Starts Head Farther South; Supply’s Finally Less than Demand
As the housing starts story continues to make home builders and their materials and products suppliers grimmace, the bad news is becoming good news.
Most of our dads or authority figures liked to hear the bad news first, so we’ll comply with that dictate. The Wall Street Journal reports:
U.S. home building and industrial production plunged last month as the recession puts Americans out of work and slows their purchases of cars and houses.
Key pieces of economic data were released Wednesday, including a U.S. Commerce Department report showing housing starts in January tumbled 16.8% to a seasonally adjusted 466,000 annual rate compared with the prior month.
At the same time, we’re going to have to gulp and see a worsening report card on the overall economy, according to the New York Times.
In gloomy economic projections released by the central bank, the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would soar to 8.5 to 8.8 percent, and that inflation would remain under greater pressure.
Bleak economic data reflecting a sharpening slide in housing, trade, industrial production, spending and employment rates “more than offset” any potential impact from an economic stimulus plan, the Fed said, forcing it to cut its economic outlook.
Which leaves it up to the “silver liners,” those who can’t take too much of a bad thing. But seriously, despite the fact that demographic projections regarding household growth might find themselves derailed like everything else these days, one could believe that housing will begin to correct when demand for homes actually outpaces supply. We haven’t seen that for some time.
Now that housing starts have dropped to such depths, we’re just about at the tipping point, at least according to this report from CNBC contributor Tony Crescenzi, chief bond market strategist at Miller Tabak+ Co.
Importantly, housing completions fell a record 24.2% to a record low 776k annualized rate, the first reading below 1.0 million since 1982. The is extremely important because until now builders were still completing homes at a pace too strong for current conditions, preventing inventory levels from falling more rapidly than they recently have. Now that fewer homes are hitting the market for sale, the growing U.S. population will have fewer homes to choose from. This will accelerate the recent decline in home inventories. Have no doubt: this is a game changer for inventories and prices.
Doubters on the inventory idea will surely point to the difficulties that prospective homeowners face in obtaining credit to purchase homes. In doing so they will ignore the most important top-down concept, which is to compare the net change in the housing stock to population growth and household formation.
The concept is simple: a basic element of human survival is shelter and the need for shelter increases along with the population. Housing starts have now fallen to levels well below what is needed to support population growth. Whether people can afford to purchase a home or obtain the credit necessary to do so is not as important as the fact that they need shelter and will rent space if necessary. The bottom-line is that empty homes will become occupied one way or another so long as builders under-build relative to population growth.
The tough part for home builders is this: Of the few brave souls who are still buying new houses, about half of them want to buy a ready-to-move-in home. This means home builders have to build spec homes even though spec homes are part of the problem.
This makes the good news bad news in its way. Home builders still have to over-produce to meet the needs of at least 50% of their current customers. This means starts will probably bottom soon based on real orders and purchases, and will be a solid baseline.
Home Builder Confidence, or Lack Thereof
Calculated Risk offers us this fevery look at home builder confidence through Jan. 09.
CR–an economist who covers housing–has a couple of observations.
The housing market index (HMI) increased slightly to 9 in February from the record low of 8 set in January.
Note: any number under 50 indicates that more builders view sales conditions as poor than good.
John Burns, a housing analyst who looks at housing economics from the dirt up, observes a pickup in the market based on his own company’s survey of home builders:
Nationally, the builders’ rating of current sales improved slightly for the second consecutive monthwhile traffic moved to Low from Very Low. The rating of expected sales again improved slightly. Average net sales per community increased to 1.4 this month nationally, from 1.0 last month.
Low mortgage rates and a healthy Texas economy are the reason. Our contacts are reporting increasing improvements in traffic and a slight uptick in sales, though this is very submarket and product specific. The increases were most pronounced in Texas, which we confirmed by visiting with several Texas builders last week.
Starts per community averaged 1 unit nationally last month, but 40% of our survey participants reported zero starts. Interestingly, 14% indicated they were starting 3 or more units this month, up from 9% last month.
Cancellation rates declining: Pricing decreases in many regions: Home prices net of incentives continue to decline monthly, as excess supply, and competition from foreclosures priced below the cost to build, destabilizes pricing.
Inventory declining: Unsold, finished inventory shifts minimally within regions and several show decreases. Communities have 4.7 units of standing inventory on average. Most notably, the Southwest and South Florida dropped 2 and 3 units per community respectively.
What Changed? And When?
Americans’ cars and Americans’ houses. Since the industrial revolution anyway, these two phenomena practically defined American cultural identity and its impetus toward fulfilling dreams and ambitions. Who you were was what you drove, or if not your ride, then where you lived.
