Some developers in my area should thank me. I just finished gathering signatures to stop 2500 homes from being build in my town. We got more than enough signatures. If we can delay them one more year, they can not afford to build.
The next step in you bullwhip diagram is lots of cancelled contracts. This should come both from homebuilders dropping land purchases and end-buyers cancelling home purchases. The best source for this info is probably anecdotal so keep your ear to the ground. I do land acquisition for a major builder and I have seen a few public home builders back out of deals, but nothing too significant yet. I will keep everyone informed.
It also interesting to note that sales in the Northeast and West (the most overheated markets) are down a combined 20% year over year. The south where home prices are relatively cheap is the only area supporting new home sales. Time to short western and NE focused homebuilders like Toll and Lennar?
The second question is maybe they know that prices might drop but they figure that even with a drop the marginal cost of construction (MCC) will still be less than the eventual sales price. Can anyone tell me why builders would stop until MC of Construction = sales price? What are the current margins in an average city?
P.S. I think the "cancellation" in the diagram is - a dropping of prices. Did anyone see the frontline (??) on the Boston real estate bust in the 80s (it was filmed in the early 80s)? It was all about the problem of inventory management and how by the time many of the new construction projects were done that demand had dropped and the condos had to be sold well below the MCC.
I guess the big wild-card in all of this is will inflation pressures continue to force the fed to raise rates. What is the balance between growth and inflation that is OK with the new fed?... Are consumers spent out? Will wage inflation come to the rescue? Will I be able to holiday at Jinny Lake come may?? http://www.nps.gov/grte/galleries/scenery/jennylake.jpg
It appears that you have been looking pretty hard at the market. How do you see (best guess) things playing out over the next two years? What do you see as the main economic wild-cards and drivers to keep an eye on? What scares you? What do you think could lead to a soft landing?
Keep in mind that inventories are nation wide. Local areas areas could be different. With houses appreciating over 100% in the last 4 years there is still money to be made in building. The issue is how much cash flow does the builder have, when did he buy the land, and what are the terms of his own construction loans. We might see a very slow bubble bursting here.
I have been tracking foreclosures from foreclosures.com. I started 5 months ago when foreclosures were at near historic lows (prior to the drop in rates I think foreclosures were at a couple a thousand in CA at one time). In California there were 60 foreclosures. They currently stand at 1044. Nationwide they were at 60k they are now at 107k. I don't think we will see blood in the streets until later next year or in 2007 (if ever).
I'm scared of the adjustable rate mortgages. $1 trillion in loans (12% of the outstanding loans) are going to adjust in 2007. People are going to either:
1. refinance (at higher rates)
2. continue with their current mortgage (at higher rates)
3. sell
If most people can afford the higher rates then they will opt for 1 or 2, which likely augurs for an economic slowdown, as people will have less to disposable income to power our consumption driven economy. I really fear that many people will forced into option 3, selling, which could devastate housing prices and lead to a recession.
Paul, your prognosis is precisely why RE bulls like Donald Trump say global markets need to keep interest rates low. there's a global housing bubble, and if rates aren't kept down the whole system will fall apart and we'll have a global recession/depression. this isn't good for anyone, particularly those who thrive on making money not of their own sweat equity.
There's the other fear layered on top of that one Richard that says if we allow the rates to sink, the system which is about to fall apart if the rates are allowed to rise, will collapse in hyper-inflation before it has a chance to collapse in a global recession/depression.
Do people still pay attention to Donald Trump? [They do. Someone pasted Fortune and Trump the other day with a lengthy piece about his 'wealth'. Not 1 picture of his most recent wife, so the piece lacked substance. QED]
Record permits and housing starts.
Falling Sales with record inventories.
If I was a builder (or an investor in homebuiders), I wouldn't like that math.
Best to all.
smells like a bullwhip....
http://www.accenture.com/pic/ideas/outlook/pov/infosharing_fig1lg.gif
can you say #1 was two months ago, #5 is starting now and #4 will start in a few months..... I like #6....
