JPM income in line so its all good (If they had a loss though it might have been even better). So lets all load up again on equities 'cause with the next Benny cut (minimum 25bp) coming at end of October all markets are going to the moon!
Again, results "surprised" analysts to the downside. How many times have we seen analysts behind the times now across a spectrum of metrics. If anything that has come out of the economic ebbs and flows the past few years, it is, that whether it be oil, commodities, real estate, we absolutely need a new set of analysts. The ones we have are either (a) committed to kool aid (b) don't get it (c) both.
Housing starts way down and pointing lower, oil approaching its all time inflation-adjusted peak - I'd say the two most time-honored recession indicators out there are flashing red today.
"Given the company's expectations for paid losses, unless the cure rate and loss severity improves, the company does not foresee net income for the fourth quarter of 2007 and the full year 2008."
Needless to say that the consensus estimate was over $3....
Who exactly is going to buy all these houses? According to the MBA not too many people.
From Reuters:
"Total mortgage originations will likely decline 18 percent to $1.89 trillion, the lowest volume of purchase and refinance loans since $1.14 trillion in 2000, according to the forecast. Loan volume will slide another 6 percent in 2009, it said."
Of course the stock market will fly higher today on real earnings from INTC and hoping they can go with minimal writedowns then dump all the toxic waste into the super-SIV earnings from JPM. History may not repeat itself, but the world is starting to look rather like October 1972. Not that I have a lot of personal experience there, but 1973/75 was not a happy time for the economy or the stock market.
It looks like the big question is how far will starts decline. In three previous recessions starts declined to below 1,000,000.
You are not considering a downward revision in your forecast. I will stick to yours since I cannot do something better. Nevertheless, could it occur that, if credit problems worsen, you would have to change your forecast?
""We're on our way down and still picking up speed," said Christopher Thornberg, a Los Angeles-based economist who four years ago warned that the pace of housing price gains in the region couldn't be sustained."
Of course the stock market will fly higher today on real earnings from INTC and hoping they can go with minimal writedowns then dump all the toxic waste into the super-SIV earnings from JPM.
Yup, so far you got that right. About this whole thing getting very ugly, it only depends on which side of the elephant you're looking at. Obviously from the Big Boys' side, it's not looking so bad.
The market may have started off with a great leap up, but look for the thing to turn nasty before noon and head south from there. There comes a point that bad news simply overwhelms and I believe we are near that point.
"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."
Lee Adler at the Wallstreetexaminer might have an interesting point re: the ABCP & the recent rally in asset markets. He claims that over the past few weeks, refusal to roll over ABCP left excess capital out there and this capital flowed into treasuries and other asset classes. In the past few days, he argues, this trend has ended because they have been forced to roll over the paper (according to a canadian banking contact)
see theroxylandr's blog link for the full article. There may be something to this...
Daniel Gross also has an excellent write up on Paulson's speech and his words about the housing market, but his last paragraph and his last sentence is one that sticks.
"Even as hundreds of thousands of people saw their homes dispossessed (some of them were probably speculators who may have simply walked away from no-money-down mortgages), the problem was essentially invisible to Paulson. Of course, it's doubtful Paulson knows many subprime borrowers or subprime lenders. On the other hand, the former head of Goldman Sachs is a member in good standing of the club of Wall Street CEOs. When the subprime meltdown began to disturb the CEOs' sleep, he responded with alacrity. Even as he had harsh words for the entire mortgage complexfrom brokers to credit-rating agenciesand recommended far-reaching reforms, Paulson was careful to single out one class of actors for protection. He noted that the issue has been raised as to "whether greater liability should be imposed on securitizers and investors." In other words, should the Wall Street firms that peddled mortgage-backed securities that turned out to be worthless a few months later be subject to greater accountability through the legal system? His answer: "In my view, this is not the answer to the problem.""
For housing Starts, look at the past 4 recessions, they were all below 1 million starts. The 1990 recession looks like it was less than 800,000 starts.
I would guess that we shall see it bottom out closer to 500,000 than 1,000,000 because inventories are at record highs now after an unprecedented bubble and financing has dried up shrinking the pool of buyers. I would guess much closer to 500,000.
So, this time is going to be much worse for housing than any of the past 4 recessions. At this point, I don't think there is anything that can be done to stop that number from coming close to 500,000. Once enough builders have gone bankrput, inventory may begin to clear, not before.
The market could possibly rebound faster down the line if the US changes immigration policy to speed up the millions of legal immigration cases backlogged since INS days. A few million extra people over the next 5-10 years could help soak up excess inventory. But nothing is gong to stop that graph from getting a lot uglier over the next 2 years.
I'm caught by a similar conundrum (pardon that) because I tend to believe they're either being good sports or, if you will, tactful. So I add a choice to your multiple-guess array (d) they have read Voltaire - as parody and not as a positivist tract.
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M-F: "I would guess that we shall see it bottom out closer to 500,000 than 1,000,000 because inventories are at record highs now after an unprecedented bubble and financing has dried up shrinking the pool of buyers. I would guess much closer to 500,000."
That has been my forecast ever since I started posting here. I plan to be here when that actually happens and to find out what the real demand was, like LESS THAN 1.2M annually and more like 1.0M.