Now, you might say we’re convulsing through the beginning of the end of the era of the fossil fuel economy. It’s not an easy passage, and weaning $40-or-so-trillion of global gross domestic product from the planet’s oil supply doesn’t bode well for a very comfortable next 50 years or so. So Americans’ cars and Americans’ houses are not ever going to mean what they have meant.
If who we are is not what we drive and where we live, then what happens? Well, three or four or five jobs that spring from giving America its automobile manufacturing and home construction capacity become a great big question mark. How many of those jobs go away when the excess capacity goes away? How many jobs go away at the moment American households fix their balance sheets and start to live within their means?
Well, the answer to that mystery seems to be written into the plot line of the near-to-longer term future. At Big Builder, we hope that we’re around to see that plot take its course across the decades, and we know that some of your companies will get cast with major and minor roles in the drama.
Meanwhile, rather than having a role in some epic tale, we seem to be stuck, of all places, in the middle of a Yogi Berra line, like “if you don’t know where you’re going, you might not get there.”
“Housing’s going through enough of its own difficult time and has its own problems,” you might say. “Why are you dragging the auto companies into the turmoil?”
We do because the fates and fortunes of so many home building companies that emerged during the past 40 to 80 years tied closely to the nation’s network of roads and auto transportation. That seems to be at least part of what’s changing. Our collective addiction to credit and our dependence on imported oil are part of what’s getting corrected.
We also do because, as we write, the hourglass deadline approaches for two of Detroit’s automotive mainstays–General Motors and Chrysler–to submit business and operational plans that meet enough Congressional approval to warrant more billions of dollars of American taxpayer support. Word is, President Barack Obama has appointed a former Lazard Freres & Co. investment banker, Ron Bloom, to work as his top advisor on the fate of U.S. auto companies. Here’s how the The Wall Street Journal describes expectations around the Bloom appointment:
People who know Mr. Bloom expect him to be tough on the auto makers, the United Auto Workers and other parties involved in their restructuring.
“The management of the Big Three are probably not going to like what Ron Bloom has to say; the UAW is not going to like what Ron Bloom has to say; and certainly the stockholders and creditors will not like what he has to say,” said Michael Psaros, a co-founder of private-equity group KPS Capital Partners, who has worked with Mr. Bloom in and out of bankruptcy courts. He adds that Mr. Bloom has “repeatedly shown an ability to transform struggling companies into profitable going concerns.”
Cars may be another industry altogether, but we believe those lines apply equally to what’s ahead for home builders. Someone is going to come along, eventually, and work with home builders on two areas of their business model: one is secular and one is market driven.
That someone is going to tell home building companies, their products and materials partners, their capital partners, and their legions of skilled and unskilled trades, not what they want to hear, but what they have to hear.
Until then, land–the real estate portion of the home building business–will act like the good and the evil twin. It will confer vast wealth in one part of the cycle; and devastate empires in the inevitable back end of the cycle.
Jobs are the Dog, Housing’s the Tail
There’s so much focus on “the bottom.” Wouldn’t it be better business to work on quantifying and valuating the overshoot to the bottom, and plan tactics, financial discipline, and scenario strategy around programs to dig out of an even deeper-than-bottom baseline?
By some lights, it takes two-plus new job creations in a locality to generate demand for one new home. By others’ lights, the U.S. economy may be on pace to lose a million jobs in the first six months of a year as gruesome as most of us have been alive to endure.
- The Wall Street Journal charts out companies and their Q1 layoffs.
The distance these opposing employment trends drift apart from one another is approximately equal to the depth of doubts around when capital flow, asset valuations, price stabilization, and the life chain of housing starts may one day resume.
Someone in one of the blogs said it last night as one of the sole sources of consolation right now–practically the only good news is that you can’t have “negative starts.”
Still, negative jobs becomes the hose in the back yard on full-blast with no one holding the nozzle. Negative jobs multiply into countless mini and mega negative growth scenarios, and negative jobs carries with it the infamous “Fear Itself” forcefield that almost necessarily encompasses moments as humbling as looting the foodstore.
The headline-grabber so far has been wealth destruction–both paper profitability on homes owned by folks who’ve been in them for a while, and newer owners who’ve fallen through the hatch and gone underwater on the reset of their home value vs. their mortgage loan balance.
A parallel and related issue is demand destruction, which throws a pall not only over the present but the future because all the virtuous circles have gone vicious.
Housing Arithmetic Lesson
Calculated Risk is at it again.
