I think it's significant that housing completions are still quite strong and a large amount of new housing is being pumped into a market that doesn't need a large amount of new housing. Add to that the foreclosure properties that are could start showing up in large numbers and reduced demand due to lenders bowing out of the market and you might have one very miserable housing market this spring.
Its a shame, but I have a hard time trusting SAAR anymore. I know the NAR adjusted their correction technique mid slowdown, and even if BLS plays it straight, the process breaks at inflection points.
Yep the problem is that stress signs are happening while UE is down and pay is increasing. When things turn down, say 600K UE and the loss of demand from that, things will be much worst.
Home prices declined from a year earlier in about half of all metropolitan areas in the fourth quarter, the National Association of Realtors reported.
It was the first time the trade group has recorded declining or unchanged prices in the majority of cities covered since it began collecting the data in 1979, a Realtors spokesman said. On a national basis, the median home price during the quarter was $219,300, down 2.7% from a year earlier. Prices began falling in many areas last year after a boom that pushed prices up at double-digit annual rates in much of the country in the first half of this decade.
CR, your blog is the epicenter of topicality nowadays. Thanks for your excellent finds and reserved commentary. I appreciate the views of many of your commenters as well.
CR:
It would be nice to have a graph showing unemployment rate along with the strts/completions. I know, I know, they say it's different this time, it's actually going to be worse!
Regarding construction employment: We are hearing that the illegal aliens are the first to lose their jobs. Because they are undocumented, what shoes up in the numbers may look different than previous years.
The Boston Herald reports fron Massachusetts. Just trying to sell a deluxe downtown condo is no picnic in this market. Yet a few developers in Dorchester and Roxbury are finding buyers willing to shell out big numbers as if it were the summer of 2005 all over again. But hold the champagne.
Many of those buyers are facing foreclosure after signing up to buy not one, but two, three or four units for numbers well higher than $1 million. Sometimes the foreclosure notices are arriving before anyone has even moved in.
These developers appear to have recruited their own pool of live bodies ready to sign off on whatever mortgage paperwork they are shown. The developer walks away with a big sale. A profusion of easy, stated-income loans makes it all possible.
When you couldnt put together a legitimate deal (anymore), you had to sell scams, Dorchester housing researcher John Anderson said of real estate downturn. Anderson has identified three or four groups of speculators who are scoring big at a time when most are not even scoring at all.
These real estate wheeler-dealers have bought and quickly flipped at least 150 to 200 units. The prices are often more than $300,000, or even $400,000, not bad for tough neighborhoods in a down market. As many as 30 units are now mired in foreclosure proceedings, often just a few months after the sale. Its about as fast as a mortgage can go into default.
This suspicious sales boomlet is producing what should be a statistical impossibility, two and often three condos in a triple-decker all facing foreclosure at the same time. Examples can be found on Park, Dix, Armedine, Draper and Bowdoin streets.
Sellers, Storrs says, need to continue to be brutally aggressive on their prices. Its just a fact of life, he said. You hear a lot its not fair, my house is worth more and I say, yeah, thats true, but not in todays market.
The Boston Globe. Boston homeowners, reacting to a fifth year of property tax hikes, have inundated the city with requests for relief. Current assessments are based on property values as of Jan. 1, 2006, before last years downturn was in full swing.
OK, rebound stats may be false and the ending of no doc loans will end it.
Also the ending of the bubble is going to affect tax revenues. Causing more UE.
"Starting from 2002, every participant in the broad real estate arena has been trained to ignore financing as an integral part of all real estate transactions. It is so easy that it seems anyone who wants a loan can get a loan. No down payment? No credit? No problem."
The western region housing start numbers were ghastly. Down to 212K from 319 in December, and one presumes that weather was not as big a factor here as in the east coast. The last time starts were this low was a one month spike down at the end of December 1996, but the last time starts were consistently in this range was 1992. In Feb 2006, this number was 487K. Either unemployment claims will see a bump in this region or Pat Buchanan and the Minutemen holding down the border will be mauled by the rush of day laborers moving back to Mexico.
If anyone remembers, I posted about a friend who sold two units together at what he considered market price. My friend is a professional developer, so he knows the market. The buyer flipped them in one day for $100k more each....that was in Dorchester.
Why should it be puzzling? The housing slowdown was disounted by the market a long time ago.
What hasn't been discounted by the market is how the non-housing, non-interest sensitive sectors of the US economy were starved for resources. Those sectors are now taking off with housing slowing down.
The market certainly isn't taking thses numbers as the end of the world. I find the markets reactions puzzling
Probably part of it is that the permits number was close to expected, and I think that's a better indicator of where things are going since it's less volatile and less affected by weather.
I think the headline number sounds more dramatic than it really is, since you could see it coming earlier from the housing permits. But it could be an indication that payrolls are about to take a hit, and possibly consumer confidence and spending as a result.
Just spouting off, so please take this comment in that spirit but is it correct to use the term correlation here to describe relationship between jobs and starts. Not doubting that a relationship exists but has there been actual correlation coefficient run between these two variables? That might be interesting to see. Of course, I am too lazy to attempt it myself...
Your blog is fantastic and all I can do is pick nits!
Historical correlations work until the robot armies from Mars start building houses for their subjugated earthlings (or until illegal immigrants take over the construction field).
Although an unemployed illegal and unemployed legal both are without a job, it is likely that the unemployed legal can hold on longer onto their place in the economy through unemployment payments. More illegals result in a faster downturn in the entire retail economy than unemployed legals.
I've brought this up before, but it's important to remember, the builders are continuing to build independant of market demand.
In the san diego area, Chula Vista specifically (but it's the same for most of the large new developements throughout the county), the new builds are all part of masterplanned communities with HOA's and Mello Roose etc. In Chula Vista they have several new communities that are less than half done. But the 128 million dollar high school to service them is built and the mello roos fees to pay for it are the current dirt lots yet to be built on. Each community already has the pool center built and paid for by the builders who expect to get paid back through fees. They just started to grade a huge swath of land enough for 15 thousand homes in Chula Vista. Their plan is to sell 3 thousand homes a year each of the next five years. The city has already done much of the infrastructure along with the builders on major roads, sewers, drainage etc, that needs to be paid back. The bulders have to pick up the HOA dues on all the empty homes to keep the landscapers employeed. This is a huge growth engine that can't stop on a dime. I spoke with a superintendant who told me that they are building shells of homes to keep the permits from expiring but they aren't putting in expensive cabinets etc to others in the area sell.
Just like you cant build only part of 100 condo tower if only say 50 sell, you can't only build part of a masterplanned community. It's all or nothing.
The construction job losses you are predicting are inevitable IMO, and highly contagious into many other related segments so multiply by 4 or more. This can't be a closely held secret. The FED is looking at the very same nambers and already seeing GDP drifting lower to reinforce their views, not to mention the deteriorating lending market that they will fiercely protect.
I'm bearish but what is the FED's likely response? What will the outcome of their response be? Will it add to housing related demand (even though we hardly need more housing units)?
I'm betting on a cut or 2 by late summer. So we get a much less valuable dollar. We get a short term decline in international demand for treasury notes but it helps to cure the trade deficit and potentially prevents a full blown '30s depression...
I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance. The family business that finished my basement does not pay unemployment insurance. I do not pay it even though 90% of my revenue now comes from one customer.
I wouldn't hold my breath too much for that unemployment to "show up" in official numbers. What we quite likely will notice are the secondary effects like reduced spending on whatever construction workers and their families pay money for.
Probably part of it is that the permits number was close to expected, and I think that's a better indicator of where things are going since it's less volatile and less affected by weather.
I think the headline number sounds more dramatic than it really is, since you could see it coming earlier from the housing permits. But it could be an indication that payrolls are about to take a hit, and possibly consumer confidence and spending as a result.
I pretty much agree with all of this. The numbers today, while not good, are not nearly as bad as the headline number suggests. Starts are extremely choppy (we definitely "chopped" down in January) but if you look at the past four months the rate of decline has slowed considerably. Given the permits and the HMI number from yesterday, there are signs of stabilization, at least for the time being.