London, 17 October 2007 -- Moody's has reviewed the recently announced proposal to create the Master Liquidity Enhancement Conduit (M-LEC) and is presently in discussions with the participating banks. The proposal is intended to facilitate the refinancing of maturing Commercial Paper and Medium Term Notes issued by Structured Investment Vehicles (SIVs) through the creation of M-LEC. We believe the creation of M-LEC will have a generally positive impact on the SIV sector and when monitoring our SIV ratings, Moody's will take into account the potential impact of the initiative as well as the exposure of each vehicle to credit and liquidity risks.
Given that vacancy rates were never as high as they are now (30-50% higher than previous homebuilding recessions), why do you think we will have a less severe bottom? There was never a period with anything close to the speculative buying of single-family homes that we've had the past few years. Condos, sure, but houses?
I too think the starts number almost certainly has to fall well below 1m. Frankly, given the confluence of the credit market squeeze and over-building, it seems inevitable at this point.
"I wouldn't call 1.1M a substantial decline from 1.191M.
ozajh"
True, but the only time starts have been below a mil in the last 30 years is during recessions.
I think the analyst are also taking into account that the builders can't stop overbuilding.
ozajh, OK, how about "another 10%". I think we still have some ways to go. Hey, it's early here!
Jas, not true. Employment is a lagging indicator - as I've pointed out many times - but most companies will respond fairly quickly to a downturn in business. Your suggested time lag doesn't fit any historical data.
Also, you wrote: "At these low levels of starts, and completions to follow, the excess inventory is being worked off, right?"
Wrong. You are incorrect. First, starts will fall further - just wait. Second, to calculate the impact on inventory you also need to know the reported sales and cancellation rates. You can't just look at starts. With cancellation rates rising, and starts still too high, the inventory levels are still increasing.
With no margins, the homebuilders will stop building, because they will go bankrupt. With about 25% to 30% of the builders left, starts will fall precipitously to levels that will shock most (but not me).
As the weaker builders go bankrupt, their land will end up being marked down such that whoever picks up the pieces will be able to profitably build and sell new homes at lower costs and prices than before -- since building material and labor costs will also drop, at much lower costs and prices.
Although there will at some point be a fire sale of the existing vacant inventory, and that will temporarily drive down new construction (and annihilate a lot of builders), after that is over, volume will rebound in terms of units -- but not of revenues.
The fire sale is going to be very interesting -- here in the suburbs of Chicago, there is an incredible inventory of very high priced homes. The fire sale is going to destroy the market's price structure.
Never underestimate the power of self-delusion. As a land use/water law attorney in SoCal, I still have clients planning on putting up expensive houses in the Inland Empire in 08 and 09.
Everyone else's margins may be going to hell, but by god their product is going to do just fine.
I think the analyst are also taking into account that the builders can't stop overbuilding. edhopper
um, ultimately, that's ridiculous. You can be quite sure they will stop overbuilding. They are already having credit problems, most of their debt is now junk rated, and that will obviously get worse. BZH is offering to make a payment to debt holders just to keep them from forcing redemptions.
They don't exist in a fantasy land. They will stop overbuilding, and then they will need to build below demand until inventory is worked off.
Following jm and that inventory build and those "fire sales" somewhat less faithfully: will we see some demolition of that inventory, the shoddier segments, in an effort to not only reduce inventory but also to support sagging housing prices and restore profits?
Why should renters live in those squalid dwellings when they could move up to a new apartment in that recently renovated condo complex? They deserve better...and housing corporations do not deserve large vacancy rates...after all their civic minded efforts, philanthropy, really compared to HF corporations.
"...they will need to build below demand until inventory is worked off. ..."
Yes and no. "Demand" is not homogeneous. Although net household formation will slow as some move back in with parents or become roommates, the steady-state growth rate will support close to a million units a year of for-sale construction, plus a few hundred thousand rental units. But most of this demand is -- absent the myth that you need to buy the most expensive home you possibly can, to get on the escalator to sure-thing wealth -- at the low end.
Meanwhile, a relatively large fraction of the inventory is at the high end. Its quite conceivable that there will be a relatively rapid re-emergence of construction of reasonably sized and affordable housing even as the upper regions of the market completely collapse.
Even with recent price reductions, the number of homes with asking prices over $1 million for sale in Chicago's suburbs represents many years of inventory -- and they're mostly vacant new spec construction. I think these homes need to come down at least 30% in price to clear the market. That will crush the price structure below. Consider that the buyers of these homes will almost all be people selling homes elsewhere -- at prices 30% below what they expected. How long can the builders and the banks sit on this inventory?
Bob_in_Mass said: "...They will stop overbuilding, and then they will need to build below demand until inventory is worked off..."
You mean, where they need to stop overbuilding, right? In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons. We build according to need instead of with a "gold-rush" mentality like in California, and housing is very affordable here (also nothing like California). We don't have a massive overhang in supply of housing too expensive for people here (or moving here) to buy. So why would homebuilders dramatically slow down their building here?
The idea that prices won't shift and the high-end houses will just sit for several years while the builders build low-end homes seems rather spurious. Prices will definitely adjust along with building. They will be sold, at whatever price, and that will absorb as much demand as an equal number of low-end homes, which, too, will be sold at a price set by the market.
Builders cannot sit on inventory, their carrying costs are high and escalating quickly.
"um, ultimately, that's ridiculous. You can be quite sure they will stop overbuilding. They are already having credit problems, most of their debt is now junk rated, and that will obviously get worse. BZH is offering to make a payment to debt holders just to keep them from forcing redemptions.
They don't exist in a fantasy land. They will stop overbuilding, and then they will need to build below demand until inventory is worked off."
