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Housing Prediction: Starts, Completions, Sales
Submitted by
CalculatedRisk on Mon, 10/09/2006 - 9:37am (45 comments)
A few comments:
1) The bar chart does not render completely.
2) Are the "Built for Owner" homes equivalent to the "orders" that homebuilders are talking about, the "For Sale" homes equivalent to spec homes, and the "For Rent" homes apartments?
3) Relating to past articles: In the top graph I would expect the "Completions" to correspond closely with layoffs in construction. This graph seems to be consistent with the fact that we haven't seen a lot of construction layoffs despite the large decline in housing starts. Though it also suggests to me that these layoffs are near.
I'll be interested in hearing what the other ac has to say about this.
The excess of supply could be much worse than you so ably describe. One very common way to "dig in" during a recession is a drop in new household formation. Call it an increase in occupancy of existing stock if you prefer. With 85m DUs an increase from 2.1 to 2.2 persons/DU would reduce population driven demand by 6m dwelling units.
Greenspan ceases to amaze me. What data is he looking at? The man is utterly clueless or he is trying to spin his legacy as much as possible. Probably a combination of both. Hey Al, when you find yourself in a hole, stop digging.
I've been amazed at how many homes are for sale in the Boston area. On top of this, I think there is a lot of shadow supply out there. Friends of mine have been told by their brokers to not list their home for the time being due to some pretty weak reasons.
ac, "built for owner" are included in starts and completions, but are NOT included in home sales. This includes two groups: owners that build their own home, and owners that hire a contractor (custom homebuilder) to build their home. This has nothing to do with orders for the major homebuilders.
For rent are units built intended to rent. This is mostly apartment buildings, but does include some single family homes.
"For Sale" is the main category - and this is the category that we are discussing for the major homebuilders.
I agree that completions and employment will probably track. As completions collapse (and they will based on starts), then employment will decline.
Robert Coté, I agree - it could be worse - it might also be better. But I think the housing bust has just started.
Best to all.
Calculations assume all oversupply will be absorbed. Is there a historical static oversupply?
Economic incentives might cause building to fire up before an undersupply actually arrives, i.e. cheaper supplies, labor and land after the first swoon.
I'm a big fan of the bust theory, but I worry some of my peers here are pretending recession is already on. US growth is still meaningfully positive.
CR,
First thanks for the forum and kudos for maintaining a civil environment.
I don't see how the housing overbuilding overhang could be any better. Everything you did in your analysis was conservative and my 2.1 -> 2.2 pers/DU was equally conservative. Add to that two demographic trends; immigration falls in recessions and our illegal immigration is not going to even stay at these levels regardless. Smoot-Hawley didn't cause the Depression but it exacerbated it. IMO the same will be said for tightened immigration today. Internal population growth is below replacement as it is. One need only look at so many places in the US like Palm Springs where 40% of the DUs are unoccupied to see a huge hidden overhang as well.
ac, I fixed the graph. This raises an interesting point about Blogger ... Blogger has many bugs and it's common to have to repeat steps (like not loading the graphic correctly). But Blogger's main problem is they have no feedback mechanism - so their users can't send them bug descriptions - so they are probably unaware of the problems. I can't imagine running a business without customer feedback. Of course it's free (they make their money from Ads - so I'm not a good contributor!) but they should still pay attention. Oh well ...
Name, I'm just trying to provide some possible numbers. I think you have to look at these projections as part of a distribution of probable outcomes. The distribution curve of likely outcomes probably isn't normal (i.e. a bell curve) - it probably has a longer tail on the high end - things can only get so bad.
Greenspan / Kohn's view is one end of the distribution curve of how far starts can fall (since we are already there). The peak of the probability distribution is at or above these numbers - but the tail is probably steep below these numbers because things can only get so bad (barring major disaster).
But this doesn't mean severe recession - so much depends on other areas of the economy.
As far as static oversupply - that is why I did a calculation of oversupply using the Census vacancy numbers too (It's in the previous post) - using the 2000 vacancy rate. That showed the 1.4 million number is not unreasonable.
Best Wishes.
