San Diego’s False Starts
San Diego residential real estate had an astonishing April and May in the teeth of the worst housing recession in at least three generations. Believe that and we’ll tell you another one.
Actually, when the numbers are accurately tallied, San Diego residential real estate had a pretty good April, up 20% from the same month in 2008, and a moderately good May, up 6.5%.
That’s not 63% better than April 2008, which is what the California Association of Realtors originally reported. And a 6.5% lift in May is no where near the 89% mega quantum leap the association crowed about a month ago.
If it’s their job to count the stuff right, why can’t they do their job? You’d think they were trying to pull one over on people. Fortunately, real estate economist Tom Lawler caught the, ahem, error of CAR’s ways.
The Wall Street Journal reports:
The California Association of Realtors expects to make sharp downward revisions in its recent monthly reports of soaring home sales in the San Diego area, Robert Kleinhenz, deputy chief economist of the trade group, said in an interview. Those revisions will mean modest downward revisions in statewide sales, he added.
The revisions are likely to be announced in late July, when
the Realtor group reports home sales for June. The problem resulted from a glitch in data from a multiple-listing service in San Diego, Mr. Kleinhenz said. He said a change in computer systems used there resulted in incorrect data being sent to the Realtor association over the past year or so.Thomas Lawler, an independent economist in Leesburg, Va., who tracks home sales nationwide, raised questions about the San Diego data in a report last week. Mr. Lawler noted that the numbers reported by the Realtors vastly exceeded those from MDA DataQuick, a research firm in La Jolla, Calif., and other sources.
Nothing like needing to sharply, downwardly revise published data to cultivate trust in an already wary market.
Appraisal Reprisal
The National Association of Realtors’ economist Lawrence Yun is anxious about the new appraisal rules.
He talks to CNBC’s Diana Olick about how appraisals are hurting home sales.
We can’t resist running the Barry Ritholz commentary on Yun’s appraisal assessment in a The Big Picture blog post referred to below.
Consider: The NAR remained notably silent during the appraisal corruption during the boom; Home sales based on loans to people who couldn’t afford them that drove prices higher were fair basis for appraisal comparables — but when these same homes are sold — inevitably through forclosure auctions, REOs or distressed sales — they should be ignored? Only up, not down?
Even worse, they seem to be calling for a return to “local” (i.e., friendlier) appraisals — like the good ole’ days. You remember the “friendlier” era of corrupt appraisals that were rife during the credit bubble?
Am I reading this correctly? It looks like code for USE APPRAISERS (i.e., CORRUPTIBLE) WHOM YOU KNOW.
I thought I was inured to the idiocy of the NAR and the fetid stank of corruption that their press releases come with, but even I am astonished by the filth emanating from their offices today. Shame on you . . .
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?
Going Green, Bleeding Red, Fading to Black
It’s going to take more than green to get home builders the leash they need to work through the dark before the dawn of residential construction’s worst era since the 1930s.
Within the past couple of weeks, we’ve witnessed the financial failure of Louisville, Colo.-based green home building pioneer McStain Neighborhoods and, now, a Eugene, Ore.-based green builder fades to black amid a mountain of debt.
Here’s why McStain capitulated in what may be the fourth or fifth inning of housing’s downturn, per a note from principal Carolyn Hoyt.
We were hit by a couple of last minute “roadside bombs” which really knocked us for a loop. We plan to finish out and sell everything in the pipeline before we close down (probably) for good.
According to “the state of the homebuilding industry” blog, McStain’s major creditors line up as follows:
McStain’s largest unsecured creditors include Scheer’s Inc. of Illinois (which is owed $10.85 million), Key Bank ($3 million), CRE400 Centennial LLC-Crestone ($2 million) and William and Associates of Boulder ($1.54 million), according to the bankruptcy filing.
Other unsecured creditors include First National Bank, GE Capital, Namaste Solar Electric Inc., Guy’s Floor Service Inc. and the City and County of Denver (sales tax).
In Oregon, the story takes place on a smaller, but no less wrenching, scale. It concerns a second-generation “master builder” Chad Ruhoff, who started working on his dad’s houses and developments in the 1980s, and ended up working for Home Depot in Portland after his mini-empire collapsed in the past two years.
Ruhoff’s showcase project was his last, a 41-unit subdivision on the old Wylie family homestead at the intersection of Garden Way and Martin Luther King Jr. Boulevard. Ruhoff paid $3.3 million for the property in June 2007.
Ruhoff not only saved the 1901 farmhouse, he sought to amplify the rural theme throughout the subdivision. He hired architect Jean Rehkam Larson of Minnesota, who literally wrote the book on the iconic American farm house design to draw up the plans for his “front porch” community.
The houses were to be his greenest yet with high-performance toilets, solar hot water heating, LED lights. He was reaching for top-rung Earth Advantage certification, said Aaron Solbeck, who was construction manager for Ruhoff for 7 1/2 years. “We were basically trying to make a super, super tight house that was eco-friendly.”
Ruhoff hired Eugene marketing firm View Design, which built a sophisticated Web site for Wylie Creek. In July 2008, Ruhoff featured Wylie Creek in the Tour of Homes.
And then sales stopped.
Green may be where home building is going, but it’s not proving to be a way to get there.
The Mortage Interest Rate Wild Card
Three stars aligned–home prices, interest rates, and first-time buyer/new-home tax credits. Toss “seasonality” into the mix of positive catalysts, and you can start discounting the nascent March, April, May run in housing as a marketplace behaving the way an injured athlete does after a big cortisone treatment. He might look okay for a while, but you can only wonder whether and how long the painkilling effect will last.