I was being a bit facetious, but builders do seem to always overbuild into a bust. That is why starts are still way above where they realistically should be, given present inventory. So yes, they do exist in a fantasy land. Until reality bites them in the ass.
Tried it, didn't work. I'm thinking of getting help from the guy with the conjure bag and maybe making an army of golems to destroy the excess inventory.
"In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons."
Sebastian,
Why give reasons? Get right to it, young man: It's different here!
And I know the nay-sayers are going to pipe up, "that's what they said about Florida, Vegas, Arizona, Bakersfield . . . ."
But where you live, it REALLY is different. It's nirvana. The lending is sane, the builders are prudent, the buyers are realistic, the jobs are secure -- you've got it all!
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"Jas, CR has been quite consistent about stating - when he believes it to be true - that builders are still starting too many homes."
What is too many? If the demand was 1.7M, annually, what would be too few? According to CRs estimates a total of 650K of excess units were built during 2004-06. So, pretty soon builders will be building too few, right?
I think that CR is hiding something that is very important. And that is the demand for housing. He has NEVER NEVER reconciled his estimate with the Census data that I have posted here at least four times. His silence speaks volume! He never addresses the data and keeps repeating how he arrived at his estimate. Scientists always must reconcile their estimate," or hypothesis, with the actual observations, no? For some reasons CR refuses to do that. And I know why, because if he does then he would have to eat his estimate and I don't think that he is ready yet. In a year he will have to when the evidence against his estimate would be overwhelming.
What Sebastian keeps missing is that the game ain't over, and there are plenty of markets that are lagging well behind. Think of San Diego and South FL as early adopters, and early decliners. Most of the rest of CA is catching up now to where these places were about 1.5 yrs ago. Parts of the NW are still 6 months or so lagging that. And then there is xanadu, NC, home of Sebastian. You see, it's time will come too, and when it does, it will only be that much uglier, because it is going to price peak at a double whammy, when spec demand is over, and when the job market starts tanking as the overall economy heads down the tubes when spillover from the rest of the early adopter housing bust markets keeps on coming.
But go ahead Sebastian, keep looking at things in isolation, and you'll be blissfully happy right up until the time the streamroller runs over you.
Jas,
I hope you are tipping CR alot, because you have an overwhelming sense of entitlement from him. I bet you are the type of person who would sue a the company that gave you a new car in a sweepstake, if you later got in a wreck. Your reasoning would be it was their fault for giving you the car in the first place. Your comments often stink of a spoiled and whiny nature.
You mean, where they need to stop overbuilding, right? In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons. We build according to need instead of with a "gold-rush" mentality like in California, and housing is very affordable here (also nothing like California). We don't have a massive overhang in supply of housing too expensive for people here (or moving here) to buy. So why would homebuilders dramatically slow down their building here?
Sebastian
When the Triangle MSA ever breaks into the top 40, then maybe it'll be analagous to something.
7 of the top 10 MSA's(14 of 20, 22 out of 30) are facing deteriorating housing conditions.
Geoff said: "But go ahead Sebastian, keep looking at things in isolation, and you'll be blissfully happy right up until the time the streamroller runs over you."
Geoff (and MTHood), if you had genuinely learned something from reading this blog you'd know what I know: Overbuilding is a key factor in housing "busts." California is "busting" and NC isn't, and the relative amount of building is one of the reasons. NC housing didn't bust the last time California did, either.
The real value of CR's blog, IMO, is not so much what he posts, but the sources of data. In the process of confirming/denying his viewpoints by examining first-hand the data he presents, that's when you can learn something really valuable.
So there, CR, I finally said something nice about you.
sebastion my daughter bought a beazer townhouse in carey last year. 3br 3.5 bath plus garage for 204,000. the section sold out quickly and is fully occupied.carey is in nc.
jim said: "sebastion my daughter bought a beazer townhouse in carey last year."
I know Cary. Routinely on the top 10 lists of most desirable small cities to live in, fast-growing, extremely low crime, year-round watering restrictions so it's not being squeezed by the drought as hard as Raleigh.
Although builders can't sit on their inventory, others can. After the high-end inventory has gone back to the banks, and they've finally got their REO disposal operations up to speed -- and have accepted that their recovery percentages will be lower than in their worst nightmares, and finally price to sell -- the fire sales of the high-end inventory will freeze the high-end resale market into stasis. Well-heeled owners who relocate will leave their homes vacant, perhaps trying vainly to rent them out at rates hardly anyone will pay, believing that if they just stick it out for a year or so the market will come back (consider how many "experts" are opining that this slowdown will be over in a year or 18 months). Even not-so-well-heeled relocatees will stick it out as long as they can. Like "holes" in a p-type semiconductor, the vacancies will migrate -- from spec-built inventory into the resale inventory.
Meanwhile, the surviving builders will pick up the assets of the fallen and keep on building. Even some of the bankrupts may keep on building, just like all those bankrupt airlines kept flying planes. Because their costs will be so much lower, they'll be able to undercut the homeowners who want to resell.
The point is not that the builders won't be building below demand. Yes, they'll be building somewhat below demand. But many people seem to think that building will fall so far below demand that the inventory overhang will quickly disappear, and we'll then be back to "normal". The point is that that's not going to happen. The builders will keep on building by undercutting the resellers.