Best Wishes.
ac, "built for owner" are included in starts and completions, but are NOT included in home sales. This includes two groups: owners that build their own home, and owners that hire a contractor (custom homebuilder) to build their home. This has nothing to do with orders for the major homebuilders.
What does an order from a major homebuilder constitute then? Is this just a preconstruction sale?
Kara Homes Inc., a luxury homebuilder in New Jersey, files chapter 11. After offering huge incentives and one years mortgage payments they were unable to move product. And so it begins.......
CR, I think your analysis is excellent as far as it goes, but ditto Robert's points.
In addition, demand is related to ability to buy, and ability to buy is a problem in many of the markets in which high potential demand exists.
I just finished slogging through Orange County's ACS numbers today, and I came up with something around 40,000 less achievable units in the next two years based on the effects of the fall in housing permits and the slack in the RE game. By that I mean that it sure looked to me as if 40,000 less "owners" will be in homes in two years in OC.
If they are still in their homes, they'll have some additional people living with them to share expenses.
In many markets, Robert's household size equation will be seen as multiple singles sharing a house, or two to three immigrant families sharing a house. I don't think you can remove the ability to buy from the demand equation.
I like your crystal ball much more than Greenspan's, btw. It's far clearer. Greenspan may have a point about population numbers, but increasing your population via illegal immigrants working off the books doesn't equate to native population housing demand ratios.
I am also deeply uneasy about using national numbers. The dynamics in a state like NJ are quite different than in a state like GA or CA. The only type of analysis that makes sense to me is a mesh analysis, and every time I do a component of that I come up with some very sobering conclusions.
Housing starts might drop fairly slowly in some areas. Where land costs are very high there is a strong incentive to build out current land inventory. Combined with lower lumber and other material costs and better prices from trades, newly built homes costs (especially marginal costs where land prices are high) may be priced competitively in the next few years. In markets where this is a big factor I would expect a weak resale market for many years but a fairly respectable number of housing starts.
Robert, good points.
ac, these numbers are from the Census Bureau, and I'm pretty sure a preconstruction order from a major builder would fall in the "Built for Sale" category.
Yertlert, I'm not surprised that we are starting to see homebuilder BKs. Some, like Kara, were talking a good game just a few months ago. During the last bust many homebuilders (including some majors) went BK.
Best Wishes.
The biggest HB liability IMO is the "assets reporting." All the land they've purchased is valued on the books at the margin of the last piece they bought. On the way up this overstates. On the way down not only do options get reported as current account loses but the rest gets revalued. The 4-6 P/Es of the HBs are vastly overstating the true condition.
MaxedOutMama, I agree - There are so many factors, I could easily be wrong about in either direction. I noted a few caveats at the beginning, and local market issues is one of them.
Still, I do think it helps to get an overall feel from the National data.
Maybe in six months I'll take another look at this data.
Best Regards.
The estimate that I read is that about 40% of sales in 2005 was to people who did not plan to occupy the house. Presumably many buyers over the past several year fit into this category. Many of these people planned on a fast flip and will certainly not be willing or able to hold for years. Renting these units is a money losing proposition. How do these speculative units fit into the equation? I would also argue that most "second home buyers" are also speculators, since the only real reason to buy is to make money in a highly leveraged investment
Bill, that is another way to come at an estimate for overbuilding.
I know some people that have bought second homes in the last few years - and they are really using them as vacation homes. Personally I like variety in my vacation trips, so I've never even thought about a vacation home. I've been a guest at some of my friend's 2nd homes, and I must admit it is kind of nice to have a place that feels like home (as opposed to a hotel room or rented condo).
So I don't think all 2nd home buying is for investment purposes - but I agree that many so-called 2nd home purchases were actually people speculating.
Best Regards.
CR:
I see your point. However, if the vacation home looks like a depreciating asset, I think that even the people who like to go to the same location each year for their vacations will have second thoughts. This also applies to the people 5-10 years from retirement who buy a retirement home. This looks like a winning proposition when home are fast appreciating. They can rationalize that even if they really don't want to retire at that location, they will make a good bundle selling the home. A lot of people buying in recent years were buying second homes, which were very attractive in an appreciating market. Now might be the time to get rid of the home while we are still showing a profit.
CR, great post.
