A Different Housing Crisis: Now and Then
You’re thinking what we’re thinking, right?
Nouriel Roubini’s gloominous look ahead on CNBC today sees good outmatched by bad.
Here’s an excerpt from “The Modern Economics of Housing,” by Randall Johnston Pozdena.
New construction of housing units during the depression was far below the levels recorded in the prosperous mid-1920s. Approximately 900,000 new housing units were built each year between 1923 and 1926. In 1930 only 330,000 new units were added and in 1933, at the nadir of homebuilding activity, a mere 93,000 new housing units were reported to have been started. As recovery from the depression proceeded (perhaps, the effects of government housing assistance began to have an effect), new construction activity gradually recovered. However, as late as 1940, the volume of new housing starts was still 30 percent below the levels recorded in the 1920s.
Here’s another way to look at the data, in housing starts per thousand households. First, though, consider what happened to household formations during The Depression. In the nine years from 1920 to 1929, about 600,000 new households per year formed. In the following nine-year stretch, household formation dropped by more than 100,000 homes a year.
Here went demand for a sustained amount of time, and the subsequent nine-year period, household formations averaged over 60% more than during the Depression years, at about 760,000 a year.
That’s why many parents remember living during the 1930s with their grandparents in three-generation harmony.
At any rate, housing’s 1920s peak came in 1925, when there were 34 housing starts per 1,000 households. Six years later, that number had fallen to single digits, 8.3 starts per 1,000 households, and the low point was 1933, when only 3 starts per 1,000 households got a start. It was 1937 before starts per thousand households broke double-digits again, and the start of World War II before the stat came close to 20 starts per thousand.
Here’s a quote from Jeff Booth’s BuildDirect blog:
But by looking at the Great Depression, we can draw parallels to when we can expect a bottom in housing in the current cycle.
As I said previously, housing starts fell by 90% to 93,000 units at the low of the Great Depression. If we were to assume that we were to reach the lows of 1933, housing starts per person would translate into a current day housing start number of 213,000.
I believe it is highly improbable that we see housing starts fall to that level. Why?
The main difference between the Great Depression and today is in terms of housing starts is the speed of the decline. Four years after the peak of the cycle in 1925 housing starts were still at .0041 starts per person or 509,000 units. That would be the equivalent of building 1,165,054 new units today. (or using the same 4 years - a higher number today and 1,165,054 units in 2010).
There are two issues here to draw insight from.
One is that the economy slowed down sustainably for long enough to seriously impact demand for either for-sale or for-rent product, and only a strong recovery in the 1940s set up a big, lasting housing bounce in the latter ’40s and 1950s.
The other is, we don’t know where homeownership will settle as a policy initiative. Real questions and no small amount of rancor have built up around the issue of trying to expand the ownership universe via imaginative financing options and economic growth.
Here’s what we’ve learned from the debate so far.
- people don’t like that idea in concept, especially in hindsight, even if they benefited hugely from the economic run up.
- punishment for those who financially miscalculate must be harsh and immediate–just the way some people treat a puppy who’s had an accident–in order to satisfy economic principles, one would think
- Bottom-calling is becoming the preferred full-contact sport of the blogosphere.
What else we know as we listen to econ icon Roubini is that policy needs to mind the business of the long haul and ensure that the artificial and unscrupulous inflators of growth that cropped up in the past 15 years get dealt with.
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.
Volatility Plus Uncertainty Equals Fools Abounding
The Mortgage Bankers Association says, like Gilda Radner used to, “Nevermind.”
They don’t say, we were wrong, we’re sorry. They say, we’re re-forecasting the year.
On The Big Picture blog, analyst Peter Boockvar offers this commentary. (We believe he’s inserted an unnecessary pair of quotation marks with his closing assertion.)