Several posts today that get at vacancy rates, for homeowners and rental units, and shadow rentals.
Stimulus whatever is up against the following phenomenon to work through. (Sorry, forgot to flow in the picture last night with the link).
Click on graph to link to CR analysis.
A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.
This leaves the homeowner vacancy rate almost 1.2% above normal, and with approximately 75 million homeowner occupied homes; this gives about 900 thousand excess vacant homes.
Here’s what Citi Investment Research senior analyst for home builders Josh Levin has to say about the vacancy data.
What’s New – Today the Census Bureau released 4Q08 vacancy rate and homeownership data. As we have noted before, we think vacancy rate analysis is a superior way to measure excess housing supply. In our opinion, vacancy rate analysis remedies many of the deficiencies of the popular but misleading months’ supply metric of homes for sale. Based on the latest data we calculate that there are ~2.2 million excess homes in the housing stock.
Yet, there may be good news in the fact that Census Bureau data miscount what’s real.
USA Today writes about one of the reasons there’s little to no pricing power in rents.
Here’s the mainstream media take on what’s happening:
The weak economy — which has brought surging foreclosures, sinking property values, vanishing home equity and mounting job losses — is playing a major role in family dynamics, pulling relatives under the same roof to pool their resources and aid relatives who’ve lost their homes.
Siblings are moving in with one another to help pay the mortgage. Adult children who’ve lost homes to foreclosure are moving back home with Mom and Dad. Even spouses in the throes of divorce are putting off separating, living together in awkward cold wars because they can’t sell their houses.
That’s in large part because those losing homes often have nowhere else to go. Many live paycheck to paycheck: Nearly 61% of local and state homeless coalitions are seeing an increase in homelessness since the foreclosure crisis began in 2007, according to an April 2008 study by the National Coalition for the Homeless. Only 5% said they hadn’t seen an increase. The survey found that more than 76% of homeowners and renters who must move because of foreclosures are staying with family and friends.
If we add this up, 820 thousand excess rental units, 900 thousand excess vacant homes, and 150 thousand excess new home inventory, this gives about 1.87 million excess housing units in the U.S. that need to be absorbed over the next few years. (Note: this data is noisy, so it’s hard to compare numbers quarter to quarter, but this is probably a reasonable approximation).
These excess units will keep pressure on housing starts and prices for some time.
Better stick with CR for insight into the data, and what it predicts.
If You Build It … Then What?
If you build it, you might be done; and if you don’t build it, you’re probably screwed anyway. Life on the flip-side of truisms is ugly business, especially when it’s costly. You recognize the truism in its adulterated inverse. Welcome to home building circa 2009, where no, housing has not turned a corner with an inflection point yet, but companies in housing may need to behave as if it already has in order to survive.
Per the December Census Bureau release last week, new homes are selling at an annualized rate of less than a thousand a day. Per what we’ve heard from home builders in the trenches, about half the homes selling these days are spec, and half are pre-orders.
Much if not all of that lore about buyers demanding the opportunity to customize their dream simply goes by the wayside. All of that theory about buyers insisting on bigger square footage, and more amenitized finishes also goes by the wayside. Their ranks diminished by 60% from their peak, half of the 331,000 hearty souls still in the market want their new home done and dusted now, and they want it more at the right price and terms than they want it to appeal to their sense of status in society.
Click for Wall Street Journal story link.
Status in society–for an individual, company, city, nation, etc.–is all about having a better balance sheet than the next guy, or organization, or municipality, or state, or government. In granular terms, you can see at least part of that in the picture here. Consumer spends less, and saves more. That’s good and it’s bad. It’s necessary because consumers overspent for too long, and didn’t save for too long. Homes as ATMs, home price appreciation, riskless debt, and all that.
It’s also horrible timing because all that sudden fiscal prudence has thrown the economy into cold turkey withdrawal. Saving on expenses happens when revenue can’t grow, and revenue can’t grow because everyone decided at the same time to save. Jobs go away, people are afraid more jobs [and their own] will go away, and they spend even less, so companies need to lay off more and preserve more cash.
“You could be talking about homes, about cars, about electronic appliances, about clothing, about nearly anything right now, and you’d have the same story,” said the CEO of one of the nation’s leading residential real estate companies just before the weekend. “When people don’t know if they’re going to have their job, they don’t spend. They save. It’s completely understandable.”
Briefly, an entire globe cash-preserving its way to a better balance sheet is what has set itself in motion, with varying time-released waves of consequence. All told, will the overreaction to fear wind up equal to the prior overreaction to greed? Do you guess that an overcorrection of 5% to 10% on the savings vs. spending continuum will occur?
