Cartoon by Randy Bish, Pittsburgh Tribune-Review

Make no mistake, any extension or expansion of the tax credit after the current program’s hard sunset on November 30 will reflect venal political motivation (i.e. reelection bids) more than it does Congressional math skills.

Still, why are so many people getting the math wrong as they voice pro or con about whether more home buying stimulus is worth our tax money or not?

• Big Builder’s Sarah Yaussi sets at least one part of the record straight on the economics of the $8,000 first-time home buyer program.

We know that Calculated Risk–a solid economics analyst–believes the policy should have never happened and should go away. He’s done much-quoted arithmetic that puts a U.S. taxpayer pricetag of $43,000 on each house sold under the program that would not have sold if the program did not exist.

Today, he says “most economists–left and right–oppose” the tax credit. He links to a J. Patrick Coolican Las Vegas Sun article that quotes a slew of right- or left-leaning economists who give myriad, often conflicting reasons the current measure is bad.

We’ve heard economists who contend that a home buyer demand stimulus can act as an adrenaline dose that can stabilize home-price declines, slow foreclosures, get people working, and steady the economy for a sustainable period.

Maybe they’re actually a minority of economists, but we think the claim that “most economists oppose” the credit may be pushing the truth.

Thing is, who do economists employ, anyway? They don’t make jobs happen or even household formations, so why should a bunch of economists–the majority of whom did not, like Tom Lawler or Robert Shiller, call the housing bubble nor anything else in the past 10 years–have any say at all? Venal political motivations cloud most of their best economic judgment anyway, so they’re really no different than the politicians.

In this case, best trust people who actually run companies large and small that put people to work. Ask them whether or not it’s worth taxpayers’ money to give housing a bit more of a bump to keep some momentum going.

Good ol’ time protest felt good. Running through James Madison’s Amendments, and exercising as many of James Mason’s Bill of Rights as one could think of or make up felt good. At least, better than the alternative, sweltering in business attire during summer’s dog days, gazing wistfully at each ATM we passed as if it were a temptress, beckoning seductively as we supressed our base instincts to spend with abandon.

Sweating, not acting the spendthrift, not using home equity or credit cards for granite counters, or a new Navigator, or Muffy’s 50th, or a Belize holiday, not sending our own private debt bomb into the global econo-sphere had gotten to feel a little deprivational. 

Yelling and screaming, and not letting Senators and Representatives get a word in edge-wise to our ranting questions about why we won’t be allowed to just continue making a few senior management executives for a few health maintenance insurance organizations very, very rich people at our expense felt like a relief from the doldrums of consumer retrenchment.

Eight years of W was morphing, quite probably, into eight years of W, and some fair number of people, it’s clear, were hopping mad. 

And in real estate and business, it was the better of times, it was the less worse of times. We could only begin to wonder, what the dickens is going on here?

All reality had become, in fact, second-derivative reality, where not-getting-bad-as-fast was the new good. In second-derivative reality, no sign of bottoming led to incipient bottoming which led to a bottom, which in turn led to apparent signs of recovery. Much was uncertain. What was clear, though, is that those with the most technical knowledge about what went wrong a year earlier and what continued to ail the system were far more fearful and dour about these “apparent signs of recovery” than the ones who know less.

Like diets and exercise, we listen to the ones who know more; but we act with those who know less. Why? Because the odds of having Nouriel Roubini, or Robert Shiller, or Paul Krugman as a next door neighbor are slim. They may be afraid of a W; ones who know less are less afraid of that.

I.e. the “rest of us.” For the “rest of us,” that glass is not three-quarters empty. Never mind more people on the dole, more people spending so long on the dole that the dole’s running out, and more and more industries running aground on the realization that maybe there’s no real place for them in the real new economy. The real new economy is that, real. The unreal new economy is what all the media hubbub was about for the first six or seven years of the current millennium. If the media companies that got rich off their spin and sales from buying into the unreal new economy could purge their archives of how they’d cannonized the same business executives they’re hanging today, they would. 

In the real new economy, jobs will come back slower, but they’ll necessarily come back in more sustainable parts of the economy. Are we already discounting and investing in stocks based on that?

