain every part of the balance sheet to make things easier on yourself if you get in trouble.
The other thing is this. If you’re headed into trouble and plan to work yourself out of it, do some work on your Web site before you announce that you’re filing. Analytics show that you’re going to get an awful lot of hits on your site the minute you file, and you want all the explanations and articulation of the go-forward plans need to be there when word surfaces that you’re reorganizing.
How do they rate their odds of getting to the other side? Rich’s opinion on the matter: “My brother Bob is like a guy up in the bridge of a ship, and he doesn’t care if there’s rocks, or icebergs, or tsunamis ahead; he’ll still say ‘full speed ahead.’ Me, I’m just really good at steering.”
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.
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.