I spent a fair part of my afternoon explaining the wisdom of "your first loss is your best loss" to an oncologist. Apparently his brother-in-law talked him into speculating in some real estate last year, and now he thinks he should pull the listing and wait "a few months" until he can "get his price." The whole conversation was so surreal on so many levels that it makes me wish I could still drink.
The most interesting stat in all that is how the custom build numbers actually fell from 1999! Interest rates fell to record lows and fewer people decided to build their own homes? CR, where does that stat come from?
Sorry to sound incredulous, but here, in western Massachusetts, almost all building is custom building. If a development has a dozen houses, it's a lot. Of course, this is a tiny market by national standards.
Name, I agree that sometimes the seemingly like-minded people give me pause in their zealousness. But just for the record, I believe that in the winter/spring of 2001, when we were in the first months of a recession, economists on average saw a 30-40% chance of recession.
The denial this time completely mirrors 2006, the inversion of the yield curve? It's different this time. Housing (tech) has fallen? Well, it was a needed adjustment, but we've hit bottom.... The regulators have toughened guidance on "exotic" mortgages, subprimes and the layering of debt and most of the lenders of those mortgages have seen their share prices go up.
I've put my money where my mouth is, and I say the homebuilders and mortgage lenders (and holders) are in for a big fall. I try to ignore the "noise" if it agrees with me or not. If I'm wrong, I'll pay the price.
Completely mirrors 2000. Sorry.
This is an attempt to find the bounds (in duration) of the crash in home prices.
I used the New Privately Owned Housing Units, Completions and Starts data from 1968 through the present.
There were areas that showed the fastest and slowest changes in home starts and completions.
Historic changes in housing completions:
Slow drop (1987-1992)
Fast drop (1973-1975)
Fast rise (1976-1978)
Slow rise (1992-2006)
There was one slightly faster rise in completions in 1982-1984, but this looks like a rare occurrence, when starts and completions bottomed out at nearly the same time.
Of course there are some specifics that have been left out of these figures, such as the upper level of completions and the lower level of completions when the housing markets (prices) started to reverse from their declines/increases. These numbers do not have a significant impact on the graphical calculations when compared to the impact of the different possible slopes of completions' rise and fall.
1) The fastest decline in completions, coupled with the fastest rise in completions, gives a duration of Feb '06 to Sept '09.
2) The slowest fall and rise in completions gives a duration of Feb'06 to Sept '15.
3) A fast drop with a slow rise gives July '11 as the recovery point.
4) A slow drop and fast rise gives Feb. '14 as the recovery point, when bottomed-out prices start to rise.
These dates give the bounds of the crash, based on housing completions, and correlated with the start of real home price recoveries.
Housing completions have already peaked, early this year.
Look for home prices to bottom out between April '08 and Sept. '12 (min and max range).
Prices will start to rise again between Sept 2009 and Sept. 2016.
This is obviously a huge range in time, but these are the min and max values based on historic downturns.
At least this squelches the idea that things will get better sometime next year.
My personal opinion is that the completion rate will drop quickly and rise slowly, giving a July 2011 date for the recovery in home prices.
The recovery in home prices is the point where Real (inflation adjusted) prices start to recover.
This data might sound dire to many readers, but many homeowners will just be starting to recover when prices start to rise again. They will be at the start of a long rise in real prices, after which, their homes will eventually be worth what they had been worth in 2005.
At some point in time, after that, their homes will be worth what they would have been worth, if they had continued to appreciate during the crash. That point will be very close to the next downturn.
I HAVE a crystal ball & it tells me, as usual, CR is softplaying the enormous downside SoCal & other bubble regions face. Too many Economists have rationalized recent price appreciation to mtg. rate reductions. A look at mtg. originations we've seen suggests they're making a serious mistake. This time IS different.
The skyrocketing prices we've seen were NOT caused by lower mtg. rates, they were caused by tax policy, greatly loosened GSE mtg. buying criteria, piggy-back loans & "funny" mtgs. offered to first-time buyers who never saved a dime, had no history of earnings & was only concerned with what their monthly payment would be. This is why we've seen the ownership rate go up a whopping 5%. After a while, with A.G. feeding the hype, many formerly reasonable home-owners lost their senses to the "game", opting to move up & even buy 2nd homes. What the heck, if someone was willing to pay them THAT much for their home, .... And, the frenzy was on.