And so, back to real estate. Apparent signs of recovery threaded together with lower asset costs that neared affordability levels not seen for decades. These “corrected” prices, in turn, blended with historically low interest rates and tax credit incentives to make “the rest of us” stop being so afraid of how prices were still caving, and start being afraid of what they’re always afraid of when times start to get better.

That is, a next door neighbor who can brag that he or she paid much less for more. We should all be so lucky as to be afraid of that.

Here’s what we know. Home building organizations of all stripes and sizes are trying to buy land now. Many of the neighborhoods they’ve been able to sell homes in in this tough market are filling up, and they need to be replaced with new communities, new stores, if you well, so that selling–and life-breathing cash–can continue.

So even though most home building companies have land holdings they can not move in today’s market, they need to find lots that can be turned quickly into sales for the demand level that is out there and expected to get incrementally better.

Builders, just like home buyers, tend to like to brag that they got more for less. So late August ‘09 dog days are not at all as sleepy a time in home building as you might imagine.

Subliminally, a guy whose dad so wanted him to be a lawyer but who had to rebel and do his own thing just had to have been inadvertently channelling Aug. 15-17, 1969, Bethel, NY, when he used so colorful a turn of phrase to describe foot traffic among some of his company’s 228 active communities.

Some two years earlier than the mud-, music- and peace-fest at Yasgur’s farm, fresh out of Penn Law, Bob bought–with dad’s help, but against his better judgment–a spot of dirt in Chester County, north of Philly from fellow big builder Jeffrey Orleans’ grandfather. It was the site of the first Toll Brothers house in June 1967, which sold for $17,490, and reaped a profit of about $400.

By the time we got to Woodstock, Bob and his brother Bruce were on pace to complete and deliver 40 homes, with total profits of about $12,000. Now, less than half an hour down the New York State Thruway from Bethel in New Paltz, NY, you can buy a Toll Brothers home at Mountain View at Gardner for $500s to $600s, one of whose gross margins more than equals the entire company’s earnings in 1969.

We suspect Bob was a wiser-than-his-years 27-year old when Woodstock took place. Much of his good fortune and shrewd business decision-making springs from having known exactly where to buy dirt as the Woodstock generation traded in matted hair, holey jeans, smelly feet, and rolling papers for places in law, medical, business, and engineering schools, and assumed elevated positions in American society within the 10 years following Jimi Hendrix’s stirring final concert encore.

A generation whose signal event was more famous for what didn’t happen than it was for what did went on and made lots and lots happen.

That same generation became particularly enamored of economics and market theories of beautiful minds like Harry Markowitz, William Sharpe, and Merton Miller, as Paul Krugman notes in his review of Justin Fox’s The Myth of the Rational Market.

Boiled down, these theories transformed business assumptions. Suddenly, a “market behaves” and a “market should behave” fused. Ultimately, actual behavior trumps what ought to occur.  Dan Ariely’s “Predictably Irrational” and George Akerlof’s and Robert Shiller’s “Animal Spirits” help explain why markets stray from efficient behavior.

This is relevant here. Not only does Bob Toll understand dirt. He understands where ”efficient market theory” falls short in explaining how housing behaves.

 Toll said he thinks the order uptick represents a genuine sea change in buyer attitude. Just a few weeks ago, if someone said at a cocktail party that they had just bought a new home, their sanity would have been questioned, Toll said. Now it’s more likely that they would be quizzed on the deal they got.

“There is now fear on both sides,” Toll said. “We fear not selling, and they fear missing” a deal.

Toll thinks the turnaround is gaining momentum. “Once a market turns, it begets more turning,” he said.

When Bob Toll looks at his 837 orders across 228 communities in the company’s Q3–ending July 31–and expresses confidence that what he’s seeing is “indicative, not anecdotal,” the only conclusion can be that something real is going on.

What his summary remarks point up–of real significance to a big builder audience that is half public companies (by marketshare) and half private–is the strengthening force of bifurcation between those companies who have access to construction financing now and those living off the vapor of their cash reserves in hopes of a stroke of good luck demand around the next corner.

Public builders have used the past 12 months to value-engineer their product line offerings to turn inventory for at least cash-generation purposes, if not profit contributing goals. In markets where publics are active, that leaves privates fewer price point posiitions to go after, and they’ve got to put a lot of skin in the game to keep building.