The question is whether or not the stability will last. The answer to that, I believe, hinges on where the economy is headed. It's not likely we have a full-fledged housing bust without a recession. If we have one over the next year, I think all bets are off and we go down further. However, if the economy holds up and inventories continue to get pared down, I think housing ceases to be a drag on the economy towards the end of the year.
"Though WLI growth has eased for two weeks it remains well above last August's low, indicating a positive U.S. growth outlook," said Lakshman Achuthan, managing director at ECRI.
"With the industrial slowdown continuing, it may be that near-term we will have a Goldilocks economy with a soft spot."
Sounds like ECRI is in the Goldilocks camp. It will be interesting to see whether their credibility holds up over the next couple of years.
"I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance."
Robert, it depends. If the builder hires "Joe the Electrical Guy" to string the lights, Joe will be an independant contractor for withholding purposes. He's not under the direct supervision of the builder. But if Joe hires four workers to help him, technically the hires are W-2 employees, 'cause they ARE under the direct supervision and control of Joe.
Does Joe do the right thing? We probably all have our doubts, but it's hard to assess.
dc1000, perhaps you can chime in here? What has been your experience on this issue?
True, but I don't see how people can say that construction losses won't show up at all in unemployment. Yes, I understand there's a lot of cash workers and illegals, but there's also a lot that are on the books, as demonstrated by the construction employment surge over the last few years.
"True, but I don't see how people can say that construction losses won't show up at all in unemployment. Yes, I understand there's a lot of cash workers and illegals, but there's also a lot that are on the books, as demonstrated by the construction employment surge over the last few years."
Steve, I believe the point that's being made is that the illegals won't show up in the weekly unemployment claim figures. (They can't, 'cause they don't qualify). So, they're getting laid off, but there's no accounting for it until perhaps the monthly jobs report, when the BLS does their birth/death schtick.
We didn't really believe the reported increase in December starts and we are equally inclined not to take too seriously the reported January plunge. The starts numbers are hugely volatile even when weather conditions are normal for the time of year, but that has not been the case in the past couple of months. The permits data are less affected by the weather, and the downtrend there seems to be over, at least for now. Another stable month in Feb would confirm the shift. Ultimately, this is more important than the noisy starts numbers, even though the latter appear more supportive of our medium-term bearish growth view. Ian Shepherdson, High Frequency Economics
i tracked a few years of data on 1 unit starts vs 1 unit permit.
they seem to track each other well until early 2006 and then from that point on, starts are consistently higher than permits (although both on a downward trend.)
CitiMortgage, a unit of Citigroup Inc., last month began requiring that borrowers who take out a stated-income loan sign an affidavit attesting to the fact that information about their income in the application is accurate and hasnt been modified by their mortgage broker or loan officer.
>
The affidavit will protect loan officers. What are its other benefits?
Maybe if we expanded our focus beyond housing a tad, we might form a more balanced view of things. As M. Darda points out:
"Trends in profits and productivity (relative to labor compensation) also suggest that unemployment will fall below 4% before this cycle ends, which means for labor, the best is probably yet to come."
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
You wouldn't know it from the price action today, but there are rumblings the plug is going to be pulled on a major subprime player. NEW has probably put itself in convenant violation with all of it's warehouse lenders and is completely at their mercy, so it has to be at the top of the list.
"Trends in profits and productivity (relative to labor compensation) also suggest that unemployment will fall below 4% before this cycle ends, which means for labor, the best is probably yet to come."
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
Recent data do not support this view. Namely, January payrolls came in weaker than expected and unemployment ticked up to 4.6%. And this weeks jobless claims looked bad.
Also this is consistent with the notion that nice weather in December and to a lesser extent in January held back the flood gates of construction layoffs. Positive November and December housing starts also support this notion. The January 14.3% decline in housing starts is consistent with the notion of "the flood gates opening" with regard to construction layoffs.
The big picture, I would argue, is that much of the growth we had in recent years was financed with debt that wasn't viable (i.e. won't be paid back). So I think a substantial portion of that growth may "roll back" in the form of credit retraction.
The as-reported earnings are what I recommend watching (and especially their growth), since they're a little harder to fudge and there's long-run data historical data available for apples-to-apples comparison.
"There were strong net upward revisions of 81K for the last two months. Payroll growth was revised up to 206K from 167K for December while Novembers payroll figure was revised to 196K from an originally estimated 154K. In other words, the trend of upward revisions has been very strong and suggests Januarys figures are more likely to be revised higher than the converse."
I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance.
Exactly. We're talking 600,000 to 1,000,000 (yes, a cool million) laid off by September where only a small fraction will get tallied into the unemployment statistics.
As the blue line in CR's graph so clearly shows, we haven't taken any of our medicine yet. The cough is getting worse. But look closely...
Construction employment is holding well above completions. This implies that contractors are manning up what jobs they have to get them done and quick. Ok, not a huge man-up. But this means when they decide to let people go... it will be in batches of 300,000 (on a national basis).
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
And RE (brokers, agents, inspectors, contractors...) Not to mention appliances (Maytag layoffs) or any industry anywhere in a bubble market (salaries to bring in new employees crimp profits). Believe it or not, I agree with you long term. Hence why I think bad recession, not depression. But first, we take our medicine and purge the debt.
"There were strong net upward revisions of 81K for the last two months. Payroll growth was revised up to 206K from 167K for December while Novembers payroll figure was revised to 196K from an originally estimated 154K. In other words, the trend of upward revisions has been very strong and suggests Januarys figures are more likely to be revised higher than the converse."
A typical economic slowdown or recession manifests as a period of strong growth, including strong job growth, which suddenly turns weak. Nothing here is inconsistent with the possibility of a recession going forward. The unemployment rate was 3.9% at the beginning of the Great Depression.
Can you give us a little context on the rumblings you are hearing? Are you in the subprime lending biz? How credible is the source in your view? I'm not implying your wrong, just trying to figure out how much weight to give to the rumor.
everyone save for my construction manager and project manager are 1099 Contract workers with me. Even my site superintendents are 1099. They are off site and out of my direct control. Even the punch-list carpenter guys we have are 1099. I give them a list and a location and I dont sit there behind them telling them what to do. thats what the other 1099 guy is for.
Joe's Electric Company is 1099 without even having to fill out the proper paperwork by virtue of having a trade name.
I believe that most of my sub's people are 1099 as well as it saves everyone on payroll taxes (in the short run at least!).
Employee status, true W-2 status is reserved for only the select few as with it comes greater responsibility by the owner....
ac said: "...A typical economic slowdown or recession manifests as a period of strong growth, including strong job growth, which suddenly turns weak..."
A convert. That's what I've been saying all along: Strong job growth has to at least BEGIN to turn weak. Forecasts of weakness aren't the same as actual weakness. Weakness concentrated in one sector that is balanced by strength in others isn't weakness in the larger sense, either.
bailey, Yes, construction losses will follow completions. We have discussed the illegal worker issue before (and there is no question that cash workers lose their jobs first), but this chart is referring to BLS reported jobs - and those will decrease too.
For those wanting balance, in many ways I'm balancing out two views: the mainstream view, and the extreme bearish views on housing. Both of those views have been wrong ... the Fed started saying they thought starts had bottomed at 1.7 million SAAR. I tried to be polite back then, but they were clearly wrong.
On the bearish side, many people thought prices would collapse. When I wrote in Dec 2005 that I thought sales would drop in 2006, but median prices will probably increase slightly, with declines in the more "heated markets", I took some heat from the bears. I based my view on fundamentals and reviewing historical housing busts.
So I think I've been pretty balanced on housing. Perhaps when people are talking about "balance", they mean the focus of this blog. Well, sorry, it's my blog.
The one key area Wall Street analysts and the Fed (including Bernanke) are wrong about right now, is they seem to believe that most of the impact of the housing bust is behind us. I am amazed that anyone believes that to be true. My view is any spillover impact from the bust is mostly ahead of us.