How many resellers will be willing and able to bring to a closing a check the size they'll have to bring to compete on price with a builder who is operating under bankruptcy court protection, or who has bought assets from a bankrupt builder? The number who can do that will be less than the number who can keep holding on paying two mortgages at once, even if the home is vacant.
Building will slow, but not by enough that the inventory overhang will quickly disappear.
I think the fact that you assume that their will be any margins in building over the next 3 to 5 years, so that banks will lend homebuilders money to build more houses, is suspect. The more likely scenario that the flood of foreclosure will in fact undercut the price of construction whereas making building new homes an unprofitable endevour no matter how far the price of land collapses. Just my take. In any event, the homebuilders will get hammered. We shall see how the screws turn...
There are many, many people whose only career experience is in home construction, many with their own small companies -- people who would make even less trying to change careers than they will if they keep on building at much lower prices. Prices for lumber and other materials have dropped, and if the average new home floor area drops back just to the level of the late '90s, lumber demand will be even lower.
Land costs will also drop -- even for land not picked up from bankrupt builders -- and communities that have become dependent on revenues from construction-related fees will drop their "prices", too.
And the banks need loan customers, too. They can't just lock the money in their vaults.
To a first approximation, all the builders know how to do is build. And all the bankers know how to do is lend. The builders can and will drop their prices low enough to undercut the resellers, and the banks will lend the money.
It's the resellers who've bought or refinanced too high who are the ones that can't budge on price.
Next year at this time let's check back and see who is right. My guess is that the foreclosures will be under the cost of new construction. You don't think so. It will be interesting to find out. 10/17/08. The winner will get 100 shares of Beazer valued at 10/17/08. Wink.
My argument is not that foreclosures will be priced higher than new construction, but rather that they will crush the pricing structure from the top down such that the non-foreclosure resale market will be put into a state resembling that imposed on Han Solo in the first "Star Wars". With the resellers frozen in Carbonite, whatever demand is not being satisfied by the foreclosures themselves (and some sales by people willing and able to sell at far-below-peak prices) will be scarfed up by the builders.
Although there will be an enormous supply of foreclosures in certain areas, in certain price ranges, a lot of those homes may remain vacant for years, and some may eventually be torn down. Which would you rather buy, a 3,000 sqft foreclosure in poor repair in a deteriorating neighborhood with more foreclosures all around, slapped together at the peak of the bubble by unskilled labor, or a 2,200 sqft home in a spiffy new development being constructed by career builders who had enough smarts to land on their feet after this?
Most of the foreclosures will probably end up in the hands of investors who will rent them back to the same sort of people who got foreclosed upon. Their prices will drop down to the 120X rent level at which competent landlords will find them a good investment.
Meanwhile, the surviving builders will keep on building, undercutting the non-foreclosure resale market, in which numerous homes will remain vacant for very long periods while their upside-down owners cling to hope of a market rebound, finding some way to keep on making two mortgage payments every month.
It's not that the rate of construction won't fall, it's that it's not going to fall so low that the inventory gets worked off any time soon. Some people (not necessarily you) seem to think that if there's a year's worth of excess inventory to be worked off, the builders will all have to stop building for a year -- implying also that the inventory overhang will be gone in a year. My argument is that this is not going to happen -- the builders will find ways to keep on building -- and so the inventory overhang is going to be with us for many years into the future.
To be even more explicit, I quite agree that foreclosures will be below the cost of new construction. They'll have to be, because new construction will be a much more attractive product!
But I don't believe that's going to stop the builders from building lots of new homes. Some of the foreclosure-heavy developments are going to end up like trailer parks. It's always been possible to get a lot more physical home for your money in a trailer park, but that's never stopped the market for non-trailer new home construction.
Interesting graph comparing the starts/completions over many business cycles. It would be interesting to also see it adjusted for population levels. That might make the predictions of 500,000 to 1 million even scarier looking...
JPM income in line so its all good (If they had a loss though it might have been even better). So lets all load up again on equities 'cause with the next Benny cut (minimum 25bp) coming at end of October all markets are going to the moon!
I wouldn't call 1.1M a substantial decline from 1.191M.
Again, results "surprised" analysts to the downside. How many times have we seen analysts behind the times now across a spectrum of metrics. If anything that has come out of the economic ebbs and flows the past few years, it is, that whether it be oil, commodities, real estate, we absolutely need a new set of analysts. The ones we have are either (a) committed to kool aid (b) don't get it (c) both.
Stuart, if anyone is "suprised" by these numbers, it should be that they are still too high (not how far they have declined).
I'm just wondering when this will show up in the official employment numbers.
Best Wishes.
Housing starts way down and pointing lower, oil approaching its all time inflation-adjusted peak - I'd say the two most time-honored recession indicators out there are flashing red today.
Moin,
here another "shocking surprise"....
MGIC Investment Corporation and Mortgage Guaranty Insurance Corporation (MGIC
"Given the company's expectations for paid losses, unless the cure rate and loss severity improves, the company does not foresee net income for the fourth quarter of 2007 and the full year 2008."
Needless to say that the consensus estimate was over $3....
THUD! Woops, false bottom! Roll 12 sided dice and assess damage. The fun never ends in McMansions and Dragons.
Who exactly is going to buy all these houses? According to the MBA not too many people.
From Reuters:
"Total mortgage originations will likely decline 18 percent to $1.89 trillion, the lowest volume of purchase and refinance loans since $1.14 trillion in 2000, according to the forecast. Loan volume will slide another 6 percent in 2009, it said."