Here are a SIMPLE truths & a few questions skeptics might do well to ask.
1. Lower mtg. rates will NOT resolve the price dilemma we face, earnings are too far behind current prices. Does anyone think these prices can hold for the 10-15 years needed for earnings to catch up? Think of this, if prices don't revert, won't we be locking out a generation of home buyers, the very group we've relied on for generations to maintain our communities (& indirectly us) in our latter years? Isn't our whole sociological system at risk if we price out those who don't already own from buying in? (Remember they're leaving college with astronomically high debt.)
2. Yes, all potential buyers ARE already "in". Home ownership rate is way higher than the pct. of population who can pay the current cost of ownership for more than a few years. And, how will many of our recent no-doc buyers fare in a slight economic slow-down? We got a hint when our avg. gas prices recently went up a whopping $100. monthly. (And, this is BEFORE the resets.)
3. Too many owners are approaching retirement & have ALL their assets wrapped up in their homes. Why do you think more didn't buy 2nd homes before? How likely are these folks to hold both homes when they see prices really begin to fall? (Remember they'll be hit TWICE as hard.)
4. Now, add in all the obvious arguments & what do we have to look forward to?
"So I don't think all 2nd home buying is for investment purposes - but I agree that many so-called 2nd home purchases were actually people speculating."
CR,
The NAR has estimated that 28% of all homes purchased in 2005 went to invesetors (with 12% going to 2nd home buyers). The NAR's estimate for 2004 was similar, at 26%.
I've always maintained that the actual percentage is probably higher, given the financial incentive to lie on the loan app regarding "owner occupied" status.
Bob_in_MA, the intent data comes from the Census Bureau. Unfortunately the data of intent only goes back to '99.
Bailey, I'm not trying to describe the "worst case", instead I'm looking for a likely scenario. It could definitely be worse, but since housing moves slowly it gives other areas of the economy time to cushion the blow.
BuyBonds, I agree that we are near the beginning of the bust - and it is hard to guess now how long it will last. In the past New Home construction bottomed long before the existing home market recovered.
I'll enjoy writing about the recovery more than writing about the bust!
Best WIshes.
Many sources have said that about $1 trillion of ARM will reset during the next 18 month.
Lets assume that half of that number ($500 B) are Option ARM and lets assume that all the people who have Option ARM will lose their home (which is very reasonable assumption). So, $500B divided by $330K (average price of a house) that would yield about 1.5 Million additional houses will be introduced to the market as a result of foreclosures.
So, the situation is going to be much worse than some people may think.
Robert Cote (whose blog is pretty good though sometimes he goes through posting dryspells) got me thinking about something with his "40 % of Palm Springs DUs are vacant" comment.
I don't really want to complicate your calculations further, but I'm wondering about how big a factor dislocations in overbuilding can be in a specific market.
To make myself as clear as possible, Think about it in terms of Vegas and NYC.
The ratio of new construction/existing housing in Vegas has to be much higher than NYC, shouldn't whatever happens in Vegas be more severe (particularly short term) than NYC?
Can you believe greenspan? Bottomed out? This guy originated this bubble now he knows that sentiment plays a vital role in the outcome of a bubble. He is trying to change sentiment cuz he knows he is to blame for this mess. He produced paper out of thin air and was the worse ever Fed chairman.
The bubble is popping now and it is ONLY going to get worse. Affordability is still off the charts and the bottom will be in when this reverses.
IMO this is the biggest mania we have ever witnessed. In the end i believe that conservative numbwers are nowhere near the amount of excess supply that is in the markets especially the bubbliest areas of the country.
How many homeowners really should not own a house right now?
How many foreclosures in the next 2-3 years?
This is added supply. It's ugly. Trying to downplay the enormity of tis is just insane. I have lost all respect for greenspan. He is a currency wrecker.
I've been a guest at some of my friend's 2nd homes, and I must admit it is kind of nice to have a place that feels like home (as opposed to a hotel room or rented condo).