I'm not involved in the subprime or mortgage markets, though the markets I do trade are highly sensitive to general credit conditions. Smaller subprime lenders have been dropping like flies since early December, and there's a lot of speculation in the market that one or more of the top tier players is on the brink. Hardly a stretch there, and NEW being the most at risk is my own conclusion, though hardly one I'm alone on. I'm not short NEW, or any financials for that matter, but I do think we're not even out of the bottom of the first of this mess.
I'm afraid there is a "balance" deficiency here, although I'm certainly not blaming you for it. It seems that the best the optimists have to offer is a recommendation that we wait for the World's Most Famous Lagging Indicator (unemployment) to tell us that there may be economic trouble ahead. How pathetic. Surely there are more robust bullish arguments out there somewhere . . .
And yes, Tanta, I did forget the blue pill this morning -- but I'm on my way to the medicine cabinet now. ;>)
I don't necessarily doubt the rumors Turbo is hearing. On the other hand, I was visiting a blog this morning (the name of which I will not mention, since CR doesn't need that kind of infestation) wherein certain folks were sharing what they claimed were "insider rumors" about the subprime industry that didn't, to be honest, sound very "insider" to me, although certainly you could call them rumors.
As Turbo notes, the odds of a bigger player hitting the skids are high enough that anybody who wants to sound like an "insider" can easily "predict" that and eventually will look like a genius.
As I said, I'm not discounting the possibility that a big one will blow; nor do I think that all rumors are groundless--we've noticed, for instance, that Fleck seems to be hearing some good ones. I just can't figure out why traders aren't more spooked by the facts we can see than they are by the rumors we can't verify. This is all starting to remind me of my long-term problem with television: apparently there are way too many people who can't get interested in something unless it has a car wreck in it.
CR, the last time housing starts were this poor was in the early '90's. However, unemployment was around 7% at the time.
The unemployment rate now is only about 4.7% or so. Why do you have such a low opinion of construction workers that you don't think they'll find other employment in a tight labor market?
Let me say that I'm as guilty as anyone else has been lately of heading for BrokerUniverse and BrokerOutpost when I need a laugh. But if you spend too much time there and you don't have the background that will help you spot the BS, you're going to come to some bizarre conclusions.
Here's a post on BU from this morning:
Weve built up a business helping lenders and banks by purchasing their charge-offs, scratch & dents, and other nonperforming or underperforming mortgages. We buy everything from singles notes to pools, 1sts, 2nds, helocs, etc.
We have the finances and resources to take our business to the next level, but were challenged in locating more sellers.
There are numerous trade organizations and resources that provide contact info for mortgage wholesalers and retailers, but thats not the case when it comes to resources to find those in the secondary market that are tasked with disposing of nonperforming paper for lenders and banks.
Can anyone point me to where I could look to locate companies and/or people looking to sell their problem children?
Thanks!
You really think that someone who has "built up" a nuclear waste business needs to go looking for leads on a broker website (brokers being famous for not being "lenders" or "banks")? Or that a legit business wouldn't leave the name of its business on the post?
You think it's possible that someone is just trawling for some dirt? The poster's name is "Jack S."
Well Tanta, if you're a little patient and if Mel Gibson can sober up, I'm sure there will be a subdivision or two that they can blow up when they make the next Lethal Weapon movie...maybe that will get the traders' attention.
Tanta,
I'm not sure that a lot of traders have focused on this or have any concerns about spill over to the rest of the mortgage biz. I did a search last night for stories, posts, etc raising concern about Alt-A loans and came away with nothing that hadn't been published in the last 24 hours and that was one or two stories that didn't appear in any mainstream publications. It's is not on the screen yet.
Tanta, that reminds me of a story. (Don't worry, I'm not ALWAYS a jerk trying to score points off of others.)
Remember several years ago, the Russian debt-default crisis? Russia defaulted on their sovereign debt, and the conditions were along the lines of what we're seeing now with sub-prime, only world-wide.
I was watching the big banks take their hits on this news, but checked into it and discovered that although the total amount of debt was large, it was spread around, and no major U.S. bank had a large enough percentage of it in their portfolio(s) to really hurt them seriously.
I beat myself up for years for not buying on the hysteria (which would have profited me handsomely), which wasn't actually justified if one just stepped back and took a longer view.
As I see it, NEW is a replay. Yes, it's involved in sub-prime, but it's a much larger player than the others that have or are going belly-up. It has nearly a years' worth of earnings in cash, and is nowhere near the limits of its credit-lines. Hysteria vs. reason.
Merrill: Subprime EPDs Accelerating
Early payment defaults on subprime residential loans are accelerating, and creditors are being highly critical of whom they do business with, a top Merrill Lynch analyst told investors Feb. 14. Merrill's Kenneth Bruce also said lenders are under intense pressure to tighten their underwriting guidelines, which could lead to a credit crunch for subprime borrowers. During the same conference call, Merrill researcher Kamal Abdullah raised the specter of a subprime "contagion" that could lead to the inability of the "bottom" 25% of all subprime borrowers to get loans. MortgageWire broke the news Feb. 9 that Merrill is making margin calls on nondepository subprime firms that it has been financing. The investment banking firm, like other Street firms, has been forcing lenders to buy back bad loans. Several undercapitalized wholesalers that cannot meet Merrill's demands -- and the demands of other secondary-market loan buyers -- have been forced into bankruptcy, including OwnIt Mortgage and ResMae of California and Mortgage Lenders Network of Connecticut. (For more details, see the Feb. 19 issue of National Mortgage News.)
Hint: REITs borrow money to make loans with, and then pay off the borrowings with the proceeds of the sale or securitization of the loans.
Being under your limit on your warehouse lines can mean you're selling loans faster than you're originating them. It can mean you aren't selling anything any more, so you aren't originating anything any more, either. It can mean that your warehouse lender is leaning on you with higher net worth or income requirements, which you aren't meeting, which can then basically "freeze" your credit line significantly under its original contractual limit. Context is everything.
Warehouse lines are not sources of operating cash. Strictly speaking. If they've become a source of operating cash, then look out below!
"Employee status, true W-2 status is reserved for only the select few as with it comes greater responsibility by the owner....
hope this helped."
It does, dc, thanks. It tells me that w-2 status is probably a fairly rare occurence in the constructin biz.
"I believe that most of my sub's people are 1099 as well as it saves everyone on payroll taxes (in the short run at least!)."
Now here's where it gets interesting. The guys that Joe the Electrician hire are most definately W-2 employees, at least from the perspective of the IRS. I would assume that these hires work under Joe's supervision and control. They don't just go about installing light fixtures and running wires without Joe telling them where, and without Joe supervising the work. If Joe pays them under the table, end of story. But if Joe gives them a 1099, his "independant contractors" can file an SS-8 with the IRS, which essentially rats Joe out. This is what the "independant contractor" does to put Joe on the hook for employment taxes. Not only does Joe find himself needing to pony up the employment taxes (his share AND the employee's share), but the IRS will also assess a portion of the income taxes that should have been withheld, as well.
I know how this works. I had a client, a taxi cab company, that the IRS put into bankruptcy over this issue. It only takes one disgruntled worker to bring down a whole lot of IRS pain on Joe.
That's interesting, winjr. I know a lot of contract underwriters who are really pissed that they can't find enough 1099 work lately (they like doing Schedule C). All the lenders who hire them for short-term contracts want to issue W-2s. They used to negotiate it; now they won't.
My view is any spillover impact from the bust is mostly ahead of us.
Absolutely correct. Everybody's so damned impatient. This'll take years to work out; heck, it could take a decade.
Sebastian, your problem is that you won't believe the snake is behind the rock until you it jumps out and bites you, despite the unmistakable rattling sounds. Newsflash! That's too late.
"All the lenders who hire them for short-term contracts want to issue W-2s."
Not surprised, Tanta. The IRS began this employee v. independant contractor crackdown about 15 years ago or so. Smart employers are real sensitive to the issue -- better to pay "x" now, than to pay "2x", plus interest and penalties later.