Here's the link:
2008 mortgage originations to hit 8-year low: MBA
| Reuters
Of course the stock market will fly higher today on real earnings from INTC and hoping they can go with minimal writedowns then dump all the toxic waste into the super-SIV earnings from JPM. History may not repeat itself, but the world is starting to look rather like October 1972. Not that I have a lot of personal experience there, but 1973/75 was not a happy time for the economy or the stock market.
adding...
I wouldn't be surprised if MBA erred on the high side with that prediction. This looks to be getting very ugly.
It looks like the big question is how far will starts decline. In three previous recessions starts declined to below 1,000,000.
You are not considering a downward revision in your forecast. I will stick to yours since I cannot do something better. Nevertheless, could it occur that, if credit problems worsen, you would have to change your forecast?
From LA times, today.
Southland home sales and prices plummet -- latimes.com
""We're on our way down and still picking up speed," said Christopher Thornberg, a Los Angeles-based economist who four years ago warned that the pace of housing price gains in the region couldn't be sustained."
Of course the stock market will fly higher today on real earnings from INTC and hoping they can go with minimal writedowns then dump all the toxic waste into the super-SIV earnings from JPM.
Yup, so far you got that right. About this whole thing getting very ugly, it only depends on which side of the elephant you're looking at. Obviously from the Big Boys' side, it's not looking so bad.
I'm just wondering where the spin is about the housing starts decline being caused by the weather.
OT - Daniel Gross sums all the recent BS up nicely.
"Protecting Paulson's Pals - The subprime collapse didn't bother the Bush administration, until Wall Street bankers started whimpering."
The subprime collapse didn't bother the Bush administration, until Paulson's pals began whimpering. - By Daniel Gross - Slate Magazine
The market may have started off with a great leap up, but look for the thing to turn nasty before noon and head south from there. There comes a point that bad news simply overwhelms and I believe we are near that point.
"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."
Expired
I wouldn't call 1.1M a substantial decline from 1.191M.
I agree.
CR,
Lee Adler at the Wallstreetexaminer might have an interesting point re: the ABCP & the recent rally in asset markets. He claims that over the past few weeks, refusal to roll over ABCP left excess capital out there and this capital flowed into treasuries and other asset classes. In the past few days, he argues, this trend has ended because they have been forced to roll over the paper (according to a canadian banking contact)
see theroxylandr's blog link for the full article. There may be something to this...
Thank you, CR, for getting up early this morning on the West Coast to post this for us.
Daniel Gross also has an excellent write up on Paulson's speech and his words about the housing market, but his last paragraph and his last sentence is one that sticks.
"Even as hundreds of thousands of people saw their homes dispossessed (some of them were probably speculators who may have simply walked away from no-money-down mortgages), the problem was essentially invisible to Paulson. Of course, it's doubtful Paulson knows many subprime borrowers or subprime lenders. On the other hand, the former head of Goldman Sachs is a member in good standing of the club of Wall Street CEOs. When the subprime meltdown began to disturb the CEOs' sleep, he responded with alacrity. Even as he had harsh words for the entire mortgage complexfrom brokers to credit-rating agenciesand recommended far-reaching reforms, Paulson was careful to single out one class of actors for protection. He noted that the issue has been raised as to "whether greater liability should be imposed on securitizers and investors." In other words, should the Wall Street firms that peddled mortgage-backed securities that turned out to be worthless a few months later be subject to greater accountability through the legal system? His answer: "In my view, this is not the answer to the problem.""
The whole thing worth a read is:
The subprime collapse didn't bother the Bush administration, until Paulson's pals began whimpering. - By Daniel Gross - Slate Magazine
You know, that $18/share price that Bank of America got for its stake in Countrywide doesn't seem like such a great deal anymore.
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CR: "I'm just wondering when this will show up in the official employment numbers."
Employment lags by 12-18 months! Businesses are horrible at managing supply-demand, especially, at turning points. That is why Business Cycles happen.
Jas
For housing Starts, look at the past 4 recessions, they were all below 1 million starts. The 1990 recession looks like it was less than 800,000 starts.
I would guess that we shall see it bottom out closer to 500,000 than 1,000,000 because inventories are at record highs now after an unprecedented bubble and financing has dried up shrinking the pool of buyers. I would guess much closer to 500,000.
So, this time is going to be much worse for housing than any of the past 4 recessions. At this point, I don't think there is anything that can be done to stop that number from coming close to 500,000. Once enough builders have gone bankrput, inventory may begin to clear, not before.
The market could possibly rebound faster down the line if the US changes immigration policy to speed up the millions of legal immigration cases backlogged since INS days. A few million extra people over the next 5-10 years could help soak up excess inventory. But nothing is gong to stop that graph from getting a lot uglier over the next 2 years.
Where is David Lereah to call the bottom? I for one am shocked! Absolutely shocked we haven't heard anyone call a bottom this morning on CNBC....
Stuart 9:06am,
I'm caught by a similar conundrum (pardon that) because I tend to believe they're either being good sports or, if you will, tactful. So I add a choice to your multiple-guess array (d) they have read Voltaire - as parody and not as a positivist tract.
--
Hello CR,
At these low levels of starts, and completions to follow, the excess inventory is being worked off, right?
At 1.1M level of starts when do you expect all the excess inventory to be worked off?
Thanks.
Jas
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M-F: "I would guess that we shall see it bottom out closer to 500,000 than 1,000,000 because inventories are at record highs now after an unprecedented bubble and financing has dried up shrinking the pool of buyers. I would guess much closer to 500,000."