Some developers in my area should thank me. I just finished gathering signatures to stop 2500 homes from being build in my town. We got more than enough signatures. If we can delay them one more year, they can not afford to build.
BBB-
The next step in you bullwhip diagram is lots of cancelled contracts. This should come both from homebuilders dropping land purchases and end-buyers cancelling home purchases. The best source for this info is probably anecdotal so keep your ear to the ground. I do land acquisition for a major builder and I have seen a few public home builders back out of deals, but nothing too significant yet. I will keep everyone informed.
It also interesting to note that sales in the Northeast and West (the most overheated markets) are down a combined 20% year over year. The south where home prices are relatively cheap is the only area supporting new home sales. Time to short western and NE focused homebuilders like Toll and Lennar?
The second question is maybe they know that prices might drop but they figure that even with a drop the marginal cost of construction (MCC) will still be less than the eventual sales price. Can anyone tell me why builders would stop until MC of Construction = sales price? What are the current margins in an average city?
P.S. I think the "cancellation" in the diagram is - a dropping of prices. Did anyone see the frontline (??) on the Boston real estate bust in the 80s (it was filmed in the early 80s)? It was all about the problem of inventory management and how by the time many of the new construction projects were done that demand had dropped and the condos had to be sold well below the MCC.
I guess the big wild-card in all of this is will inflation pressures continue to force the fed to raise rates. What is the balance between growth and inflation that is OK with the new fed?... Are consumers spent out? Will wage inflation come to the rescue? Will I be able to holiday at Jinny Lake come may??
http://www.nps.gov/grte/galleries/scenery/jennylake.jpg
Paul....
It appears that you have been looking pretty hard at the market. How do you see (best guess) things playing out over the next two years? What do you see as the main economic wild-cards and drivers to keep an eye on? What scares you? What do you think could lead to a soft landing?
Keep in mind that inventories are nation wide. Local areas areas could be different. With houses appreciating over 100% in the last 4 years there is still money to be made in building. The issue is how much cash flow does the builder have, when did he buy the land, and what are the terms of his own construction loans. We might see a very slow bubble bursting here.
Does anyone know, where on the internet, I can find a graph of "number of forecloseres vs. time" and "mortgage interest rates vs. time"?
Gerry, I don't know about foreclosures, but for rates, I graphed the last few years on Angry Bear: Mortgage Rates.
You can get raw data on rates from Freddie Mac.
Best Regards.
I have been tracking foreclosures from foreclosures.com. I started 5 months ago when foreclosures were at near historic lows (prior to the drop in rates I think foreclosures were at a couple a thousand in CA at one time). In California there were 60 foreclosures. They currently stand at 1044. Nationwide they were at 60k they are now at 107k. I don't think we will see blood in the streets until later next year or in 2007 (if ever).
BBB-
I'm scared of the adjustable rate mortgages. $1 trillion in loans (12% of the outstanding loans) are going to adjust in 2007. People are going to either:
1. refinance (at higher rates)
2. continue with their current mortgage (at higher rates)
3. sell
If most people can afford the higher rates then they will opt for 1 or 2, which likely augurs for an economic slowdown, as people will have less to disposable income to power our consumption driven economy. I really fear that many people will forced into option 3, selling, which could devastate housing prices and lead to a recession.
Paul, your prognosis is precisely why RE bulls like Donald Trump say global markets need to keep interest rates low. there's a global housing bubble, and if rates aren't kept down the whole system will fall apart and we'll have a global recession/depression. this isn't good for anyone, particularly those who thrive on making money not of their own sweat equity.
There's the other fear layered on top of that one Richard that says if we allow the rates to sink, the system which is about to fall apart if the rates are allowed to rise, will collapse in hyper-inflation before it has a chance to collapse in a global recession/depression.
Do people still pay attention to Donald Trump? [They do. Someone pasted Fortune and Trump the other day with a lengthy piece about his 'wealth'. Not 1 picture of his most recent wife, so the piece lacked substance. QED]