I prefer tents myself. The only problem is the bedroom is so small & the beds are always hard & lumpy. But the bathrooms are HUGE... and what a view!!
CR - I made a suggestion in the comments section of your last post that maybe you create a running tally graph similar to what you've done with employment except do it for housing... upper limit, lower limit & then track the progress month to month of variables like... new starts, completions, sales, etc.
I tend to agree with B Cote (above) that there are more variables than just inventory overhang. I do believe DU occupancy, vacancy rates & ownership rates could change a lot with changes in economic conditions.
You've got a science background (besides business) - limiting to inventory effect only would be like trying to calculate the performance of a real world 'thermodynamic process' by modeling it as either adiabatic ONLY or isothermal ONLY... when in reality it is almost always a mix of the two and the two are confounded.
For RE you might calculate a 'best case' limit based on Kohn-Greenspan like assumptions and 'worst case' situations based on current overbuild and long range historic occupancy & vacancy & ownership rates (go back & look at recessions to see how badly these factors fall off).
I understand that would be an awful lot of work - but would be illuminating in ways most media isn't.
Just a thought.
dryfly, in the post Demographics and Housing Demand, I pointed out that changes in average household size was important in understanding the impact of demographics on housing. In the '70s, more house units were needed because of changes in household size than from population growth!
As both Robert and you suggested, the ratio could change during economic slowdowns, but it's hard to see that in the data from the Census Bureau - the data is too coarse.
As far as "best case", aka Kohn-Greenspan scenario, I think we are already there.
These kind of problems can't be solved mathematically with enough accuracy to make it worth putting too much more time into the analysis. There are simply too many variables - so I think we have to stick with these rough estimates.
Best Wishes.
CR, you have a terrific site and the quality of your on-going analysis of housing is really exceptional.
CR, I agree that the recovery will start long after the bottoming of the house completions.
I determined my guess of the bounds (in time) of the process, correlating it with the added time needed to reach the upswing.
You have a great blog.
It's done a great job of evolving slowly, as we have approached and started the awful event that is uppon us.
Is there a method to the Fed's madness?
It appears most on this Blog agree there's still big housing downside to be played out in the bubble "zones". The question remains, when? Credit is still ridiculously easy (& cheap), and until this changes there will be no seller panic. As owners run short of funds they can easily open new 0% interest until 2008 credit cards or refi to another no-doc, interest-only, cash-out teaser loan, right?
I understand why the Fed's jawboning that we're seeing a housing "floor", but I sure don't understand why it's still actively encouraging the same irresponsible actions that got us here.
Is that a bell I hear ringing?!! JP Morgan just upgraded the Homebuilders today because they see "inventories beginning to stabilize and cancelation rates should also stabilize." Yeah, inventories might stabilize but sales will continue to nosedive and incentives will get out of control.
I would expect more banks to upgrade the homebuilders since these analysts work in packs.
Credit is still ridiculously easy (& cheap)
But it seems to be tightening a bit -- Sunday's Boston Globe had an article about a family which has been trying to sell a condo unit. They've had two offers, both close to the asking price, but both fell through because the purchaser couldn't obtain financing. I wondered if this represents a turn in the easy-mortgage tide.
Holly, You may be on to something! SoCal's Tim Iacono cites an L.A.Times story in agreeing with you that loose credit days (years) may FINALLY be coming to an end.
The Mess That Greenspan Made: A Cruel Joke
I read comments on a mortgage boker's blog about loans being turned down under appraisal review. So, it seems that lending standards probably are tightening a little. Indy Mac said that about 25% of their loans during 2005 did not meet present loan standards (although I am not sure whether they are abiding by the new standards). The 10 year rates seem to have made a sharp correction upwards in the last three trading days. I wonder how high they will go as positions unwind.
CR, the American Housing Survey (AHS) is limited in geography but comprehensive in scope. They do intense regional counts that are IMO not too coarse. Their margins of error are quite good at least for a while shortly after the decennial Census. The AHS seems to track household formation and occupancy in accordance with dryfly's observation. I only glanced at a few "stable" places so I could be wrong.
Bill, I hope you are right. Correction, I have a large bet that you are right. I bought some 10yr futures contracts betting (no other word) on a bounce.