After the note I just sent on the Fed, the MBA said that after raising its forecast for mortgage originations by over $800b in March after the Fed’s QE plan and the subsequent decline in interest rates, they are cutting its ‘09 est by $700b. 88% of the cut is due to refi’s as the Fed “has not been successful in maintaining lower treasury yields.” In March when they raised their estimate they had this caveat, “with the billions in Treasury securities that would be issued to finance record budget deficits and with the Fed expected to purchase only a portion of those, how long rates stayed low would depend on whether other investors stayed in the market. If other investors shied away from Treasuries due to expectations of future inflation and the declining value of the $, the effect on rates would be more short-lived and our mortgage originations forecast would prove too optimistic.” “That has proven to be the case.”
Here’s CNBC’s Diana Olick reporting on the MBA reversal:
Here’s the question. If the threat of inflation is the cause for upward pressure on interest rates, why–with no reason to believe that at least wage inflation is in the offing–is there so much panic about imminent, momentum-crushing inflation?
We think the bigger concern to focus on is the weakness of the recovery itself, as Big Builder online editor Bill Gloede notes in his blog post today.
You know what? The MBA can reforecast again in three months and change it all back.
Isakson Back with Home Buyer Tax Credit Bump
Senator Johnny Isakson hasn’t given up on an expanded tax credit for home buyers as a way to juice up economic recovery.
The Georgia Republican shepherded a similar initiative through Senate approval in February, only to meet an untimely demise in the stimulus reconciliation bill eventually signed into law in mid-February as the $787 billion American Recovery and Reinvestment Act of 2009 .
Well, now a measure looking eerily akin to a demand-stimulus plan proferred last fall by the Fix Housing First Coalition of organizations including builders, real estate agents and brokers, building material suppliers, home inspectors, and home owners associations is making its way through committee as S 1230. The long and short of it is that it would up the current $8,000 credit to a maximum of $15K, open the deal to all home buyers (not just first-time buyers with a ceiling on incomes), extend the deadline for another year, and maintain historically low mortgage interest rates for that same time period.
Here’s Isakson’s take on the measure.
Johnny Isakson, D-Ga.
“The first-time homebuyer tax credit has made a difference. First-time home buyers used it and the market stabilized, but we don’t have a recession in first-time home buyers. We have a recession in the move-up market,”Isakson said. “One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can.”
Isakson has some pretty high voltage backing on this one. A group, formed in April, called the Business Roundtable Housing Working Group, consisting of the CEOs of $5 trillion worth of U.S. corporations with almost 10 million employees is wholly behind Isakson and a bi-partisan support group in Senate.
Here’s a link to the Business Roundtable.
Problem is the House of Representatives, where elected officials thought the Fix Housing First measure and its benefits smacked of a bailout for builders, the ones many voters thought caused the financial crisis in the first place.
One way or another, the Obama Administration and House chief Nancy Pelosi are going to have to get behind the plan for it to go anywhere.
Still, you got to hand it to Johnny Isakson to keep carrying the torch for a “housing-will-be-the-engine-of-recovery” plan. At a time broad economic signals seem to be short-circuiting and mixed, and the best hope now is for an anemic bounce back, a housing-led rebound sounds about as dreamy as anything.
Harvard Joint Center for Housing Studies Notes Duress
This release today from the Harvard University Joint Center for Housing Studies.
(New York) The worst housing downturn in generations continues to grind on, finds a study released today by the Joint Center for Housing Studies of Harvard University. Despite some stabilization in homebuilding and home sales in the spring, real home prices continued to fall and foreclosures mount in most areas in the first quarter of the 2009. With mortgage interest rates heading higher in June and the economy still contracting, a sustained recovery for housing still faces an uphill climb. “Although there are some signs of improvement or at least steadiness in new construction and sales,” says Nicolas P. Retsinas, Director of the Joint Center, “housing starts stand near 60+ year lows and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits, and low interest rates that moved higher in recent weeks.”
Housing demand has withered under the weight of crushing job losses, house price deflation, and tighter credit standards, the report concludes. First-time homebuyers are struggling to meet today’s stricter underwriting guidelines, household growth is well below long-term trends, and immigration has slowed; as a result, the share of homes for sale and vacancies stand at near record levels despite sharp decreases in housing production. “The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery,” remarks Eric S. Belsky, Executive Director of the Joint Center. “For now, markets remain under considerable stress.”