And the IRS -- they didn't care that their assessment bankrupted my client. That told me just how serious they were about the crackdown.
Regarding NEW's warehouse lines, are these disclosed in previous SEC filings? (I've been too lazy to check
One of the concerns is violation of covenants, with the possibility that restatement of earnings may be sufficient violation in and of itself to risk the line. This is in addition to the income/net worth triggers which could limit the line but not remove it altogether.
Sebastian, I keep noting "Many of these workers will find new jobs". I can't repeat everything in every post!
But there are two problems: 1) the speed of the jobs losses will create what economists call friction, and 2) many of these housing related jobs are relatively high paying with low education requirements, therefore the current job holders might have difficultly finding new jobs with similar pay.
This is why we need to keep an eye on the reported residential construction job losses. If they are slower than I expect, than the economy can absorb these workers better.
I pointed out on Wednesday that (IMO) residential construction employment is one of the three keys to understand the severity of the impact of the housing bust on the general economy. The first was some sort of sector-specific credit crunch - that has already happened. The second is employment (we are watching). And the third is MEW and the associated impact of less MEW on the economy.
Anyone who hasn't read this should as it is very informative. He also provides results from some of his REO (Real Estate Owned as listed on bank balance sheets) test samples in San Diego. His tests show the 2nd mortgages are not holding up to stress very well. He also shows why trying to get a short sale done is going to be harder this cycle. A lot of good stuff.
Your tone has always been balanced and measured. That is why I like reading your posts. But I would think you appreciate also having thoughtful commenters though they may disagree with you.
I have made the argument that the liquidity backdrop along with low interest rates and very healthy corporate earnings are underpinning the economy even as the interest sensitive sectors of the economy go through an inventory adjustment.
Also given the recent dollar devaluation, labor and housing costs are rather reasonable historically. And given that housing was crowding out other sectors of the economy, the recent housing slowdown is actually helping boost the other sectors by freeing up resources.
So as long as interest rates stay low I think the chances of a recession are rather small. Maybe only 10%.
John, all the warehouse information should be in the SEC filings. I personally go straight to the footnotes on that stuff--for precisely the reason that telling me what the line limit vs. outstandings is doesn't tell me what I want to know.
You bet your donuts that restatement of the financials will trigger the wrath of the warehouse lender. Also, frankly, will using too many warehouse dollars to buy back loans with. (The things are intended for the "gestation" of new loans, not for floating the capital to buy back mistakes with.) I haven't spent any time looking at NEW's past financials in this regard because, obviously, there's no point until they come out with the new and improved ones at month-end. But I'd bet substantially more than NEW's current share price that there are some conversations going on, right this minute, between NEW and the lenders that could supply the dialog for Brian's Lethal Weapon: First Subdivision Blood movie.
Fullcarry, fair enough. If I was reading this blog, I'd be more interested in the analysis than the conclusion. I'd draw my own conclusions - as you are doing.
That is why I've tried to explain the reasons I think housing will do worse in '07 than '06, why I think the spillover from housing into the general economy is ahead of us, what the possible spillover effects will be, etc. I'd be doing the same thing if I didn't have a blog - write down my reasons why I think something, and then review it in the future. It's a humbling experience!
BTW, I've read several of the Wall Street analysts projections for 2007. They all sound similar: 2.5% to 3.0% real GDP growth with "significant downside risks". I've never seen the same phrase repeated so many times! I guess I'm just weighting those "downside risks" a little more.
Goldman Sachs' Jan Hatzius is actually bearish for housing and thinks the Fed will wait until the housing downturn shows up significantly in the form of job losses and move fairly aggressively expecting the year to close at 4.25%. A chart of their GDP vs housing here: Paper Economy - A US Real Estate Bubble Blog: 2007 Goldman Sachs Housing Conference
The broad credit markets are still so wildly bullish that, as stupid as this sounds, it takes a very brave (and probably foolish) soul to go short credit (outside of subprime) on bad news, which is why the broad market appears not to have taken notice. That's also why there's so much (semi-informed) speculation about the possible fate of NEW, etc. Will a large subprime failure finally be a tipping point for credit spreads? That's the question I'm really trying to answer. Oh well, as Neil would say, got popcorn?
So as long as interest rates stay low I think the chances of a recession are rather small. Maybe only 10%
Surprised to hear that out of a fellow goldbug! I can name a dozen reasons why the economy's running on empty right off the top of my head. Housing's only the first domino likely to drop and knock over all the rest. [Apologies for the mixed metaphors.]
my only other significant experience with a credit blow has been in emerging market fixed income. and i remember when russia blew up, its not like the world stopped lending to the US. nor when brazil went in the tank or mexico or whoever the heck else.
subprime junk debt blows up all the time and the prime players still get their juice.
the real question to me is why was that crap rated BBB in the first place???
Interesting that the Goldman Sachs graph shows housing as a drag well into 2008, but that last quarter of 2006 had the strongest impact....(?)
It won't take long to find out if they're right, anyway.
But I think the ramping foreclosure and NOD charts elsewhere, plus the tightening of lending standards for re-fi's, tell us more about where we are headed...
I'm afraid I'm missing this one. The data I see from the Census [http://www.census.gov/const/www/quarterly_starts_completions.pdf]shows that completions are down by 29 percent 4th quarter of 2005 to 4th quarter 2006. Is there another data series that I should be looking at?
I think it's significant that housing completions are still quite strong and a large amount of new housing is being pumped into a market that doesn't need a large amount of new housing. Add to that the foreclosure properties that are could start showing up in large numbers and reduced demand due to lenders bowing out of the market and you might have one very miserable housing market this spring.
Especially if people start losing their jobs too.
Its a shame, but I have a hard time trusting SAAR anymore. I know the NAR adjusted their correction technique mid slowdown, and even if BLS plays it straight, the process breaks at inflection points.
Yep the problem is that stress signs are happening while UE is down and pay is increasing. When things turn down, say 600K UE and the loss of demand from that, things will be much worst.
Home prices declined from a year earlier in about half of all metropolitan areas in the fourth quarter, the National Association of Realtors reported.
It was the first time the trade group has recorded declining or unchanged prices in the majority of cities covered since it began collecting the data in 1979, a Realtors spokesman said. On a national basis, the median home price during the quarter was $219,300, down 2.7% from a year earlier. Prices began falling in many areas last year after a boom that pushed prices up at double-digit annual rates in much of the country in the first half of this decade.
Big Picture
bold is mine.
Looks like things are headed for a once a generation event.
CR, your blog is the epicenter of topicality nowadays. Thanks for your excellent finds and reserved commentary. I appreciate the views of many of your commenters as well.
With a 2.7% vacancy rate, that level of permits looks a bit too high for the conditions. To me, that is.
CR:
It would be nice to have a graph showing unemployment rate along with the strts/completions. I know, I know, they say it's different this time, it's actually going to be worse!
Regarding construction employment: We are hearing that the illegal aliens are the first to lose their jobs. Because they are undocumented, what shoes up in the numbers may look different than previous years.
From the good folks over at Boston Herald via Housing Bubble Blog
The Boston Herald reports fron Massachusetts. Just trying to sell a deluxe downtown condo is no picnic in this market. Yet a few developers in Dorchester and Roxbury are finding buyers willing to shell out big numbers as if it were the summer of 2005 all over again. But hold the champagne.
Many of those buyers are facing foreclosure after signing up to buy not one, but two, three or four units for numbers well higher than $1 million. Sometimes the foreclosure notices are arriving before anyone has even moved in.
These developers appear to have recruited their own pool of live bodies ready to sign off on whatever mortgage paperwork they are shown. The developer walks away with a big sale. A profusion of easy, stated-income loans makes it all possible.
When you couldnt put together a legitimate deal (anymore), you had to sell scams, Dorchester housing researcher John Anderson said of real estate downturn. Anderson has identified three or four groups of speculators who are scoring big at a time when most are not even scoring at all.