Lindsey, thanks for the kind words, I will try to be more consistent for the 100 frequent readers of my pathetic blog. The demand driven NYC construction is indeed different from the speculative LV market. NYC was one of only two large cities in the Northeast that was actually at population highs relative to 1950 in the 2000 census. I'd sooner have speculated on SUVs, buying them in the expectation of futre appreciation than "invest" in LV condos.
Dryfly, I second the range graph idea. It would be interesting to bound with "soft landing" vs "armageddon." Cr is like me when making a point with data. We tend to be conservative on inputs and that results in cumulative large conservative biases in results. That said I don't think there is a worst case bound to be calculated. Not only too many variables but truth be told; too many unknowns. We are in unchartered territory wrt to loan risk for but one example.
At this point it looks like the Fed is facing a choice twixt the dollar or the domestic economy. They may be forced to pick one and trash it.
We track new housing permits vs. sales in Santa Clara County at:
this
We find:
New permits last 12 months =5,912 (=4.3-month supply)
New permits since Sep'02 =22,756 (=16.6-month supply)
Yet cheerleaders continue to claim there's nowhere left to build new houses in Silicon Valley?
Hmmm...
Whatever happens, I sure hope buildings being torn down for new building of any kind are recycled. A mall was recently demolished for a new building in Mission, KS. Nearly all the materials from that structure have been recycled. With the high cost of cement and every other building material, everything needs to be recycled to not only be good for the environment, but to help keep costs down in building and remodeling.
While shopping in the gift store at the Awahanee Lodge on Sunday I noticed the slate roof material was entirely recycled. Most went to new road base but some was saved for tourist value.
The problem is I cannot imagine owning anything built post 1999 as it won't last or return value. That's like 15% of the stock I won't even consider.
Recycle the land but not the structures.
KB Homes only has $400 million left on their Line of Credit!!!
Our calculations show they will burn through that in about 3 months. However, given they are in default on their earnings statement they will not be able to borrow anymore.
They could be in bankruptcy by the 1st of the year.
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Liquidity and Capital Resources.
We fund our business activities with cash flows generated from our operations
and from debt financing, including through the issuance of publicly-traded notes
and by entering into credit agreements to borrow funds from banks and other
financial institutions. Currently, our primary credit agreement is a $1.5
billion unsecured revolving credit facility (the $1.5 Billion Credit
Facility), which allows us, from time to time and subject to certain conditions
precedent, to draw funds as needed to support our business. As of October 10,
2006, we had $600.0 million of outstanding borrowings under our $1.5 Billion
Credit Facility and $487.0 million of outstanding letters of credit, leaving us
with $413.0 million of available capacity.
The delayed filing of our Third Quarter 10-Q may impair our ability to
raise external financing to support our business. The delayed filing of the
Third Quarter 10-Q will cause us to not be current in our filings required under
the Exchange Act which will prevent us from using a Form S-3 registration
statement for the public offering of new debt or equity securities until we have
filed the Third Quarter 10-Q and have been current in our filings of all other
required Exchange Act reports for a period of 12 months.
In addition, the delayed filing of the Third Quarter 10-Q and the
unavailability of third quarter financial statements may result in a default
under the indentures governing our senior and senior subordinated notes and our
credit agreements. As a result of such
delay or unavailability, we may be unable to obtain additional borrowings under
our $1.5 Billion Credit Facility. If uncured, such delay or unavailability could
also result in acceleration of repayment of our currently outstanding
indebtedness. We do not know if any indenture trustee, administrative agent of
any of credit agreements or creditor will assert that the delayed filing of our
Third Quarter 10-Q or the unavailability of our third quarter financial
statements constitutes a default in the performance of these agreements.
However, because our indentures and credit agreements contain cross-default and
cross-acceleration provisions, if any indenture trustee, administrative agent,
creditor or group of creditors were to be successful in claiming we had
defaulted and we did not cure such default within the grace period available, we
would be required to seek a waiver or amendment, to refinance all or part of our
existing debt and/or to pay fees or penalties, which, individually or in
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Edit from CR: this was a post using another posters name.
Living in the formerly hot Charleston, SC mkt, sales are dropping quickly although at this time prices are not. Time will tell.