For all the focus on multipliers, when will the turn in a dollar spend vs. a dollar saved at the household level turn into jobs, consumer confidence, spending, earnings, capital spending expansion, and revenue growth? It’s anyone’s guess.
Improved balance sheets, it turns out, will happen when a certain amount of the bubble profitability of land prices gets marked down to reality. In today’s business environment, we understand, this is not an easy thing to do, whether the asset is commercial paper or land.
Still, unless long-term household demographic growth estimates are off, it’s widely believed that the U.S. will add 1.3 million new homes a year. If you assume that even 65% of those new households are homeowners, there’s a demand base for more than 800,000 added home purchases each year.
This, and the fact that a number of drivers in the overall economy now point to improvement beginning in the latter part of 2009, means that housing’s misery is finite after all.
Home builders need to keep working through their inventory, not only of already-started homes and completed homes, but finished lots to shrink, and possibly overly tighten supply.
They have to keep starts going for two reasons.
One is existential: If they don’t build, then they may not exist as company at all. The other reason is that if they don’t keep building, half of the scant total of customers out there will go to someone else for their ready-to-purchase home. Whether it’s half a million or 331,000 or even less, the one out of two of the ones who can get their loan and put their money down for a deal want their keys now.
Credits: The Housing Chronicles blog; The Wall Street Journal; the New York Times; Wachovia Securities.
You Heard it Here at Housing Crisis First
We’re opening a thread here, looking for your list of three to 10 housing predictions for 2009. Care to call the bottom? Now that private equity has put a value of about $14 billion on IndyMac, will there be takers for real estate related assets of other banks at asking prices that make the deals pencil? How many home building-related companies, trades, manufacturers, and distributors will need to close their doors as they run dry of resources to keep operating?
Prophets who got it wrong in the old days had something to lose when they messed up on the job. Like their lives. Today though, if you’re wrong about what you say will happen in the next 12 months, you’ll probably be right about it within the 12 months after that. The bears after all were dead wrong for two or three years before they were absolutely right, proving the bulls wrong for a year or three.
Reader-generated content is taking other business sectors by storm, and the flow of wit, witticism, insight, and cynicism has sparked new ideas and budding relationships galore. Imagine, you could start something in residential real estate and share in the pride of your authorship, which we’ll be glad either to publish or keep quiet, as you prefer.
Maybe the following list of 10 relatively playful predictions for 2009 will help prime your prognostigative pump. Remember, you heard these here first:
- Congress won’t fix housing first. Most of our elected officials would find it too daunting and difficult to switch out screens for storm windows, let alone understand the intricate weave of home building, jobs, spending, and confidence that advocates of a home purchasing stimulus propose.
- Former John Laing Homes CEO Larry Webb will finish the job disposing of LandSource, and will lead a vaunted team of experienced executives in a successful effort to buy a company for about $250 million. Maybe John Laing Homes.
- Builder will be hard-pressed to identify a Builder 100 for 2009 in 2010, and the “Next 100″ will be even harder to develop.
- Giants 28-Titans 24, Feb. 7, 2009. Hey, this is our list!
- MatlinPatterson will merge Standard Pacific, TOUSA, Levitt, and Beazer into a Southeast-based super-regional Top 10 public operator, exit the land ownership and development business, and finally sell its newly streamlined merchant home building organization to NVR.
- $1 in 2006 currency will be worth 18 pennies in June 2009.
- J. Crew will introduce a line of smart casual road-crew wear aimed at former Wall Street associates.
- AIG will have sold any and all of its non-toxic businesses, and the resulting cesspool of credit derivatives will ultimately be deemed too inconsequential to bail out again. The company’s executives will meet at the Aspen St. Regis for five days to dismantle operations.
- Quadrillion will be the new trillion [see post below].
- By Super Bowl XLV in Dallas, in February 2010, high-volume home building will once again refer to more than the loudness of boom boxes in the rafters of new construction. Barely perceptible, recovery will begin with three home sales per community per month. That’s high volume.
Your list goes in the “comments” area below.
The Operative Term–Total Insured Unemployment
Precision and the end of the Great Depression are widely regarded as mutually exclusive concepts. The end of the 1930s arrived, and the economy in the United States was still reeling. The start of World II ignited a burst of spending on borrowed dime; industry cranked up to arm troops and operate a wartime society. Call it distraction, or the illusion of prosperity, but this period of a few years during the war finally put an end to a decade of economic woe and job stagnancy.
Although we’re now getting used to anomalies at every turn, there’s no reason to think the current economic crisis will end at a single definable moment any more than downturns of the past. Right now, focus is justifiably on the “second derivative” of trends in unemployment claims and housing prices.
