real estate

/ / , , , , /

Odd Housing Report

If you simply read the headlines you would come away with a distorted view of today’s housing reports from the government. The Financial Times typifies the way in which the good news gets plastered all over the place, and the bad/worse news is buried for only the diligent to locate. The headline reads: “US homebuilding soars in April”

Well sort of.

As a practical matter new home starts did rise nicely in April: up 5.8% to an annual rate of 672,000. If you want to characterize that as ‘soaring’ go ahead. I don’t. It a very good increase, but ‘soaring’? I don’t think so.

The FT goes on to let us know that the increase brings starts to a point 41% up from the same time last year. Now that is soaring! Except, of course that last April was the worst month on record and was appalling by any stretch of the imagination. Frankly anything would feel like soaring after that. Plus, the FT fails to note that starts are still 70% below their peak reached back in 2006, and about 30% below the level most people see as the required rate of construction for our population growth. So we have a long way to go to reach solid ground.

So I offer this as an example of the way in which the financial media – and the stock market – latches on to news and leaves aside inconvenient facts that muddle their predetermined analytical conclusion. The media and the markets want strong growth, that’s what generates business for them, so anything bad gets tossed aside unless its compelling.

And hyperbole is deployed lavishly to support the skew.

Deeper in the government report is less ‘soaring’ news.

Permits for new houses, an indicator that speaks to the likely level of activity later in the year, fell. I suppose we should call their 11.5% decline in April a ‘precipitous plummet’ to keep a balance with the FT’s language for these movements.

From my point of view the permit number is more credible. It has always been a more stable and reliable data series than starts. The problem with the starts data is that a warm month can generate a ton of building activity, and we have no way of knowing whether that activity is representative of a long term trend, or is simply a function of that warmer weather. Yet the financial media latches onto to starts and hardly ever talks about permits.

Having said that the ‘analysis’ offered on the permits number can be quite infantile.

Take this paragraph from MarketWatch.com:

The decline in permits “suggests that future construction activity will be restrained,” wrote Gary Bigg, economist for Bank of America Merrill Lynch.

No?

This is comment with no information content. Of course a decline in permits indicates lower starts activity in the future. Any future start has to be represented, at some point, by a preceding permit. So if the level of permits is lower, now future starts will be lower. Duh.

It might be more helpful to opine as to why this is going on.

Let me take a stab at actual analysis.

It looks as if the government’s subsidy of first time purchasers encouraged a small burst of speculative construction, especially in those parts of the country where there was less overbuilding during the bubble. Looking back in the record, we see that permits jumped a bit when the subsidy was put in place, and the starts associated with that jump are now showing up as new construction.

But.

The subsidy has now gone away, and builders are retreating while they wait to see what shape the recovery takes. The unsold inventory of housing is still quite large by historical standards, especially for this point in an economic cycle. That will dampen construction in the near term. Plus the economy’s fundamental spending power is still weak: wages are not growing quickly; unemployment is still high; and consumers are still focused on debt repayments rather than on asset acquisition. Offsetting that is the fact that interest rates are still low, but credit standards have been tightened and mortgages are tougher to get than during the bubble years.

This all tells me that, while housing is obviously better than it was last year – how could it not be? – it is not booming, jumping or any other thing indicative of a ‘soar’.

Look for a modest housing recovery as the year progresses, with good starts numbers in may and June followed by flatter figures later on.

/ / , , , , /

Housing Picks Up

Before we all declare the war over allow me to remind you about the volatility of the housing starts data: the March report has an enormous statistical error range of +/- 15.2%. That is sufficient to eliminate and reverse any gains in the news.

Having said that the report was a decent one: March starts were up 1.6% to an annualized rate of 626,000 units. More importantly, the March data adds to a string of decent reports, and brings construction back well above the nadir reached in 2009. The only negative chink in the news is the fact that the entire gain was based in the South, while the entire rest of the country showed a decline. Plus, most of the pick-up came in the form of multi-unit dwellings and not in single family homes.

This latter fact is hardly surprising: starts of apartments and condominiums had plunged by 31.8% in the last twelve months. This huge decline masked the equally sharp recovery in single family homes, which had jumped by 47.1% over the same period. As you can see the data bounces around all over the place so getting a good read on the trend line is sometimes very difficult.

To help us predict the next few months we should take into account the fact that building permits have also risen, at an annualized rate of 7.5% in March, which suggests that the recent growth will continue throughout the summer.