That has been my forecast ever since I started posting here. I plan to be here when that actually happens and to find out what the real demand was, like LESS THAN 1.2M annually and more like 1.0M.
Jas
moody's on m-lec:
London, 17 October 2007 -- Moody's has reviewed the recently announced proposal to create the Master Liquidity Enhancement Conduit (M-LEC) and is presently in discussions with the participating banks. The proposal is intended to facilitate the refinancing of maturing Commercial Paper and Medium Term Notes issued by Structured Investment Vehicles (SIVs) through the creation of M-LEC. We believe the creation of M-LEC will have a generally positive impact on the SIV sector and when monitoring our SIV ratings, Moody's will take into account the potential impact of the initiative as well as the exposure of each vehicle to credit and liquidity risks.
Remind me never to invite JJ to a dinner party.
CR (and Tanta) thanks for all the posts . . . yesterday's prolific posting was great.
Jas,
CR has been quite consistent about stating - when he believes it to be true - that builders are still starting too many homes.
CR,
Given that vacancy rates were never as high as they are now (30-50% higher than previous homebuilding recessions), why do you think we will have a less severe bottom? There was never a period with anything close to the speculative buying of single-family homes that we've had the past few years. Condos, sure, but houses?
I too think the starts number almost certainly has to fall well below 1m. Frankly, given the confluence of the credit market squeeze and over-building, it seems inevitable at this point.
"I wouldn't call 1.1M a substantial decline from 1.191M.
ozajh"
True, but the only time starts have been below a mil in the last 30 years is during recessions.
I think the analyst are also taking into account that the builders can't stop overbuilding.
ozajh, OK, how about "another 10%". I think we still have some ways to go. Hey, it's early here!
Jas, not true. Employment is a lagging indicator - as I've pointed out many times - but most companies will respond fairly quickly to a downturn in business. Your suggested time lag doesn't fit any historical data.
Also, you wrote: "At these low levels of starts, and completions to follow, the excess inventory is being worked off, right?"
Wrong. You are incorrect. First, starts will fall further - just wait. Second, to calculate the impact on inventory you also need to know the reported sales and cancellation rates. You can't just look at starts. With cancellation rates rising, and starts still too high, the inventory levels are still increasing.
Best to all.
With no margins, the homebuilders will stop building, because they will go bankrupt. With about 25% to 30% of the builders left, starts will fall precipitously to levels that will shock most (but not me).
As the weaker builders go bankrupt, their land will end up being marked down such that whoever picks up the pieces will be able to profitably build and sell new homes at lower costs and prices than before -- since building material and labor costs will also drop, at much lower costs and prices.
Although there will at some point be a fire sale of the existing vacant inventory, and that will temporarily drive down new construction (and annihilate a lot of builders), after that is over, volume will rebound in terms of units -- but not of revenues.
The fire sale is going to be very interesting -- here in the suburbs of Chicago, there is an incredible inventory of very high priced homes. The fire sale is going to destroy the market's price structure.
Never underestimate the power of self-delusion. As a land use/water law attorney in SoCal, I still have clients planning on putting up expensive houses in the Inland Empire in 08 and 09.
Everyone else's margins may be going to hell, but by god their product is going to do just fine.
jm,
What you say is likely true. However, it will take several years to play out, so the "temporarily" you use is a very relative term.
I think the analyst are also taking into account that the builders can't stop overbuilding. edhopper
um, ultimately, that's ridiculous. You can be quite sure they will stop overbuilding. They are already having credit problems, most of their debt is now junk rated, and that will obviously get worse. BZH is offering to make a payment to debt holders just to keep them from forcing redemptions.
They don't exist in a fantasy land. They will stop overbuilding, and then they will need to build below demand until inventory is worked off.
Following jm and that inventory build and those "fire sales" somewhat less faithfully: will we see some demolition of that inventory, the shoddier segments, in an effort to not only reduce inventory but also to support sagging housing prices and restore profits?
Why should renters live in those squalid dwellings when they could move up to a new apartment in that recently renovated condo complex? They deserve better...and housing corporations do not deserve large vacancy rates...after all their civic minded efforts, philanthropy, really compared to HF corporations.
CR,
I think we still have some ways to go.
I do agree. If anything, I think your 1.1M estimate may be insufficiently pessimistic here. The current California numbers are horrible.
Bob_in_Mass,
"...they will need to build below demand until inventory is worked off. ..."
Yes and no. "Demand" is not homogeneous. Although net household formation will slow as some move back in with parents or become roommates, the steady-state growth rate will support close to a million units a year of for-sale construction, plus a few hundred thousand rental units. But most of this demand is -- absent the myth that you need to buy the most expensive home you possibly can, to get on the escalator to sure-thing wealth -- at the low end.
Meanwhile, a relatively large fraction of the inventory is at the high end. Its quite conceivable that there will be a relatively rapid re-emergence of construction of reasonably sized and affordable housing even as the upper regions of the market completely collapse.
Even with recent price reductions, the number of homes with asking prices over $1 million for sale in Chicago's suburbs represents many years of inventory -- and they're mostly vacant new spec construction. I think these homes need to come down at least 30% in price to clear the market. That will crush the price structure below. Consider that the buyers of these homes will almost all be people selling homes elsewhere -- at prices 30% below what they expected. How long can the builders and the banks sit on this inventory?