These real estate wheeler-dealers have bought and quickly flipped at least 150 to 200 units. The prices are often more than $300,000, or even $400,000, not bad for tough neighborhoods in a down market. As many as 30 units are now mired in foreclosure proceedings, often just a few months after the sale. Its about as fast as a mortgage can go into default.
This suspicious sales boomlet is producing what should be a statistical impossibility, two and often three condos in a triple-decker all facing foreclosure at the same time. Examples can be found on Park, Dix, Armedine, Draper and Bowdoin streets.
Sellers, Storrs says, need to continue to be brutally aggressive on their prices. Its just a fact of life, he said. You hear a lot its not fair, my house is worth more and I say, yeah, thats true, but not in todays market.
The Boston Globe. Boston homeowners, reacting to a fifth year of property tax hikes, have inundated the city with requests for relief. Current assessments are based on property values as of Jan. 1, 2006, before last years downturn was in full swing.
OK, rebound stats may be false and the ending of no doc loans will end it.
Also the ending of the bubble is going to affect tax revenues. Causing more UE.
Good analysis
Guest Commentary: Ramsey on Foreclosure Impact | Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
from above ref
"Starting from 2002, every participant in the broad real estate arena has been trained to ignore financing as an integral part of all real estate transactions. It is so easy that it seems anyone who wants a loan can get a loan. No down payment? No credit? No problem."
The western region housing start numbers were ghastly. Down to 212K from 319 in December, and one presumes that weather was not as big a factor here as in the east coast. The last time starts were this low was a one month spike down at the end of December 1996, but the last time starts were consistently in this range was 1992. In Feb 2006, this number was 487K. Either unemployment claims will see a bump in this region or Pat Buchanan and the Minutemen holding down the border will be mauled by the rush of day laborers moving back to Mexico.
The market certainly isn't taking thses numbers as the end of the world. I find the markets reactions puzzling
If anyone remembers, I posted about a friend who sold two units together at what he considered market price. My friend is a professional developer, so he knows the market. The buyer flipped them in one day for $100k more each....that was in Dorchester.
Banker
Why should it be puzzling? The housing slowdown was disounted by the market a long time ago.
What hasn't been discounted by the market is how the non-housing, non-interest sensitive sectors of the US economy were starved for resources. Those sectors are now taking off with housing slowing down.
I find the markets reactions puzzling
Why should it be puzzling?
Sockpuppet repartee -- isn't that adorable? Not to mention disingenuous.
Fellas, here's a hot tip for you: NEW is yielding 40%! Load up and pass it on.
And write if you get work.
The market certainly isn't taking thses numbers as the end of the world. I find the markets reactions puzzling
Probably part of it is that the permits number was close to expected, and I think that's a better indicator of where things are going since it's less volatile and less affected by weather.
I think the headline number sounds more dramatic than it really is, since you could see it coming earlier from the housing permits. But it could be an indication that payrolls are about to take a hit, and possibly consumer confidence and spending as a result.
Dear CR
Just spouting off, so please take this comment in that spirit but is it correct to use the term correlation here to describe relationship between jobs and starts. Not doubting that a relationship exists but has there been actual correlation coefficient run between these two variables? That might be interesting to see. Of course, I am too lazy to attempt it myself...
Your blog is fantastic and all I can do is pick nits!
Regards
CR,
Your irrefutable logic is starting to annoy me.
Historical correlations work until the robot armies from Mars start building houses for their subjugated earthlings (or until illegal immigrants take over the construction field).
Getting in Front of the Reality Train:
Winter (Economic and Market) Watch » Getting in Front of the Fast Moving Reality Train
Although an unemployed illegal and unemployed legal both are without a job, it is likely that the unemployed legal can hold on longer onto their place in the economy through unemployment payments. More illegals result in a faster downturn in the entire retail economy than unemployed legals.
Illegals are the "hot money" of the employment world.
I've brought this up before, but it's important to remember, the builders are continuing to build independant of market demand.
In the san diego area, Chula Vista specifically (but it's the same for most of the large new developements throughout the county), the new builds are all part of masterplanned communities with HOA's and Mello Roose etc. In Chula Vista they have several new communities that are less than half done. But the 128 million dollar high school to service them is built and the mello roos fees to pay for it are the current dirt lots yet to be built on. Each community already has the pool center built and paid for by the builders who expect to get paid back through fees. They just started to grade a huge swath of land enough for 15 thousand homes in Chula Vista. Their plan is to sell 3 thousand homes a year each of the next five years. The city has already done much of the infrastructure along with the builders on major roads, sewers, drainage etc, that needs to be paid back. The bulders have to pick up the HOA dues on all the empty homes to keep the landscapers employeed. This is a huge growth engine that can't stop on a dime. I spoke with a superintendant who told me that they are building shells of homes to keep the permits from expiring but they aren't putting in expensive cabinets etc to others in the area sell.
Just like you cant build only part of 100 condo tower if only say 50 sell, you can't only build part of a masterplanned community. It's all or nothing.
The construction job losses you are predicting are inevitable IMO, and highly contagious into many other related segments so multiply by 4 or more. This can't be a closely held secret. The FED is looking at the very same nambers and already seeing GDP drifting lower to reinforce their views, not to mention the deteriorating lending market that they will fiercely protect.
I'm bearish but what is the FED's likely response? What will the outcome of their response be? Will it add to housing related demand (even though we hardly need more housing units)?
I'm betting on a cut or 2 by late summer. So we get a much less valuable dollar. We get a short term decline in international demand for treasury notes but it helps to cure the trade deficit and potentially prevents a full blown '30s depression...
Re unemployed construction workers.
I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance. The family business that finished my basement does not pay unemployment insurance. I do not pay it even though 90% of my revenue now comes from one customer.
Wow, 4shzl's been taking his Vitamin S (Snot) this morning. Hey, dude, chill out! Maybe you need, like, a crystal or something.
The Ultra Advanced Psychotronic Money Magnet Professional Version 1.0
http://www.lifetechnology.org/moneymagnetpro.htm
ECRI has an optimistic projection for construction for the near future: the leading construction index at ECRI | Home
I wouldn't hold my breath too much for that unemployment to "show up" in official numbers. What we quite likely will notice are the secondary effects like reduced spending on whatever construction workers and their families pay money for.
Probably part of it is that the permits number was close to expected, and I think that's a better indicator of where things are going since it's less volatile and less affected by weather.
I think the headline number sounds more dramatic than it really is, since you could see it coming earlier from the housing permits. But it could be an indication that payrolls are about to take a hit, and possibly consumer confidence and spending as a result.
I pretty much agree with all of this. The numbers today, while not good, are not nearly as bad as the headline number suggests. Starts are extremely choppy (we definitely "chopped" down in January) but if you look at the past four months the rate of decline has slowed considerably. Given the permits and the HMI number from yesterday, there are signs of stabilization, at least for the time being.
The question is whether or not the stability will last. The answer to that, I believe, hinges on where the economy is headed. It's not likely we have a full-fledged housing bust without a recession. If we have one over the next year, I think all bets are off and we go down further. However, if the economy holds up and inventories continue to get pared down, I think housing ceases to be a drag on the economy towards the end of the year.
4shzl said: "...Sockpuppet repartee -- isn't that adorable? Not to mention disingenuous.
Fellas, here's a hot tip for you: NEW is yielding 40%! Load up and pass it on..."
I'd seen the "sockpuppet" reference here before, but didn't understand it. Now I do, thanks.
And don't knock NEW.
I've got a nice profit in it since I bought it earlier in the week. It's going to be a great investment.
S.
I wouldn't hold my breath too much for that unemployment to "show up" in official numbers.
Why not? They showed up on the way up.
Steve - the large adjustment made to the employment basis may mean that quite a few of them didn't.
"Though WLI growth has eased for two weeks it remains well above last August's low, indicating a positive U.S. growth outlook," said Lakshman Achuthan, managing director at ECRI.
"With the industrial slowdown continuing, it may be that near-term we will have a Goldilocks economy with a soft spot."