The housing downturn hit low-income minorities especially hard. With unemployment rates sharply higher among minorities, minority households are more likely than others to spend more than half of their incomes on housing. Also, higher shares of minorities live in neighborhoods with elevated foreclosure rates and where house prices fell the most.
Meanwhile, the number and share of households spending more than half their incomes on housing continues to remain at elevated levels. Before the economy began to shed jobs in 2008 and 2009, the number of households with such severe cost burdens, in 2007, stood at 18 million, up from 14 million, in 2001. Although renters are more cost burdened than homeowners, the most rapid growth in households with housing burdens, during the decade, occurred among owners.
Even though present housing challenges are legion—including still soaring foreclosures, millions of homeowners stuck in homes worth less than the amount they owe on their mortgage, and falling rental property values—the State of the Nation’s Housing report concludes that the demographic moorings of future demand remain strong. The largest generation in American history will be reaching young adulthood in record numbers over the next decade. As a result, even under a set of household projections that assume annual immigration falls some 40 percent below the average of the first half of this decade to just half of U.S. Census Bureau immigration projections, household growth from 2010-2020 should still rival the solid performance in the 1995-2005 period. Even if immigration slows considerably, minorities will still account for about three-quarters of household growth.
“With the echo baby boom driving demand for starter homes and apartments and the baby boom powering demand for homes suited to older Americans,” explains Mohsen Mostafavi, Dean of the Harvard University Graduate School of Design, “the design professions will be called upon to deploy new technologies and designs to meet the aesthetic tastes and functional needs of a new, more diverse younger generation on the one hand and a generation in need of home modifications to help them age more safely and healthfully in place on the other.”
Looking beyond the current turmoil, the report underscores the potential to reduce domestic energy consumption by making the existing housing stock more energy efficient and creating dynamic mixed-use communities. Bringing the efficiency of the existing housing stock up to that of homes built since 2000 could save as much as 20 percent of residential energy consumption and more compact urban development could cut vehicle miles traveled substantially. Getting there will be a challenge, cautions the report, because local regulations often discourage compact and mixed use developments. Further incentives may be necessary to get property owners to invest in meaningful energy upgrades.
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.
Sample Sentiment vs. Presentiment
In John Burns’ reading of his sample’s pulse, positives outweigh the negatives among executives at home building companies in the months ahead.
This month’s commentary is the most optimistic we have seen since the survey began one year ago.
In our post last week about Wachovia housing senior analyst Carl Reichardt’s Neighborhood Watch survey of sales managers, he too struck a it’s-better-than-when-it-was-worse chord in his remarks.
We now believe that field conditions saw their low ebb in early 2009.
In his comments about the one-point slippage in today’s June NAHB/Wells Fargo Housing Market Index (HMI), Reichardt’s “Takeaway” repeats his conviction that the “field conditions” bottom has come and gone.
The NAHB’s attributed June’s decline to conditions in the South. We note this was supported by market commentary in our monthly Neighborhood Watch Survey where Southeast and Texas (including Atlanta, Charlotte and Houston) saw the weakest conditions. With some state housing stimulus winding down (i.e. California) and mortgage rates beginning to climb, builders remain cautious about the future despite better traffic and current sales rates than seen earlier in 2009.
We don’t know about you, but we’re seeing a de-coupling going on, between the NAHB sample and the respondents to both Burns’ and Reichardt’s surveys.
The HMI set appears to reflect a high sensitivity to the very recent move up in interest rates, an angle the Wall Street Journal report on the index’s release today takes with it’s headline: Higher Interest Rates Sap Builder Confidence.
Confidence faltered in June among U.S. home builders, left uneasy by a rise in mortgage rates.
A market sentiment index published monthly by the National Association of Home Builders dipped this month. The gauge reflects builder confidence in sales of new, single-family houses.
The drop in the NAHB’s housing market index reported Monday, to 15 from 16 in May, followed two months of increases that had nurtured hopes of a bottom to the housing crisis. Signs have surfaced this spring indicating the worst of the recession is past.
We don’t quite follow the logic, as the “June HMI” reflects responses to the NAHB survey in May. The interest rates bumped up starting May 27, so how could they have sapped builder confidence ahead of when they occurred.
