CNN: Jump in Cancelled Orders for New Homes
Submitted by
CalculatedRisk on Fri, 02/24/2006 - 4:26pm (30 comments)
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Excellent Blog. Very informative. And very well organized.Online Auctions are really looking up with more and more people interested in buying and selling product online.
Keep it up. We need more such blogs which provide quality
information.
Thank you
It's clear from the Census stats that even rather lower rates of construction than the last two years were enough to raise the home
Year SF & MF Mfrd Total
1998 1,271 374 1,645
1999 1,302 338 1,640
2000 1,231 281 1,512
2001 1,273 196 1,469
2002 1,359 174 1,533
2003 1,499 140 1,639
2004 1,611 124 1,735
2005 1,716 121 1,837
SF & MF: Single-family and multi-family starts
Mfrd: Manufactured home placements
ownership rate 0.5 percentage points a year from 1994-2004. Throughout that period, about a quarter of the production -- about 400k units a year -- went into raising the ownership rate. But despite the higher construction pace in 2005, the home ownership rate stopped rising, and may even have slightly fallen. Unless one believes that the rate of household formation suddenly surged by something like 50%, one must conclude that the number of units being bought up by "investors" or second-home buyers was hundreds of thousands greater than in earlier years.
If speculative demand disappears and the absorption rate drops back more nearly to the household formation rate, inventory will be plentiful.
If speculators start unloading their holdings and the ownership rate starts dropping back from its present 69% towards the 64% range it maintained for decades before 1996, there will be a glut that will last for years.
The Census stats are here:
Vacancy Rates for Rental Units: 1970 to Present
Vacancy Rates for Homeowner units: 1970 to Present
Estimates of the Total Housing Inventory
Homeownership Rates for the U.S. and Regions: 1965 to Present
Homeownership Rates by Age of Householder: Fourth Quarter: 2004 and 2005
New Privately Owned Housing Units Started in the United States by Purpose and Design
Placements of New Manufactured Homes by Region and Size of Home
Let not forget the human factor. If home prices are dropping, then folks will wait to buy.
If folks are underwater, they cannot buy.
If folks see folks losing homes, then that will be a factor.
The opposite of the increase will be the comps in a neighborhood. Just as increasing comps drives prices, then dropping comps also drive prices.
Finding some conveniently usable stats for Midyear Population, By Age and Sex, correlating the numbers for 2004 against the Homeownership Rates by Age of Householder to get percentages of people in each 5-year age cohort who are homeowners, and examining the year-to-year deltas in the size of each 5-year age cohort, I see little support for the frequently heard claim that demographic trends will underpin strong demand for housing in the next few years. Though the age cohorts that encompass most first-time buyers will increase in size, the increase won't be anywhere near enough to counter even the stabilization of the ownership rate, let alone make up for disappearance of speculative demand.
This grapevine forum for mortgage brokers is very interesting. The site has links to many other sources of info on the current real estate environment.
here in the wilmington, nc area, we are seeing a differet kind of cancellation. a developers buys large tracts of land, subdivides lots, puts in roads, sewer, water and other infrastructure, and usually sells the completed subdivision to a builder, who takes down the lots in stages of completion. we are seeing more and more builder cancellations, which leave the developer with a highly leveraged tract of land. the fed funds rate increases have pushed interest rates, developers must pay, to 8%. when a builder cancels, it's not uncommon to see a developer paying over $1,00,000 a month just to hold on to the developed property.
Yes, as I warned/praised CR last week, he may have done his job too well. By highlighting the danger of the Bubble he may have helped deflate it. A Prophet never gets enough credit in his own country.
We are not out of the woods, danger signs are all around, but I suspect a lot fewer people are taking out second mortgages to make "can't miss" real estate investments as a result of CR's and others' work in highlighting the risks.
Good work sir. We may just squeak by this one. Certain speculators will get hurt, hey that is the market, but hopefully a lot of homeowners have been warned off.
On another page
the mortgage broker site reports:
Lester Dominick, president of MortgageFlex, told us last week that the REO (real estate-owned) tsunami should hit later this year or early next. He expects the first bloodletting will occur in investor properties. "They're going to get creamed," he predicted. He expects the Miami and Las Vegas markets could suffer the most. MortgageFlex, by the way, an LOS provider, is jumping into the servicing technology arena and already has two clients signed upÂ…
The crash begins. Of course, China is spending money on its peasants now instead of pouring it into loans.