Sounds like ECRI is in the Goldilocks camp. It will be interesting to see whether their credibility holds up over the next couple of years.
"I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance."
Robert, it depends. If the builder hires "Joe the Electrical Guy" to string the lights, Joe will be an independant contractor for withholding purposes. He's not under the direct supervision of the builder. But if Joe hires four workers to help him, technically the hires are W-2 employees, 'cause they ARE under the direct supervision and control of Joe.
Does Joe do the right thing? We probably all have our doubts, but it's hard to assess.
dc1000, perhaps you can chime in here? What has been your experience on this issue?
MaxedOutMama,
True, but I don't see how people can say that construction losses won't show up at all in unemployment. Yes, I understand there's a lot of cash workers and illegals, but there's also a lot that are on the books, as demonstrated by the construction employment surge over the last few years.
ECRI has an optimistic projection for construction for the near future: the leading construction index at www.businesscycle.com
I take it this is subscription only? I don't see it on their website.
"True, but I don't see how people can say that construction losses won't show up at all in unemployment. Yes, I understand there's a lot of cash workers and illegals, but there's also a lot that are on the books, as demonstrated by the construction employment surge over the last few years."
Steve, I believe the point that's being made is that the illegals won't show up in the weekly unemployment claim figures. (They can't, 'cause they don't qualify). So, they're getting laid off, but there's no accounting for it until perhaps the monthly jobs report, when the BLS does their birth/death schtick.
I think Ian Shepherdson gets it right:
We didn't really believe the reported increase in December starts and we are equally inclined not to take too seriously the reported January plunge. The starts numbers are hugely volatile even when weather conditions are normal for the time of year, but that has not been the case in the past couple of months. The permits data are less affected by the weather, and the downtrend there seems to be over, at least for now. Another stable month in Feb would confirm the shift. Ultimately, this is more important than the noisy starts numbers, even though the latter appear more supportive of our medium-term bearish growth view. Ian Shepherdson, High Frequency Economics
34 posts, by east coast lunchtime. This thread will be a barn burner. Look for 100+ tonight.
anyone have in-depth views on permits?
i tracked a few years of data on 1 unit starts vs 1 unit permit.
they seem to track each other well until early 2006 and then from that point on, starts are consistently higher than permits (although both on a downward trend.)
is this meaningful or just abberation in data?
Mortgage_Refinancing_Gets_Tougher: Personal Finance News from Yahoo! Finance
CitiMortgage, a unit of Citigroup Inc., last month began requiring that borrowers who take out a stated-income loan sign an affidavit attesting to the fact that information about their income in the application is accurate and hasnt been modified by their mortgage broker or loan officer.
Steve,
-- in the subscription excerpts section.
This is the leading construction chart at ECRI | Home
Maybe if we expanded our focus beyond housing a tad, we might form a more balanced view of things. As M. Darda points out:
"Trends in profits and productivity (relative to labor compensation) also suggest that unemployment will fall below 4% before this cycle ends, which means for labor, the best is probably yet to come."
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
Caveat: as long as interest rates stay low.
ac,
I heard Achuthan being interviewed -- he's not making any predictions beyond this year. The news release says "near-term".
You wouldn't know it from the price action today, but there are rumblings the plug is going to be pulled on a major subprime player. NEW has probably put itself in convenant violation with all of it's warehouse lenders and is completely at their mercy, so it has to be at the top of the list.
"Trends in profits and productivity (relative to labor compensation) also suggest that unemployment will fall below 4% before this cycle ends, which means for labor, the best is probably yet to come."
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
Recent data do not support this view. Namely, January payrolls came in weaker than expected and unemployment ticked up to 4.6%. And this weeks jobless claims looked bad.
Also this is consistent with the notion that nice weather in December and to a lesser extent in January held back the flood gates of construction layoffs. Positive November and December housing starts also support this notion. The January 14.3% decline in housing starts is consistent with the notion of "the flood gates opening" with regard to construction layoffs.
The big picture, I would argue, is that much of the growth we had in recent years was financed with debt that wasn't viable (i.e. won't be paid back). So I think a substantial portion of that growth may "roll back" in the form of credit retraction.
Fullcarry said: "Maybe if we expanded our focus beyond housing a tad, we might form a more balanced view of things..."
That's a great idea. Here's an easily-accessible dataset for anyone looking for clues about what's happening/is going to happen in the economy:
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
The as-reported earnings are what I recommend watching (and especially their growth), since they're a little harder to fudge and there's long-run data historical data available for apples-to-apples comparison.
Sebastia
BR,
Thanks. I didn't catch it at first, seeing as how they were hiding it right there on the front page!
ac
Again from Darda regarding Jan payrolls:
"There were strong net upward revisions of 81K for the last two months. Payroll growth was revised up to 206K from 167K for December while Novembers payroll figure was revised to 196K from an originally estimated 154K. In other words, the trend of upward revisions has been very strong and suggests Januarys figures are more likely to be revised higher than the converse."
I suspect that a lot of these folks are independent contractors, not W-2 employees. So even the legals may not be eligible for unemployment insurance.
Exactly. We're talking 600,000 to 1,000,000 (yes, a cool million) laid off by September where only a small fraction will get tallied into the unemployment statistics.
As the blue line in CR's graph so clearly shows, we haven't taken any of our medicine yet. The cough is getting worse. But look closely...
Construction employment is holding well above completions. This implies that contractors are manning up what jobs they have to get them done and quick. Ok, not a huge man-up. But this means when they decide to let people go... it will be in batches of 300,000 (on a national basis).
I would say it more simply: Right now in the US labor is pretty inexpensive relative to what it was in year 2000. Given that companies are flush with cash, the job market outside of housing (and autos) should continue its solid expansion.
And RE (brokers, agents, inspectors, contractors...) Not to mention appliances (Maytag layoffs) or any industry anywhere in a bubble market (salaries to bring in new employees crimp profits). Believe it or not, I agree with you long term. Hence why I think bad recession, not depression. But first, we take our medicine and purge the debt.
Got popcorn?
Neil
Again from Darda regarding Jan payrolls:
"There were strong net upward revisions of 81K for the last two months. Payroll growth was revised up to 206K from 167K for December while Novembers payroll figure was revised to 196K from an originally estimated 154K. In other words, the trend of upward revisions has been very strong and suggests Januarys figures are more likely to be revised higher than the converse."
A typical economic slowdown or recession manifests as a period of strong growth, including strong job growth, which suddenly turns weak. Nothing here is inconsistent with the possibility of a recession going forward. The unemployment rate was 3.9% at the beginning of the Great Depression.
Turbo,
Can you give us a little context on the rumblings you are hearing? Are you in the subprime lending biz? How credible is the source in your view? I'm not implying your wrong, just trying to figure out how much weight to give to the rumor.
Thanks
winjr:
everyone save for my construction manager and project manager are 1099 Contract workers with me. Even my site superintendents are 1099. They are off site and out of my direct control. Even the punch-list carpenter guys we have are 1099. I give them a list and a location and I dont sit there behind them telling them what to do. thats what the other 1099 guy is for.
Joe's Electric Company is 1099 without even having to fill out the proper paperwork by virtue of having a trade name.
I believe that most of my sub's people are 1099 as well as it saves everyone on payroll taxes (in the short run at least!).
Employee status, true W-2 status is reserved for only the select few as with it comes greater responsibility by the owner....
hope this helped.
That's not what you said originally. I was responding to the following statement:
"Recent data do not support this view."
So I was showing you recent data.
And now your:
"Nothing here is inconsistent with the possibility of a recession going forward."
No there isn't and neither is the converse. As I said originally I am trying to bring some balance to the views here.
ac said: "...A typical economic slowdown or recession manifests as a period of strong growth, including strong job growth, which suddenly turns weak..."
A convert.
That's what I've been saying all along: Strong job growth has to at least BEGIN to turn weak. Forecasts of weakness aren't the same as actual weakness. Weakness concentrated in one sector that is balanced by strength in others isn't weakness in the larger sense, either.