Now, Toll’s also saying that at the upper end of the volume market, having access to building dollars may be at the expense of some custom builders who are stuck for construction financing.

So, going into budgeting and planning for 2010, privates–especially ones who’re active in the same markets publics are building–must have one thing on their mind. Winning.

The right product in the right price position in the right location built with the right process and the right vendor structure and supported and sold through by the right team… It’s a lot of things to get right.

This September through November planning period is likely to be even more intense than last year. The seismic shocks to the financial system of 12 months ago have now mostly found equilibrium. Now, it is what it is. Whatever you do, don’t stay stuck in the mud.

Here’s JP Morgan housing sector analyst on the “Street” expectations for the various housing economy benchmarks due this week.

This week features the July NAHB Survey (Street: 16; Prior: 15) on Thursday, June Housing Starts (Street: 530K Prior: 532K), and Building Permits (Street: 523K; Prior: 518K) on Friday.

Here’s the sum-up of last week in the housing sector from Citi housing analyst Josh Levin.

Although there were no housing market data releases, and despite the fact that mortgage rates continued to drop, the homebuilding stocks sold off ~6.5% w-o-w versus the broader market’s ~1.9% decline w-o-w. Our sense is that the underperformance of the homebuilding space was less homebuilding/housing market specific and more a result of overall risk reduction in the market. We also note that trading volumes were on the light side. Our coverage universe now trades at ~1.0x current TBV. According to Bankrate.com, 30-year mortgage rates now stand at 5.29% versus the prior week’s 5.34%.

Speaking of loans, young professionals–doctors, lawyers, dentists opening up new practices–are being shut out of the risk-averse market for mortgages, reports The New York Times this past weekend.

The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent.

Housing usually leads the country into a recession, which certainly happened this time, and also leads it out — which will not happen in 2010, the real estate industry contends, without stronger efforts to thaw the market.

The piece goes on to note that Congress is considering not one, not two, but three separate proposals to extend, expand, and increase the $8,000 tax credit available to first-time home buyers through Dec. 1, 2009. The existence of these proposals is the occasion for Housing Crisis’s sound bite of the week, spoken by one of the housing industry’s beloved analysts Ivy Zelman.

Some economists, noting that tax incentives helped stoke the boom, say these proposals should be shunned. “When do you decide enough is enough?” said the housing consultant Ivy Zelman. “I don’t want to feed the drug addict with more drugs.”

Zelman is not known as one who minces words, and she’s never eaten her own either. Lest she lose sleep over whether Capitol Hill policy should make the addict go Cold Turkey or try a Methadone plan, another observer, Yale economist Robert Shiller, offers a 40k-foot perspective that should calm agitated nerves a bit over what to do.

Calculated Risk posts:

Housing markets are very inefficient – and that is why it takes several years for prices to fall to a market clearing price. Even if the rate of price declines has slowed, there will probably be a long tail of real price declines in many areas.

“My more probable scenario is languishing of the housing market for years.”
Robert Shiller

Beneath the glare of the macroeconomic and “Animal Spirits” surface–although not too far–the festering Chinese dry wall story is quickly oozing into public scrutiny in a big way. The Wall Street Journal reports this a.m.

Lennar Corp. has identified 400 homes in Florida that have confirmed problems with defective Chinese drywall, and it has set aside $39.8 million to repair the homes, the Miami-based home builder said in a securities filing Friday.

The figures are as of May 31, Lennar said.

Complaints about odors and corrosion linked to defective drywall have been increasing for months.

The U.S. Consumer Product Safety Commission said in a letter to four U.S. Senators last week that it has received more than 600 complaints related to the drywall issue from 21 states and the District of Columbia. Most of the reports are from Florida, Louisiana and Virginia.

Housing, clearly, has become a perilous occupation, not just on the job site, but in the office, the field, the bank, and the planning board.

That’s a mid-July Monday morning for you.

• People think, “there is a greater fool out there than me.”
• Statistically, 60%-plus people think they’re smarter than the rest, which can’t be.
• Some fair number of us think we’re above the law.
• Lots of us believe we won’t get caught if we do something wrong.