If its really speculators that are canceling orders that is probably healthy for the housing market over the next few years.
Agreed. A controlled slow down would be ideal. But even then the decline in activity will slow the economy... but probably not enough to cause a recession buy itself.
But if people in general are putting off buying - not just speculators - then all bets are off.
dryfly,
The slowdown in housing activity is happening across the board.
Speculators - estimated to be 25 to 35 percent of the broad market - aren't buying any more. Throw all those homeowners who moved up into a bigger and more expensive home than they should have ... and you have a serious fall in aggregate demand for homes.
A big part of the price compression will start at the top, in high-end homes. When the general public stops moving up and the speculators stop buying at all, a recession is highly likely.
Throw in an inverted yield curve, and the recession gets even more likely.
Once price appreciation levels off(or even declines a little bit), and new buyers FINALLY figure out how much less expensive it is to rent than to buy, there will be a tremendous drop in demand and supply will skyrocket. I pay 1200/mo for a BRAND new home 4BR/2.5BA 2200sqft that comps for 325k. LOL, our new neighbors are renters and share my views.
Meanwhile building is going on at a breakneck pace here in the Portland/Vancouver area with 30% of the job growth in the last 5 years attributed to RE...this will not end nicely.
kirk
people are getting it.
i just advised a friend not to buy any real estate.
and i'm a broker.
buying real estate has been rational even with payments and interest carry exceeding rents because of the little g, growth.
remove g from the equation and renting is rational.
and its that time in DC.
we're turning what was planned to be a mixed use development into purely a commercial one because of the soft residential market. we'll do the residential when the time is right one day.
that said, i have another client who is making an offer on a $1.4MM house in kalorama, perhaps one of the finest in-town neighborhoods. it seems to make sense for him: long time horizon, over $1MM paid cash, and rental unit in the basement bringing in $2000.
one thing is for certain is that single family homes will out perform the condo market in 2006.
thanks dc - love to hear your take.
Must be a damn nice rental. Here in San Diego, a $700,000 SFR rents for $2,000 a month.
thats DC for ya. its a 1BR, 1000sqft basement rental unit that rents for $2000.00. Like i said, kalorama is one of the finest neighborhoods in the city.
things are expensive here.
doesn't mean some of the property values aren't out of whack tho.
Once price appreciation levels off(or even declines a little bit), and new buyers FINALLY figure out how much less expensive it is to rent than to buy...
So are you renting, Kirk?
One thing that really propelled the crazy housing market in eastern Mass. was the loss of rent control about 10 years ago -- rents started skyrocketing, and mortgages + property taxes weren't any more for many people per month than their rent was, plus a house was bigger than an apartment, in most cases. I'm not sure that equation holds true any longer, though.
I think there's been an overall loss of rental housing in the Boston area as many apartments have been converted into condos in the housing fever. Nevertheless, I see an awful lot of "For Rent" signs around. At the same time, rents really haven't gone down. I'm not sure what to make of that situation.
Holly,
Yes I'm a lowly scumbucket renter ..lol.. to buy the place I rent with little money down would cost me twice as much as I pay now in rent. Thats why I laugh, I'd have to be insane to buy at that price. There are tons of brand new homes for rent in our area(and more being built). Some developments are over 30% investor owned(according to the builders) and must be renting at a loss unless they own the new homes outright. My landlord used a voodoo loan to acquire this house and used the "equity" in his home to cover the fees etc.
Talk about rolling the dice......
kirk
Kirk, that's pretty much the position I'm in. To buy the same amount of space I rent now would cost about twice as much per month even with a fat down payment, which just strikes me as nuts even considering that I'd be building equity.
I read in Fortune magazine, I think, that housing prices would have to stay flat in Boston for 10 years in order for wages to catch up; does that count as a "soft landing" if it actually happens?
Holly,
I think your 10 yr scenario is actually the "Permanently High Plateau" theory. A soft landing will be a drop in prices in real terms, if I understand correctly, and a hard landing is where prices just drop...kerplunk...."Prices Down Nationally 4.5% Since Last June" is what I'm waiting to hear.
kirk
ps-even when I lived in MT from 03-05 it was cheaper to rent the(brand new) duplex we lived in rather than to buy a similar one across the street.....in Billings MT, not a place or state known for econmoic might(although home building has been doing very well and supporting the local economy) and there is absolutely no shortage of land..lol.
So why the high prices..who knows?
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