S.
bailey, Yes, construction losses will follow completions. We have discussed the illegal worker issue before (and there is no question that cash workers lose their jobs first), but this chart is referring to BLS reported jobs - and those will decrease too.
For those wanting balance, in many ways I'm balancing out two views: the mainstream view, and the extreme bearish views on housing. Both of those views have been wrong ... the Fed started saying they thought starts had bottomed at 1.7 million SAAR. I tried to be polite back then, but they were clearly wrong.
On the bearish side, many people thought prices would collapse. When I wrote in Dec 2005 that I thought sales would drop in 2006, but median prices will probably increase slightly, with declines in the more "heated markets", I took some heat from the bears. I based my view on fundamentals and reviewing historical housing busts.
So I think I've been pretty balanced on housing. Perhaps when people are talking about "balance", they mean the focus of this blog. Well, sorry, it's my blog.
The one key area Wall Street analysts and the Fed (including Bernanke) are wrong about right now, is they seem to believe that most of the impact of the housing bust is behind us. I am amazed that anyone believes that to be true. My view is any spillover impact from the bust is mostly ahead of us.
Best to all.
I'm not involved in the subprime or mortgage markets, though the markets I do trade are highly sensitive to general credit conditions. Smaller subprime lenders have been dropping like flies since early December, and there's a lot of speculation in the market that one or more of the top tier players is on the brink. Hardly a stretch there, and NEW being the most at risk is my own conclusion, though hardly one I'm alone on. I'm not short NEW, or any financials for that matter, but I do think we're not even out of the bottom of the first of this mess.
I need a housing upgrade and visit new houses often. Empiracle data says illegals are a big part of construction employment.
Deciding how much first order UE comes from the reduction of WIP depends so much on the unknown percentage of illegals.
Is there any noteworthy estimate out there?
CR,
I'm afraid there is a "balance" deficiency here, although I'm certainly not blaming you for it. It seems that the best the optimists have to offer is a recommendation that we wait for the World's Most Famous Lagging Indicator (unemployment) to tell us that there may be economic trouble ahead. How pathetic. Surely there are more robust bullish arguments out there somewhere . . .
And yes, Tanta, I did forget the blue pill this morning -- but I'm on my way to the medicine cabinet now. ;>)
Turbo & Brian:
I don't necessarily doubt the rumors Turbo is hearing. On the other hand, I was visiting a blog this morning (the name of which I will not mention, since CR doesn't need that kind of infestation) wherein certain folks were sharing what they claimed were "insider rumors" about the subprime industry that didn't, to be honest, sound very "insider" to me, although certainly you could call them rumors.
As Turbo notes, the odds of a bigger player hitting the skids are high enough that anybody who wants to sound like an "insider" can easily "predict" that and eventually will look like a genius.
As I said, I'm not discounting the possibility that a big one will blow; nor do I think that all rumors are groundless--we've noticed, for instance, that Fleck seems to be hearing some good ones. I just can't figure out why traders aren't more spooked by the facts we can see than they are by the rumors we can't verify. This is all starting to remind me of my long-term problem with television: apparently there are way too many people who can't get interested in something unless it has a car wreck in it.
CR, the last time housing starts were this poor was in the early '90's. However, unemployment was around 7% at the time.
The unemployment rate now is only about 4.7% or so. Why do you have such a low opinion of construction workers that you don't think they'll find other employment in a tight labor market?
Sebastian
Let me say that I'm as guilty as anyone else has been lately of heading for BrokerUniverse and BrokerOutpost when I need a laugh. But if you spend too much time there and you don't have the background that will help you spot the BS, you're going to come to some bizarre conclusions.
Here's a post on BU from this morning:
Weve built up a business helping lenders and banks by purchasing their charge-offs, scratch & dents, and other nonperforming or underperforming mortgages. We buy everything from singles notes to pools, 1sts, 2nds, helocs, etc.
We have the finances and resources to take our business to the next level, but were challenged in locating more sellers.
There are numerous trade organizations and resources that provide contact info for mortgage wholesalers and retailers, but thats not the case when it comes to resources to find those in the secondary market that are tasked with disposing of nonperforming paper for lenders and banks.
Can anyone point me to where I could look to locate companies and/or people looking to sell their problem children?
Thanks!
You really think that someone who has "built up" a nuclear waste business needs to go looking for leads on a broker website (brokers being famous for not being "lenders" or "banks")? Or that a legit business wouldn't leave the name of its business on the post?
You think it's possible that someone is just trawling for some dirt? The poster's name is "Jack S."
Mortgage Grapevine: Need info on Non-Performing Scratch & Dents
Looks like some good stuff to chew on in here. I've just skimmed it
Link
Here's a link to the audio for the event at which it was presented
more info
Well Tanta, if you're a little patient and if Mel Gibson can sober up, I'm sure there will be a subdivision or two that they can blow up when they make the next Lethal Weapon movie...maybe that will get the traders' attention.
Tanta,
I'm not sure that a lot of traders have focused on this or have any concerns about spill over to the rest of the mortgage biz. I did a search last night for stories, posts, etc raising concern about Alt-A loans and came away with nothing that hadn't been published in the last 24 hours and that was one or two stories that didn't appear in any mainstream publications. It's is not on the screen yet.
Tanta, that reminds me of a story. (Don't worry, I'm not ALWAYS a jerk trying to score points off of others.)
Remember several years ago, the Russian debt-default crisis? Russia defaulted on their sovereign debt, and the conditions were along the lines of what we're seeing now with sub-prime, only world-wide.
I was watching the big banks take their hits on this news, but checked into it and discovered that although the total amount of debt was large, it was spread around, and no major U.S. bank had a large enough percentage of it in their portfolio(s) to really hurt them seriously.
I beat myself up for years for not buying on the hysteria (which would have profited me handsomely), which wasn't actually justified if one just stepped back and took a longer view.
As I see it, NEW is a replay. Yes, it's involved in sub-prime, but it's a much larger player than the others that have or are going belly-up. It has nearly a years' worth of earnings in cash, and is nowhere near the limits of its credit-lines. Hysteria vs. reason.
Sebastia
Merrill: Subprime EPDs Accelerating
Early payment defaults on subprime residential loans are accelerating, and creditors are being highly critical of whom they do business with, a top Merrill Lynch analyst told investors Feb. 14. Merrill's Kenneth Bruce also said lenders are under intense pressure to tighten their underwriting guidelines, which could lead to a credit crunch for subprime borrowers. During the same conference call, Merrill researcher Kamal Abdullah raised the specter of a subprime "contagion" that could lead to the inability of the "bottom" 25% of all subprime borrowers to get loans. MortgageWire broke the news Feb. 9 that Merrill is making margin calls on nondepository subprime firms that it has been financing. The investment banking firm, like other Street firms, has been forcing lenders to buy back bad loans. Several undercapitalized wholesalers that cannot meet Merrill's demands -- and the demands of other secondary-market loan buyers -- have been forced into bankruptcy, including OwnIt Mortgage and ResMae of California and Mortgage Lenders Network of Connecticut. (For more details, see the Feb. 19 issue of National Mortgage News.)
BrokerUniverse - Origination News
Sebastian,
To be fair, surviving the Russian debt default did involve a Fed-organized bailout of LTCM.
is nowhere near the limits of its credit-lines.
Sebastian, you are sure that this is a good thing? Which "credit lines" are you talking about?
Hint: REITs borrow money to make loans with, and then pay off the borrowings with the proceeds of the sale or securitization of the loans.
Being under your limit on your warehouse lines can mean you're selling loans faster than you're originating them. It can mean you aren't selling anything any more, so you aren't originating anything any more, either. It can mean that your warehouse lender is leaning on you with higher net worth or income requirements, which you aren't meeting, which can then basically "freeze" your credit line significantly under its original contractual limit. Context is everything.
Warehouse lines are not sources of operating cash. Strictly speaking. If they've become a source of operating cash, then look out below!
"Employee status, true W-2 status is reserved for only the select few as with it comes greater responsibility by the owner....
hope this helped."