Bob_in_Mass said: "...They will stop overbuilding, and then they will need to build below demand until inventory is worked off..."
You mean, where they need to stop overbuilding, right? In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons. We build according to need instead of with a "gold-rush" mentality like in California, and housing is very affordable here (also nothing like California). We don't have a massive overhang in supply of housing too expensive for people here (or moving here) to buy. So why would homebuilders dramatically slow down their building here?
Sebastia
JM,
The idea that prices won't shift and the high-end houses will just sit for several years while the builders build low-end homes seems rather spurious. Prices will definitely adjust along with building. They will be sold, at whatever price, and that will absorb as much demand as an equal number of low-end homes, which, too, will be sold at a price set by the market.
Builders cannot sit on inventory, their carrying costs are high and escalating quickly.
Francis @ 10:59
Get your fees up front. I didn't and lived to regret it.
"um, ultimately, that's ridiculous. You can be quite sure they will stop overbuilding. They are already having credit problems, most of their debt is now junk rated, and that will obviously get worse. BZH is offering to make a payment to debt holders just to keep them from forcing redemptions.
They don't exist in a fantasy land. They will stop overbuilding, and then they will need to build below demand until inventory is worked off."
I was being a bit facetious, but builders do seem to always overbuild into a bust. That is why starts are still way above where they realistically should be, given present inventory. So yes, they do exist in a fantasy land. Until reality bites them in the ass.
Geoff: I know, I'll cast a MGIC missile!
Tried it, didn't work. I'm thinking of getting help from the guy with the conjure bag and maybe making an army of golems to destroy the excess inventory.
"In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons."
Sebastian,
Why give reasons? Get right to it, young man: It's different here!
And I know the nay-sayers are going to pipe up, "that's what they said about Florida, Vegas, Arizona, Bakersfield . . . ."
But where you live, it REALLY is different. It's nirvana. The lending is sane, the builders are prudent, the buyers are realistic, the jobs are secure -- you've got it all!
--
"Jas, CR has been quite consistent about stating - when he believes it to be true - that builders are still starting too many homes."
What is too many? If the demand was 1.7M, annually, what would be too few? According to CRs estimates a total of 650K of excess units were built during 2004-06. So, pretty soon builders will be building too few, right?
I think that CR is hiding something that is very important. And that is the demand for housing. He has NEVER NEVER reconciled his estimate with the Census data that I have posted here at least four times. His silence speaks volume! He never addresses the data and keeps repeating how he arrived at his estimate. Scientists always must reconcile their estimate," or hypothesis, with the actual observations, no? For some reasons CR refuses to do that. And I know why, because if he does then he would have to eat his estimate and I don't think that he is ready yet. In a year he will have to when the evidence against his estimate would be overwhelming.
Jas
What Sebastian keeps missing is that the game ain't over, and there are plenty of markets that are lagging well behind. Think of San Diego and South FL as early adopters, and early decliners. Most of the rest of CA is catching up now to where these places were about 1.5 yrs ago. Parts of the NW are still 6 months or so lagging that. And then there is xanadu, NC, home of Sebastian. You see, it's time will come too, and when it does, it will only be that much uglier, because it is going to price peak at a double whammy, when spec demand is over, and when the job market starts tanking as the overall economy heads down the tubes when spillover from the rest of the early adopter housing bust markets keeps on coming.
But go ahead Sebastian, keep looking at things in isolation, and you'll be blissfully happy right up until the time the streamroller runs over you.
Forgot to add:
Hey Hey
My My
Research Triangle will never die
Jas,
I hope you are tipping CR alot, because you have an overwhelming sense of entitlement from him. I bet you are the type of person who would sue a the company that gave you a new car in a sweepstake, if you later got in a wreck. Your reasoning would be it was their fault for giving you the car in the first place. Your comments often stink of a spoiled and whiny nature.
You mean, where they need to stop overbuilding, right? In my area (Research Triangle) housing inventory keeps rising, but so do prices, for a couple of reasons. We build according to need instead of with a "gold-rush" mentality like in California, and housing is very affordable here (also nothing like California). We don't have a massive overhang in supply of housing too expensive for people here (or moving here) to buy. So why would homebuilders dramatically slow down their building here?
Sebastian
When the Triangle MSA ever breaks into the top 40, then maybe it'll be analagous to something.
7 of the top 10 MSA's(14 of 20, 22 out of 30) are facing deteriorating housing conditions.
Geoff said: "But go ahead Sebastian, keep looking at things in isolation, and you'll be blissfully happy right up until the time the streamroller runs over you."
Geoff (and MTHood), if you had genuinely learned something from reading this blog you'd know what I know: Overbuilding is a key factor in housing "busts." California is "busting" and NC isn't, and the relative amount of building is one of the reasons. NC housing didn't bust the last time California did, either.
The real value of CR's blog, IMO, is not so much what he posts, but the sources of data. In the process of confirming/denying his viewpoints by examining first-hand the data he presents, that's when you can learn something really valuable.
So there, CR, I finally said something nice about you.
Sebastia
sebastion my daughter bought a beazer townhouse in carey last year. 3br 3.5 bath plus garage for 204,000. the section sold out quickly and is fully occupied.carey is in nc.
jim said: "sebastion my daughter bought a beazer townhouse in carey last year."
I know Cary. Routinely on the top 10 lists of most desirable small cities to live in, fast-growing, extremely low crime, year-round watering restrictions so it's not being squeezed by the drought as hard as Raleigh.