Now, just when data starts rolling in that supports this alignment, interest rates have begun shaking loose from their virtuous bond with more affordable house prices and a kick-back from Uncle Sam or a state for a home purchase.
The Wall Street Journal leads this a.m. with its take on the quantum leap percentage point-plus increase in mortgage rates since the end of May.
“Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
Investors have been anxiously watching bond yields climb over the past few weeks, pushing up mortgage rates, which normally track 10-year Treasury notes. The yield on the those briefly hit 4% on Wednesday afternoon for the first time since mid-October before ending the day at 3.937%.
Many policy makers see the rise in Treasury yields as a sign that investors are optimistic that the economy is on the mend. But many market participants say higher long-term bond yields indicate investors are increasingly worried about inflation.
What unfortunate timing! Look at a key “take-away” from Wachovia senior analyst Carl Reichardt’s latest “Neighborhood Watch Survey” of new-home community sales managers.
With three straight surveys and a broader base of SMs reporting better-than-expected sales and traffic, we now believe that field conditions saw their low ebb in early 2009. While seasonality plays some role in our data, SMs expect strength this time of year, yet still see activity above these expectations.
This verbiage is rosy, given where it’s coming from. Reichardt notes that upward pressure on interest rates may stall the new-found momentum. Other analysts point also to the fact that tax credit programs for first-time home buyers expire on a Federal level by the end of calendar 2009, and state-funded programs will only last until the coffers run dry.
Hanley Wood Market Intelligence has done an extensive market-by-market analysis that ties the effecitve date of California’s $10K tax credit to new-home purchase activity. The Orange County Register’s Jonathan Lansner quoted the HWMI study at length in his blog post about how the O.C. was SOL when it came to an upside of the combined California and U.S. government tax credits for home purchases.
Click to Enlarge graph of Hanley Wood Market Intelligence Data.
Costa Mesa-based Hanley Wood Market Intelligence reports that Orange County buyers signed 35% fewer sales contracts for new homes in March and April, the first months of a homebuyer tax credit designed to spur the purchase of newly built residences.
The California program gives homebuyers a tax credit of up to $10,000 for new single-family homes selling after March 1. (Uncle Sam will chip in another $8,000 if you’re a first-time buyer!) But while demand has been high statewide for the California tax credit, that has yet to impact the pace of sales and construction here:
What Lansner neglects to report on is whether the 35% decline year-on-year for the two-month March/April period is more or less than the decline year-on-year from, say January-February of 2009 from a year earlier.
He does acknowledge that statewide, the $10,000 tax-credit appeared to have jumpstarted sales in many communities.
In Reichardt’s Neighborhood Watch survey, he notes:
Trends in the West — especially No Cal — made a surprising turn as SMs cited the strongest sales trends compared to expectations.
The big question post the “Spring Selling Season” uptick must be how to keep whatever momentum there is in the market going through the balance of the year… especially without the critical tailwind of low, low interest rates.
California, as of June, is said to be 85% through its $100-million allocation for home buyer tax credits, and nobody expects below 5% home loan rates to come back to roost anytime soon.
Here’s Calculated Risk’s take on mortgage rate trends, and how to stay ahead of the curve on them:
Here is a new tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields
This is based off the chart I posted last Friday and is very timely with the Ten Year Yield pushing 4%.
Using their tool, with the Ten Year yield at 3.99%, this suggests that 30 year mortgage rates will rise to 5.8% based on the historical relationship between the Ten Year yield and mortgage rates.
The question is, does the demand resubmerge when the three stars are not in alignment? Will those who move off the sidelines because of the sense that “there will never be a better time to buy” now begin to feel they’ll do better if they wait out further house price declines?
As most new-home builders have discovered, the monthly payments riddle is the one they need most critically to solve. If interest rates go up, prices have to go down to solve that riddle.
It strongly suggests that in the current policy environment, a strong likelihood is that Fix Housing First’s original plan for both a compelling tax credit and a mortgage buy-down may do the trick of sparking demand, clearing more inventory, restoring scarcity, and putting a new floor of value under residential real estate.
We see a Stimulus 2.0 package emerging during the Fall session of Congress, designed to capture any green shoots still out there, and accelerate the economy’s ability to begin paying down the “Wall of Capital” with which the Fed and Co. met the economic crisis starting last Fall. A mortgage buy-down might likely be in that program, to test new residential construction’s capacity to serve an accustomed role as an engine driving the broader economy.
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.
Toll Talks Up “Expressions of Interest”
There are two reasons analysts and the media may continue to be overly focused on housing’s negative headlines, according to Toll Brothers CEO and Chairman Bob Toll.
One is they may not be close enough to the market to pick up the change in buyer behavior that’s happening in sales offices in about 80% of the country’s markets, he says. If you don’t see people turning up as traffic, then coming back with “expressions of interest,” backed by a non-refundable deposit, and finally returning to go to contract, then you’re focused on lagging permits and starts data.
The other reason analysts and journalists may be accentuating the negative, says Toll, is “They may not be doing their jobs.”
Toll is not going so far as to affirm CNBC’s Jim Cramer on a June 30, 2009 “housing bottom,” but he is relieved that things are better than they were worse.
Here’s a seven-minute blast of cautious optimism from one of home building’s most brutal realists.