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.
Countdown to December 1 Boosts Housing Starts
Some regard housing and real estate as a nice place to visit. A goodly number of those individuals used to have jobs in Wall Street’s extended dysfunctional family of traders, analysts, ne’er-do-wells, hangers-on. They’ve left, but they won’t go away.
Oh well. They can be ignored.
They don’t report the news, because that would require more work and different disciplines than they’re accustomed to or capable of. Instead, they consider it their calling to take potshots on a free-for-all basis at both newsmakers and news reporters alike. They’re the business and politics world’s Greek Chorus; they always have something smart to say.
They weighed in Friday about June housing starts data from the Census Bureau. The Wall Street Journal–known among the know-it-all bloggers as the leader of the MSM (mainstream media)–reported the story as follows:
Construction of new homes rose in June by 3.6% from the prior month to a seasonally adjusted annual rate of 582,000, the Commerce Department said Friday. It was the third consecutive monthly gain, leaving the level of new-home construction at its highest since November, although the pace remains well below the 1.1 million rate seen in June 2008.
Wrong, the Greek Chorus said. Not up 3.6%, but down 46%, because the right way to look at the data is year on year, not sequential. Here’s the Barry Ritholtz The Big Picture retort to a positive reading of June’s starts data.
Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.
For those who eat, sleep, and breathe housing, June housing starts and permits data cheered rather than disheartened.
The smarter of housing’s blogger analysts, Calculated Risk, took up consideration of how to view the latest data from Census and the Commerce Department. This one is readable and credible:
For the last few years, whenever housing starts increased, I wrote that was bad news because there was already too much inventory.
Now, even though there is still too much existing home inventory, and too much new home inventory in some areas, it appears that new home sales have stabilized. Since single family housing starts (built for sale) have been below new home sales for six consecutive quarters (through Q1), this suggests single family housing starts should also bottom soon. There is a good chance that has already happened.
Those who are in the trenches can be cheered because they know the difference between themselves and national data. They know that the battle is on the submarket front. They know the war is with financial duress on the commercial and home mortgage front.
The question we’ve been asking, and will continue to, is if home builders beyond the publics are able to put starts in the ground, how are they putting their hands on money to do it? Is it rainy day cash reserves knifed out of the mattress? Is it newfound friends-and-family investors? Is it local private equity? The biggest question of all is: At what risk?
We can imagine that at least in some areas, there’s some betting going on with some of these starts, and we can only hope that the bets pay off.
Orange County Green Shoots
Housing recessions don’t end when starts, sales, and pricing data say they’ve ended.
Everybody who’s been through them knows it’s different than that. Bob Toll, Toll Brothers’ patriarch and CEO, has put it this way:
“Somebody gets up on a Saturday or Sunday morning and decides it’s a good day to buy a house, and a reporter for the New York Times finds out and reports in a Monday headline that it’s a good time to buy a house.”
It has gone like that enough times that veterans of residential development and home building swear that’s what happens.
In an isolated number of markets–including ones that were doing nothing good six months ago–people are starting to say, “the light’s back on.”
Here’s a note from the Orange County Register’s real estate writer Marilyn Kalfus.
“Orange County is continually trending to inch up month over month,” said Kristine Thalman, CEO for the Orange County chapter of the California Building Industry Association.
She said the $10,000 tax credit for new home buyers is continuing to spur demand since it went into effect in March.
“As one of my builders called it, somebody turned the light on,” she said.
Statewide, builders pulled permits for 2,203 single-family homes in May, down 7 percent from April but 40 percent lower than in May 2008. On a seasonally adjusted basis, CIRB reported that May’s figures were down just 1.6 percent compared to April.
“This is very good news,” said Robert Rivinius, the California Building Industry Associaton’s president and CEO. “As this continued strength in new-home construction shows, the credit is indeed working.”
The Franchise Tax Board has reported that nearly all of the $100 million for the program is spent. The homebuilding industry is trying to get it extended.
Based on the strength in the single-family market, CIRB for the first time this year has adjusted its annual forecast upward this month. The Board now expects single-family housing starts to total 24,900 and total housing starts to be 40,200 for the year.