S.
Bob_in_Mass,
Although builders can't sit on their inventory, others can. After the high-end inventory has gone back to the banks, and they've finally got their REO disposal operations up to speed -- and have accepted that their recovery percentages will be lower than in their worst nightmares, and finally price to sell -- the fire sales of the high-end inventory will freeze the high-end resale market into stasis. Well-heeled owners who relocate will leave their homes vacant, perhaps trying vainly to rent them out at rates hardly anyone will pay, believing that if they just stick it out for a year or so the market will come back (consider how many "experts" are opining that this slowdown will be over in a year or 18 months). Even not-so-well-heeled relocatees will stick it out as long as they can. Like "holes" in a p-type semiconductor, the vacancies will migrate -- from spec-built inventory into the resale inventory.
Meanwhile, the surviving builders will pick up the assets of the fallen and keep on building. Even some of the bankrupts may keep on building, just like all those bankrupt airlines kept flying planes. Because their costs will be so much lower, they'll be able to undercut the homeowners who want to resell.
The point is not that the builders won't be building below demand. Yes, they'll be building somewhat below demand. But many people seem to think that building will fall so far below demand that the inventory overhang will quickly disappear, and we'll then be back to "normal". The point is that that's not going to happen. The builders will keep on building by undercutting the resellers.
How many resellers will be willing and able to bring to a closing a check the size they'll have to bring to compete on price with a builder who is operating under bankruptcy court protection, or who has bought assets from a bankrupt builder? The number who can do that will be less than the number who can keep holding on paying two mortgages at once, even if the home is vacant.
Building will slow, but not by enough that the inventory overhang will quickly disappear.
jim-
sounds like your daughter got a great deal and can't lose if the home does not encounter any foundation/plumbing/electrical problems but...
I would never buy a home from a homebuilder that is probably going to end up in BK.
Public or private.
jm,
I think the fact that you assume that their will be any margins in building over the next 3 to 5 years, so that banks will lend homebuilders money to build more houses, is suspect. The more likely scenario that the flood of foreclosure will in fact undercut the price of construction whereas making building new homes an unprofitable endevour no matter how far the price of land collapses. Just my take. In any event, the homebuilders will get hammered. We shall see how the screws turn...
Elvis,
There are many, many people whose only career experience is in home construction, many with their own small companies -- people who would make even less trying to change careers than they will if they keep on building at much lower prices. Prices for lumber and other materials have dropped, and if the average new home floor area drops back just to the level of the late '90s, lumber demand will be even lower.
Land costs will also drop -- even for land not picked up from bankrupt builders -- and communities that have become dependent on revenues from construction-related fees will drop their "prices", too.
And the banks need loan customers, too. They can't just lock the money in their vaults.
To a first approximation, all the builders know how to do is build. And all the bankers know how to do is lend. The builders can and will drop their prices low enough to undercut the resellers, and the banks will lend the money.
It's the resellers who've bought or refinanced too high who are the ones that can't budge on price.
jm,
Next year at this time let's check back and see who is right. My guess is that the foreclosures will be under the cost of new construction. You don't think so. It will be interesting to find out. 10/17/08. The winner will get 100 shares of Beazer valued at 10/17/08. Wink.
Elvis,
My argument is not that foreclosures will be priced higher than new construction, but rather that they will crush the pricing structure from the top down such that the non-foreclosure resale market will be put into a state resembling that imposed on Han Solo in the first "Star Wars". With the resellers frozen in Carbonite, whatever demand is not being satisfied by the foreclosures themselves (and some sales by people willing and able to sell at far-below-peak prices) will be scarfed up by the builders.
Although there will be an enormous supply of foreclosures in certain areas, in certain price ranges, a lot of those homes may remain vacant for years, and some may eventually be torn down. Which would you rather buy, a 3,000 sqft foreclosure in poor repair in a deteriorating neighborhood with more foreclosures all around, slapped together at the peak of the bubble by unskilled labor, or a 2,200 sqft home in a spiffy new development being constructed by career builders who had enough smarts to land on their feet after this?
Most of the foreclosures will probably end up in the hands of investors who will rent them back to the same sort of people who got foreclosed upon. Their prices will drop down to the 120X rent level at which competent landlords will find them a good investment.
Meanwhile, the surviving builders will keep on building, undercutting the non-foreclosure resale market, in which numerous homes will remain vacant for very long periods while their upside-down owners cling to hope of a market rebound, finding some way to keep on making two mortgage payments every month.
It's not that the rate of construction won't fall, it's that it's not going to fall so low that the inventory gets worked off any time soon. Some people (not necessarily you) seem to think that if there's a year's worth of excess inventory to be worked off, the builders will all have to stop building for a year -- implying also that the inventory overhang will be gone in a year. My argument is that this is not going to happen -- the builders will find ways to keep on building -- and so the inventory overhang is going to be with us for many years into the future.
Elvis,
To be even more explicit, I quite agree that foreclosures will be below the cost of new construction. They'll have to be, because new construction will be a much more attractive product!
But I don't believe that's going to stop the builders from building lots of new homes. Some of the foreclosure-heavy developments are going to end up like trailer parks. It's always been possible to get a lot more physical home for your money in a trailer park, but that's never stopped the market for non-trailer new home construction.
Interesting graph comparing the starts/completions over many business cycles. It would be interesting to also see it adjusted for population levels. That might make the predictions of 500,000 to 1 million even scarier looking...