It does, dc, thanks. It tells me that w-2 status is probably a fairly rare occurence in the constructin biz.
"I believe that most of my sub's people are 1099 as well as it saves everyone on payroll taxes (in the short run at least!)."
Now here's where it gets interesting. The guys that Joe the Electrician hire are most definately W-2 employees, at least from the perspective of the IRS. I would assume that these hires work under Joe's supervision and control. They don't just go about installing light fixtures and running wires without Joe telling them where, and without Joe supervising the work. If Joe pays them under the table, end of story. But if Joe gives them a 1099, his "independant contractors" can file an SS-8 with the IRS, which essentially rats Joe out. This is what the "independant contractor" does to put Joe on the hook for employment taxes. Not only does Joe find himself needing to pony up the employment taxes (his share AND the employee's share), but the IRS will also assess a portion of the income taxes that should have been withheld, as well.
I know how this works. I had a client, a taxi cab company, that the IRS put into bankruptcy over this issue. It only takes one disgruntled worker to bring down a whole lot of IRS pain on Joe.
That's interesting, winjr. I know a lot of contract underwriters who are really pissed that they can't find enough 1099 work lately (they like doing Schedule C). All the lenders who hire them for short-term contracts want to issue W-2s. They used to negotiate it; now they won't.
My view is any spillover impact from the bust is mostly ahead of us.
Absolutely correct. Everybody's so damned impatient. This'll take years to work out; heck, it could take a decade.
Sebastian, your problem is that you won't believe the snake is behind the rock until you it jumps out and bites you, despite the unmistakable rattling sounds. Newsflash! That's too late.
"All the lenders who hire them for short-term contracts want to issue W-2s."
Not surprised, Tanta. The IRS began this employee v. independant contractor crackdown about 15 years ago or so. Smart employers are real sensitive to the issue -- better to pay "x" now, than to pay "2x", plus interest and penalties later.
And the IRS -- they didn't care that their assessment bankrupted my client. That told me just how serious they were about the crackdown.
Tanta,
Regarding NEW's warehouse lines, are these disclosed in previous SEC filings? (I've been too lazy to check
One of the concerns is violation of covenants, with the possibility that restatement of earnings may be sufficient violation in and of itself to risk the line. This is in addition to the income/net worth triggers which could limit the line but not remove it altogether.
Sebastian, I keep noting "Many of these workers will find new jobs". I can't repeat everything in every post!
But there are two problems: 1) the speed of the jobs losses will create what economists call friction, and 2) many of these housing related jobs are relatively high paying with low education requirements, therefore the current job holders might have difficultly finding new jobs with similar pay.
This is why we need to keep an eye on the reported residential construction job losses. If they are slower than I expect, than the economy can absorb these workers better.
I pointed out on Wednesday that (IMO) residential construction employment is one of the three keys to understand the severity of the impact of the housing bust on the general economy. The first was some sort of sector-specific credit crunch - that has already happened. The second is employment (we are watching). And the third is MEW and the associated impact of less MEW on the economy.
Best to all.
OCRenter2's and I believe someone yesterday posted this from Pigginton's site: Guest Commentary: Ramsey on Foreclosure Impact | Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
Anyone who hasn't read this should as it is very informative. He also provides results from some of his REO (Real Estate Owned as listed on bank balance sheets) test samples in San Diego. His tests show the 2nd mortgages are not holding up to stress very well. He also shows why trying to get a short sale done is going to be harder this cycle. A lot of good stuff.
CR,
Your tone has always been balanced and measured. That is why I like reading your posts. But I would think you appreciate also having thoughtful commenters though they may disagree with you.
I have made the argument that the liquidity backdrop along with low interest rates and very healthy corporate earnings are underpinning the economy even as the interest sensitive sectors of the economy go through an inventory adjustment.
Also given the recent dollar devaluation, labor and housing costs are rather reasonable historically. And given that housing was crowding out other sectors of the economy, the recent housing slowdown is actually helping boost the other sectors by freeing up resources.
So as long as interest rates stay low I think the chances of a recession are rather small. Maybe only 10%.
Regards FC
John, all the warehouse information should be in the SEC filings. I personally go straight to the footnotes on that stuff--for precisely the reason that telling me what the line limit vs. outstandings is doesn't tell me what I want to know.
You bet your donuts that restatement of the financials will trigger the wrath of the warehouse lender. Also, frankly, will using too many warehouse dollars to buy back loans with. (The things are intended for the "gestation" of new loans, not for floating the capital to buy back mistakes with.) I haven't spent any time looking at NEW's past financials in this regard because, obviously, there's no point until they come out with the new and improved ones at month-end. But I'd bet substantially more than NEW's current share price that there are some conversations going on, right this minute, between NEW and the lenders that could supply the dialog for Brian's Lethal Weapon: First Subdivision Blood movie.
Fullcarry, fair enough. If I was reading this blog, I'd be more interested in the analysis than the conclusion. I'd draw my own conclusions - as you are doing.
That is why I've tried to explain the reasons I think housing will do worse in '07 than '06, why I think the spillover from housing into the general economy is ahead of us, what the possible spillover effects will be, etc. I'd be doing the same thing if I didn't have a blog - write down my reasons why I think something, and then review it in the future. It's a humbling experience!
BTW, I've read several of the Wall Street analysts projections for 2007. They all sound similar: 2.5% to 3.0% real GDP growth with "significant downside risks". I've never seen the same phrase repeated so many times! I guess I'm just weighting those "downside risks" a little more.
Best Wishes.
Goldman Sachs' Jan Hatzius is actually bearish for housing and thinks the Fed will wait until the housing downturn shows up significantly in the form of job losses and move fairly aggressively expecting the year to close at 4.25%. A chart of their GDP vs housing here:
Paper Economy - A US Real Estate Bubble Blog: 2007 Goldman Sachs Housing Conference
Tanta,
The broad credit markets are still so wildly bullish that, as stupid as this sounds, it takes a very brave (and probably foolish) soul to go short credit (outside of subprime) on bad news, which is why the broad market appears not to have taken notice. That's also why there's so much (semi-informed) speculation about the possible fate of NEW, etc. Will a large subprime failure finally be a tipping point for credit spreads? That's the question I'm really trying to answer. Oh well, as Neil would say, got popcorn?
So as long as interest rates stay low I think the chances of a recession are rather small. Maybe only 10%
Surprised to hear that out of a fellow goldbug! I can name a dozen reasons why the economy's running on empty right off the top of my head. Housing's only the first domino likely to drop and knock over all the rest. [Apologies for the mixed metaphors.]
I think Goldilocks might need a sweater. Just a bit cooler than "just right".
Goldilocks better buy some arctic gear... the Kondratieff Winter is coming!
my only other significant experience with a credit blow has been in emerging market fixed income. and i remember when russia blew up, its not like the world stopped lending to the US. nor when brazil went in the tank or mexico or whoever the heck else.
subprime junk debt blows up all the time and the prime players still get their juice.
the real question to me is why was that crap rated BBB in the first place???
which aint AAA anyhow, but still
The lag between starts and completions is not 6 month anymore. Wea have a shift toward luxury condos with a cicle about a year or even more.
Expect the average diff to drift from 6 month toward 7-8.
D.I.D.,
Sinners live fast and die young, and the grim reaper's coming for your portfolio.
p.s.: My precious metals are doing just fine, thank you. Too bad for you that dollars are devaluing faster than stocks are climbing.
Interesting that the Goldman Sachs graph shows housing as a drag well into 2008, but that last quarter of 2006 had the strongest impact....(?)
It won't take long to find out if they're right, anyway.
But I think the ramping foreclosure and NOD charts elsewhere, plus the tightening of lending standards for re-fi's, tell us more about where we are headed...
I'm afraid I'm missing this one. The data I see from the Census [http://www.census.gov/const/www/quarterly_starts_completions.pdf]shows that completions are down by 29 percent 4th quarter of 2005 to 4th quarter 2006. Is there another data series that I should be looking at?