Here’s a priceless thought from Ariely that helps clarify how strict Adam Smith rules fall short when it comes to understanding the dislocation of the moment:

I found this quote in a wonderful book called 3 men in a boat.  The book was written in 1889 by Jerome K. Jerome, and interestingly it does not seem that much has changed since then.

I knew a young man once, he was a most conscientious fellow and, when he took to fly-fishing, he determined never to exaggerate his hauls by more than twenty-five percent.
“When I have caught forty fish,” said he, “then I will tell people that I have caught fifty, and so on. But I will not lie any more than that, because it is sinful to lie.”

Here’s a piece by Thaler in the New York Times that helps clarify how mortgage products are not created equal, and that most borrowers thrive on more rigidity in the loan structures while a very few might do well with “exotic” loans, providing they have been certified and qualified.

First, inexperienced borrowers are steered toward the vanilla mortgages, the terms of which are chosen to be easy to understand. Vanilla mortgages would be the equivalent to the green runs at ski resorts that are intended for novices. The rocky-road mortgages would at least come with warning labels (“Don’t even think about going down this run unless you are an expert skier, or have a trusted professional instructor by your side”), and it is possible that for very exotic mortgages, borrowers might have to demonstrate that they understand the risks or have been aided by a certified mortgage planner.

Here’s a quote in today’s NY Times from Harvard economist Edward Glaser:

One major point of economics is that predicting asset prices is extremely hard, and that goes for housing as well as stocks. Moreover, the last seven years should make everyone wary about predicting housing price changes.

At this point, not only is our foresight limited but our hindsight isn’t exactly 20-20 either. The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Over a four-year period — from February 2002 to February 2006 — the Case-Shiller index increased 68 percent in nominal terms or about 50 percent in constant dollars.

Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom, and we built hundreds of thousands of additional homes. Our current low levels of construction will continue until we work through all of this extra housing stock.

We expect our economists to forecast the future, but how can they when several of the assumptions traditionally used to understand the present have been proven wrong?

It’s refreshing to hear an economist say he or she doesn’t really know what’s next. Especially one who might have hit the nail on the head years ago to predict where we are now.

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.

U.S. home prices continued their multiyear tumble in April, according to the S&P Case-Shiller home-price indexes, although the indexes showed their third-straight month of slightly smaller declines.

Seventeen of 20 major metropolitan areas posted price declines of more than 10% from a year earlier, with the Sun Belt continuing to be hit hardest. Nationally, home prices are at levels similar to the middle of 2003.

David M. Blitzer, chairman of S&P’s index committee, said the pace of residential real-estate decline slowed in April. “While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions.”

Here’s the Standard & Poors monthly release.

Calculated Risk charts up the data in three ways to get insight. Here’s a dramatic one on peak-to-date declines in the 20 Case-Shiller cities.

Click to access Calculated Risk post on Case-Shiller data.

Importantly for an understanding of the relationship between housing and the broader economy, Calculated Risk will show current home price declines in comparison to the Treasury Department’s stress test scenarios to gauge the relative health of the banks.

Since last month’s home price declines were already at or worse than the the “baseline” scenarios projected by the U.S. Treasury, this month’s will clearly show that the stress test was not stressful enough to reality check banks.

Still, second-derivative improvement may be as good news as we’ll get for some months to come, and we’ll have to learn to make the most of it. At any rate, it beats Madoff day two stories by a longshot.

Here’s S&P’s David Blitzer on CNBC with toplines on Case-Shiller’s April data:

In a fit of apparently propitious timing, MacroMarkets, LLC, the developer and seller of structured financial products co-founded by Dr. Robert Shiller, on Tuesday will introduce its new MacroShares Major Metro Housing Shares to trading on the New York Stock Exchange.

Why propitious? Well, in California at least, it looks like prices are starting to firm up and even rise. The early second-quarter view from Lennar and KB Home earnings ;last week also seems to indicate better news, or at least market movement, ahead. 

The new housing shares will trade under the symbols UMM, for housing market up, and DMM, for housing market down. The shares will track the S&P/Case Shiller Composite 10 home price index, a value-weighted average of the 10 original Case-Shiller metro area indices, which include Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington.

Dr. Shiller’s aim is to generate liquidity and stability around residential real estate, outcomes he says will occur if there’s a natural futures market for it.