The slippage in the HMI vs. more sanguine attitudes and outlooks in the Burns and Reichardt surveys probably underscores the difference in the respective sample bases.
As Hanley Wood Market Intelligence senior VP for products and innovation Jonathan Smoke has noted, the NAHB hasn’t trued up its survey sample since a massive consolidation of home building took place in the first part of the decade.
Since it hasn’t updated its sample, the pulse it’s taking on the industry may miss the fact that large builders are making progress in a number of markets, where the smaller ones are still getting pummelled by tough home mortgage credit conditions and a brutal construction lending environment.
Whereas John Burns’ and Carl Reichardt’s reports are coming in from production builders’ communities and companies–those with a whole different capital structure or access, and motivation to price their product to sell on the double.
We think that while housing is certainly not out of the woods, we’re going to see the very first inklings of recovery among production builders vs. those who ply their trade on a house by house basis.
While residential real estate is local, money is hardly that right now. While money is stuck in the Fed and Treasury coffers, it’s the bigger players who need it less who’ll move housing’s near-term future along the bottom.
Here’s a two-minute video from CNBC’s Diana Olick that focuses on the NAHB/Wells Fargo HMI.
Willing to Settle for Yellow Weeds Over Scorched Earth? You Betcha!
The good news here is of the second-derivative nature. NYU econ icon Nouriel Roubini offers nine reasons for continued pessimism about the outlook for 2009, 2010, and well, just about every year after that.
Dr. Doom's Top 9
The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery – whenever it comes – will be robust or weak over the medium term. One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.
For Roubini, the economy’s antonym for Houdini, continued doom has nine principal causes, which he happily enumerates here.
Still, that’s not as bad as it was a few months ago. Then, it would have been a Top 10 list.
Home Builders Join in Renewed Pursuit of Land
Even before the jury’s fully in on whether the nascent uptick in new-home sales is sustainable, reports from high-level home building company executives in a number of markets indicate that home builders are back in the land game with a vengeance.
“In the past four to six weeks, we’ve seen a sea change,” said the CEO of a leading publicly-traded home building company. “Until then, most of the interest in lots was coming from financial investor players. Now it’s home builders. There’s eight or 10 home builders aggressively in the lot market right now.”
Investment “land opportunity funds” have been trolling the residential landscape all along, trying to snap up prized lots for a song. But as the global credit crisis unfolded, many of these vulture funds either went dark or remained on the sidelines, not knowing when to pounce.
Meanwhile, home builders were scarcely able to underwrite new land acquisition, given that their balance sheets needed every bit of cash in the event of another year of sales paralysis. What’s occurred in the past few months is that everybody’s witnessed that if prospective buyers are given enough incentives, a healthy complement of them will show up looking to buy.
Home builders who’ve pursued an asset-light land strategy have actually done well enough at working through their dirt inventory since the turn of the new year to reach a point where they need to replenish.
Other builders may not be so fortunate, but still need land. They need land that’s less expensive than the stock of lots they’ve got so that they can bring more affordable home communities to market during the earlier stages of a housing recovery. So these companies represent as urgent a demand for cheaper lots as those who are running low on lots.
All told, the strategic demand for lots from builders is putting pressure on land prices, even before they settle at the low cents-on-a-dollar level that many expected they would. Experts who are involved in land deals nationally estimate that prices for lots have reverted to about 2002 prices, which is a higher number than many would have guessed a few months ago.
“Where we thought we’d be paying $35,000 a lot, we’re paying more like $45,000,” the head of one large national home builder said. “Prices didn’t come down as far as we thought because there are more builder buyers for these lots than we thought there’d be.”
Two of real estate’s most vaunted new-home residential development entities–LandSource/Newhall Ranch & Farm and what is known as the Lehman Brothers’ SunCal–are still considered bellwethers for resetting land prices. But they’re currently slogging through complex and drawn out bankruptcy proceedings.
Word from the field is that the most exuberant land aquisition market right now is Phoenix, but that California (excluding Southern California) and Texas have also seen the reemergence of home builder buyers for residential lots.