That this bounce up is occurring can be no surprise. Developers had slashed construction in the wake of the bubble in order to eliminate the enormous inventory of unsold homes. This tactic had reduced the actual number of homes being actively constructed all the way down to 489,000, the lowest on record. With that extreme low level of activity the inventory has been worked down somewhat and so any demand at all will, of necessity, produce a spurt in new starts. The recent trend is a product of this very sharp cyclical process.

Putting this in context: we should welcome the upturn in construction as a useful component in the economy’s overall recovery. At the same time we should all hope that the ludicrous excesses of the last decade are not repeated, which given the extraordinary adjustment the construction industry has been forced through seems unlikely. This long sought after sanity in real estate implies that even if the industry returns to modest health it will not be the driver of the economy it once was. Remember that construction provided a highly disproportionate share of our job gains throughout the last decade – a decade that was bereft of job growth without construction. So if our outlook of a steady and sane real estate market holds up over the next few years, we will have lost a key engine of job generation, and will have to search more thoroughly in other sectors to replace it.

This then is the classic ‘good news/bad news’ story of economics. The return to health within real estate is a welcome sign of recovery. Unfortunately that shifts the pressure elesewhere.

This year is all about finding that ‘elsewhere’, and getting more jobs.

Meanwhile real estate is not the problem it once was.

/ / , , , , /

Housing Dips Again

Amidst all the hullabaloo over health care reform the economy chugs along largely unchanged from when we last saw it. Today’s news that sales of existing homes dropped again, for the third straight month, should cause us to reflect on just how fragile our incipient recovery remains.

The February data shows sales at an annual rate of 5.02 million, down 0.6% from January, and the lowest for eight months. Most of last year’s gain has now been lost and we are approaching all time lows for activity. Most of the decline was centered in the usual areas: the West and South, while the Northeast actually experienced a gain.

The median price of the homes sold was $165,100, a drop of 1.8% compared with a year earlier.

Lastly: the inventory of unsold homes rose 312,000 to 3.59 million, which was a much larger jump than usual for February and brings the inventory overhang to 8.2 months, the largest since last August.

What does all this mean?

Obviously real estate is still mired in its post-bubble hangover, and we are yet to find the firm footing necessary for full recovery. There is anecdotal evidence that prices are still too high to re-ignite strong activity – there are complaints in Southern California about a dearth of sub $500,000 homes, which suggests that we overbuilt expensive homes and that the inventory for sale does not match the price range within which people are now looking to buy. To get the market to clear something has to give, and with wages stuck and credit tight, most of that movement will have to come in the form of further price reductions.

The tax credit for first time buyers has been extended but is seemingly having far less impact than it did in its first incarnation. This tells me that the backlog of demand that existed last year has been exhausted and that further efforts at stimulus of real estate will have little impact.

The decline of real estate is a massively distorting factor in our economy – just as the absurdity of the bubble itself was. The deflationary drag of the persistent weakness in housing shows up throughout the data. The Consumer Price Index, for instance, is heavily influenced by housing, which is given a weighting of 40% in the overall index. Clearly the post-bubble malaise is a major factor in keeping inflation low at present. Indeed if we look at inflation without housing it is around 3% a year; add housing back and it drops to near zero. The implication is that housing is still suffering outright deflation and thus is accumulating problems rather than resolving them.

This deflation has widespread effect. Not only does it reduce wealth through lost home value, but in eliminates the prospect for price appreciation over the medium term – housing is not a good investment at the moment. Clearly there will be localized exceptions to this, but for the country as a whole the days of wealth accumulation through home ownership are over. This is a hammer blow to the middle class and has enormous knock on effects. It forces us to save elsewhere for retirement and those big expenses like college tuition. This limits our ability to spend what we earn and thus will reduce GDP growth. It makes renting much more attractive and will have a long term impact on the supply of rental property. And, obviously, it presents a devastating blow to anyone trying to re-finance a home. The number of homes with negative equity has risen to an all time high and continues to rise. It also represents a massively destabilizing potential for the economy: eventually those losses have to be realized, which will reduce the purchasing power available within the economy for years to come.

The key to remember is that this lost wealth is permanent. Even if prices rise strongly again, which I currently doubt, we will have lost the demand of the last two or three years for ever. That is a very heavy burden to pay for the wild and irrational excesses of the mid 2000’s, and will have a lifetime long impact on hundreds of thousands of households. All the stimulus and all the market recovery in the world cannot recapture or offset the losses we have sustained through our obsession with real estate.