Those familiar with the plotline of housing downturns know that recovery isn’t a single event, but a process. It’s the light going back on in multiple markets, when enough prospective buyers believe that the market has made enough prospective sellers capitulate.
The constant flow of policy has slowed down and added complexity to the process. Big, noteworthy players have capitulated, but only in isolated instances. The heavy hand of a corrective market has not driven enough property holders to their knees for potential buyers to believe their moment has come.
The policy game has favored sitting tight in hopes of some form of bail out as opposed to cutting one’s losses and moving on. That’s probably why the bottom, so to speak, is proving to be elusive.
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.
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.
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.
Very Few in Ivy’s League
In housing and real estate insight, the name Zelman has few equals.
Here, CNBC’s Diana Olick taps into commentary from Ivy Zelman on how to read into starts, permits, and foreclosures data releases that have streamed through the past couple of days.
Housing Starts and Fits
Single family housing starts scratched out a 2,000-home improvement in March from January’s adjusted record low of 356,000.
Here’s Calculated Risk’s picture of the current total starts and one-family data.
Click image for access to Calculated Risk's "Housing Starts: Near Record Low" post.
Calculated Risk’s take-away comment:
Total starts and single family starts declined in March (compared to February), and are both just above the record low set in January. This is the second month in a row with starts slightly above the record low – this is just a slight increase in total starts and single family starts are essentially flat with the record low.
It is still too early to call the bottom in January, however I do expect housing starts to bottom sometime in 2009.
Starts data reflects the mayhem in the credit markets dating back to late September ‘08, which shut down construction and project lending, and seized up residential construction mid-hammer blow.
- The Wall Street Journal report on housing starts.
- The WSJ’s panel of economists debate “the bottom.”
- The Census Bureau’s release on Starts, Permits, and Completions.
- The New York Times reports on surging foreclosures and plunging starts.
It’s made it a toughest-ever winter for home builders of all sizes and stripes.
Builders say they’re reduced to two positions: Cash and fetal.
Weekends they like to work, but with no one coming through the model homes over the weekends, a good number of them have nothing better to do than to sit on the couch, remote in hand. After the drama at Augusta this past weekend, one home building executive writes:
I watched the final holes of the Masters but my sports highlight this weekend was the final game of the Frozen Four NCAA Hockey Championship from the Verizon Center on Saturday night. Boston University beat Miami of Ohio in overtime after scoring 2 goals in the final minute of the game to tie the score.The game and result was further proof that nothing good is happening in Ohio and that some cosmic power is either staring down with the stink eye or sticking needles in a voodoo dollish map of the United States.
Bottoms Fish
Here is a post from Calculated Risk that clearly explains the path housing recovery will take.
There will be two distinct bottoms for housing:
1) First single-family housing starts and new home sales will bottom.
and then followed some time later …
2) Prices for existing homes will bottom.
Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom.
It’s conventional real estate wisdom about the chronology of trends that occur when housing’s cycle runs its downward course and begins to flatten.
Stock market, sales volume, pricing power. The discounting mechanism of the stock market makes it a leading indicator. It’ll take a lot of patience to get to the point where home prices get their floor, and it may take a reversal of employment trends from declining to growing before home pricing power factors in.
What Calculated Risk does not address in his theory that home sales volume may hit its lowpoint this year, is that that point finally means that from a sector standpoint, some home builders will have reached their moment of opportunity.
Access to cash and capital will have a lot to do with who’s there to jump on the chance to thrive amid a wide landscape of distress–lowest direct costs per square foot will be a building company’s lever back into high volume business. Equally important, though, it will be who’ll nail the right product for the moment, emerging out of the most formidable economic scare in a century.
If the rental trend is doubled-up, will home builders figure out a way to offer household and community options that feed off the same consumer instinct? Will Baby Boomer parents have enough wherewithal to spot down payment assistance for their kids’ first house? And will that detract from those same Boomers’ desire to have a second home or evolving retirement home option?
The next two to five years should provide insight. Meanwhile, we think that as the Calculated Risk order of housing recovery plays out in the next 12 to 24 months, the very spotty anecdotal evidence of sales improving will, after fits and starts, gel into a trend.
Our guess is that by the time the trend becomes widely perceived, the 100 largest home building operations will be responsible for more than one of every two new homes built and sold in the U.S.