- Calculated Risk reminds us to keep our eye on the ball.
- Lest you are skeptical of the analysis of a skeptic, the Wall Street Journal records other analysts’ take on the latest jobless data.
Once the rate of deterioration slows–sustainably–there can be reason for hopefulness around a bottoming of the flows and forces that most impact consumer confidence and sentiment. Government spending can serve as a band-aid.
Consumer spending at a healthy, responsible clip will be the real sign of an economy on the mend.
‘Twas the Night before FY
‘Twas the Night Before FY
(Beware CFOs with open tabs… apologies to Clement Clarke Moore)
‘Twas the night before FY, we’re now at the bar.
Our guidance is dreadful; we’re no NVR.
And fresh off a WebEx with dame Ivy Z,
We’ve spun metrics, pro formas, even fibbed a degree.
First-time buyers are mirages, our banks are a mess,
And privates are all creaking with signs of distress.
The free-markets free-fall, the jobless claims mount,
FCF’s but a trickle, backlog’s down for the count.
We’ve right-sized and downsized and hammered our trades,
Zeroed out our revolver, still our gross margin fades.
We’ve taken out talent, cut our costs to the bone,
Still we can’t move the houses; there just aren’t the loans.
When Ben lowers Fed rates, it scarce makes an impression.
We seem headed straight for much worse than recession.
We’ve combed through our inputs, we’ve slashed costs and burned,
We’ve walked, and we’ve mothballed, and to impairments we’ve turned.
We’ve reset all our prices, again and again,
‘Til a dollar’s worth pennies in just a stroke of a pen.
We’re waiting for bottom, for signs of a trough,
We need the absorptions, we’ve had quite enough.
Now Dreier! Now, Mizel! Now Dugas! Now Miller!
Hovnanian! Hilton! Mezger and Eller!
On Tomnitz! On Toll, McCarthy, and Schar!
On chairman of StanPac, whoever you are!
For we are the publics, the world needs our good health,
We’ve sworn off our bonuses, toned down our wealth.
Our community counts are but half what they were,
We’re exiting markets so fast it’s a blur.
I’ve worked spreadsheet magic, I know my job well.
Just look at our leverage and the huge NOL.
We’ve got tons of dry powder, we’ve cut down our debt,
Not an analyst doubts, we can weather this yet.
We’ll miss old Ken Neumann, Dunmore, Legend and Trend,
Royce, Village and Barratt, and all our BK friends.
We’ll bet they’re not done; they’ll be back around,
From OldCo to NewCo, when fresh capital can be found.
Until then, you don’t have to guess where we’ll be!
Right here at the pub, I run t&e!
We’ll hope for good earnings, we’ll pray for the jobs,
We’ll pray people buy Fords, Chevys, Volvos, Hondas and Saabs.
We’ll raise our glass too, to the men of Wall Street.
So gracious in triumph, so gallant in defeat.
They’ll find new employment in less well-paid posts,
Then they’ll buy up our houses on East and West Coasts!
For Barack is coming, just wait ‘til you see,
A non-stop flight, Honolulu to DC.
He’ll head to the Oval, all rested and tan,
With a dream team Cabinet and a trillion dollar plan.
He’ll rebuild the bridges, he’ll repave the roads,
He’ll wire all the schools, even add wi-fi nodes.
He’ll start in on health-care, and insure one and all.
For New Deal Number Two, no order’s too tall!
With Geithner, and Volcker and Rahm at his side,
Obama won’t give in ‘til he’s turned the tide.
So let’s toast the new Prez. Let’s hope we’ve seen the worst,
He’s still got to learn, we’ve got to fix housing first!
Housing Starts Records Broken, a Broken Record–Update
Starts, permits, consumer prices plummet in unprecedented degrees of magnitude. The housing data has nudged to its lowest level since 1959, when this stuff started getting tracked. Worsening data begets new efforts among Fed and Treasury officials to throw more policy at the problem. Fed rates too may go to record lows today.
- The Wall Street Journal reports, “Inflation Eases, Suggesting Fed Rate Cuts.”
- CNBC has an analysis of the grim housing numbers.
- Builderonline.com senior editor John Caulfield ties historical employment trends to housing cycles through recessions past to try to plot where we may be amidst our present travails.
- Calculated Risk puts the pictures and the words into perspective in his blog post: Housing Starts Decline to Record Low.
Calculated Risk’s professorial conclusion:
Notice that single-family completions are significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will probably continue to decline.
A VERY weak report …