Today’s news tells us that market is still contracting and likely will remain weak for months, if not years. It will thus act as a drag on overall activity.

This is yet another reminder that we are not going to experience a rapid, sharp recovery. Indeed if real estate stays in the doldrums much longer it adds to the risk that we will not be able to sustain much growth at all.

Having said all that, we should see some sort of growth in sales as the warmer weather sets in, and the usual Spring burst in activity gets underway. Hopefully this will allow us to find that firm footing we need. Put that another way: if we don’t see the normal seasonal uptick, we can pencil in a double dip recession for later this year!

/ / , , , /

Real Estate Double Whammy

To add to today’s gloom is the Case-Schiller report on home prices, which fell in 0.2% December. While that decline is much smaller than those of the months back in the depth of the crisis, it represents a give-back of the strengthening we had seen at the end of last summer. It confirms the thought we had back then that the only source of support for home prices was the stimulus package in the form of the first time buyer tax credit. That credit gave a temporary boost to the market, and brought just enough buyers in to bolster demand and thus firm up prices. With the effects of the credit fading, and with wages stuck in the deep freeze, there is no ongoing reason for prices to firm more. More likely, they will slip a little until the usual seasonal blip over the summer stems the rot.

Within the numbers a separation appears to be growing: at the low end of the price range the situation seems to be stabilizing. The wipe-out caused by the sub-prime mess and the surge in job losses has peaked for now, and so low end homes are not losing value as fast as before. Indeed, in some cities, prices have edged up as the low end market settles at a new and lower level. In contrast, at the high end prices appear still to be weak. It looks a if there will be more price erosion in the expensive home market, and that it will take the rest of 2010 for that higher end to reach stability.

Meanwhile in commercial real estate the losses continue to mount. The glut in commercial real estate is having a particularly strong impact on smaller and middle sized banks who typically have a goodly number of loans in their local commercial real estate markets. The collapse of these projects often takes a long time to be reflected in a bank’s books – there is a natural tendency to try to stave off the losses as long as possible, and it is notoriously difficult to get good valuations in marginal building projects. So it has taken a few quarters for the storm to gather momentum, and this year will see its full force.

This means we are now seeing the expected wave of loan charge-offs, with the result that there are more than 700 banks nationally in sufficient financial difficulty to earn them a place on the FDIC’s ‘watch list’. This represents about one in ten of all our banks, and is the highest number in sixteen years. This stark fact provides us with a massive reminder that the banking sector is far from stable at the moment. It is little wonder that small businesses everywhere are having trouble finding credit: the banking system is still too fragile for it to be a strong source of finance.

To put this in context: assets defined as being ‘troubled’ – i.e. with a good chance of turning into losses – rose to $402.8 billion nation wide at the end of 2009. This compares with $345.9 at the end of the third quarter.

On the bright side: according to the FDIC, 95% of all banks have adequate or more than adequate capital, which means that many of that 700 on the watch list will have enough capital to survive. So it is not all gloom.

It just seems that way.

/ / , /

Housing Still Soft

The news keeps trickling out. This week is very busy from a reporting standpoint with today’s focus on sales of new homes. The results are not that good and suggest the real estate market is still weak. This, of course, is no surprise – except to the perennial optimists ate the National Association of Realtors.

Sales fell to a seasonally adjusted annual rate of 342,000 which was off 7.6% from November’s 370,000. Remember that November’s figure was down 9.3$ from October. So in two months we have given back much, if not all, the gain seen in the late summer and early fall. For the year as a whole sales of new homes were an abysmal 374,000, which is 23% down from 2008 and easily the worst since this particular statistic was first recorded. It takes little imagination to see that we are likely to record another very poor year in 2010: we are beginning the year with a ‘run rate’ a full 30,000 units below last year’s record low. It will take quite an effort to crawl back just to 2009’s awful performance let alone get back into a more comfortable range.

That’s what happens when you binge: the aftermath is sometimes very unpleasant. This one’s a doozy.

Taking today’s data along with the earlier reports about sales of existing homes, I can find reason to forecast anything very positive for housing. Clearly this is a great time to be a buyer: prices will be soft as sellers dump inventory and the backlog of unsold homes gets cleared. This adjustment is still underway and there is no end of it in sight. The data simply does not support a firming in prices or sales for a while yet.

The glut continues.

«< 11 12 13 14 15 >»