I'm not sure what it means, but by region the drop in starts was largely concentrated in the south. Though I suppose that shouldn't be a surprise really, since Florida and Atlanta have seen such crazy overbuilding and enormous inventory buildups.
A drop of around 20% on new home sales and housing starts has been a pretty accurate leading indicator of a recession in the past, and we have now blown through those levels. Publicly at least, the Fed is still driving with both eyes firmly on the rear-view mirror, looking to slay the inflation dragon. I wonder how much longer the equity market, the Fed, etc can maintain the delusion of a soft landing?
One might expect that starts would hold up the best in the South, based on weather conditions. I haven't looked to see whether state by state data are available, but a fall of the cliff should certainly be expected for Florida.
Since January, housing starts are down 34% and permits have fallen by 30%. Pretty dismal numbers, right? Actually, we see this as an unambiguously good thing. The faster builders address their bloated inventories and bring the pace of home construction down, the quicker the housing correction will play out and the economy can return to a more normal footing. -- Stephen Stanley, RBS Greenwich Capital
Implying if the number had gone up 5% they would have all told us how bad it was? People look back at things like the tech bubble and ask, how could the market not see this for what it was?
SAM, it's no big surprise if you live in the northern Rockies, where there is plentiful land for building, and $450-500K buys you a custom-built palace and all the clean air and water they can soak in. What Californian isn't going to want that? By next spring, after a few more reports like this morning's, they'll realize that they can drop their price by a hundred K, pay cash for two or three times the house they've got, and STILL have a nice chunk of change in their pockets.
"Starts of new homes plunged 14.6% last month to a seasonally adjusted annual rate of 1.486 million, the lowest level since July 2000, the Commerce Department estimated Friday."
No, seriously -- this is just a return to more "normal" conditions. It couldn't possibly get any worse, even though we've been saying that for the last six months.
I'm with you Bob -- it's a little late in the game for people to be trying to find the silver lining on this one. The damage is already built in, the only questions left are how much and how rapidly it will unwind (hopefully not too much nor too fast).
great graphs, CR: back to 01 construction employment levels, that will be a big shock. Interesting that completions peaked in Feb-Mar 06 and the effect seems to be hitting the food chain quickly. (home depot, williams-sonoma, framing lumber). No wonder the Fed minutes showed concern about housing.
Had an interesting discussion today with a friend of mine who is a subcontractor. He's done extraordinarily well the last 3-4 years... had as many as a dozen teams of 5-6 workers out there working overtime on good margin jobs for some of those mega-builders... little overhead so not much fixed cost risk. He was printing money.
Things are real slow now because he refuses to take jobs at a loss just to keep busy. There are still jobs out there but the pipeline is emptying - he can see that. He bids the remaining jobs at a reasonable margin & if he loses the work, fine, spends more time with his family & grand kids.
He lives in a house on about 15 acres he built himself over 20 years ago (paid off) and has a couple million in the bank to boot. He told me flat out he can wait this thing out if it takes a decade as long as he doesn't throw good money after bad. Let others do that.
However his workers are struggling & big time. He keeps in touch & calls them back when he has work (he hasn't completely shut down yet - just slow). Many are offering to work for less if he'd just win the bids. Even with that the margins suck he says - nothing he can do.
He lives in one of those fast growing exurbs - in a county that was for a while had one of the fastest growth rates in the country. Not anymore.
But I know this guy real well - he really could drop to zero and last a decade and have more net worth at the end than he does now (he has invested wisely and doesn't spend money).
kett82, It's strange that those economists didn't mention the coming job losses. It appears the impact of the housing bust is ahead of us, not behind us. The bulk of the housing related job losses haven't happened yet (completions are near record levels), and any impact from the loss of MEW is also ahead of us.
I don't know what they are thinking about.
ron and all, just a technical note: The BLS started breaking out residential construction jobs in 2001 - that is why my graph only goes back to '01. Before 2001, residential was just part of overall construction, so any comparison between construction jobs and completions, for earlier periods, is muddled by nonresidential construction jobs.
dryfly, those in construction that planned ahead will be fine. I have several friends that have been through this before and have been savings as much as possible - they will be fine.
I feel bad for the skilled workers that probably won't be able to use their skills at other jobs. This is going to be tough on them.
banker, I haven't made a call yet, although I think the odds of a recession are uncomfortably high.
The overwhelming consensus is for a soft landing. Maybe they are right. But I'm leaning towards Roubini's view.
I still remember late '94 when I was one of the few bulls in town. I went against the consensus and predicted a soft landing and a booming stock market. Got that one right, and I can tell you it's more fun to be an out of consensus bull, than an out of consensus bear.
Many people predicted the '01 recession, so I take no credit for that call.
Maybe I'll be wrong this time; I've been wrong many times before. But I try to post why I think something will happen with plenty of data - and also to provide a historical perspective. That is the best I can do for now; I've ordered a Crystal Ball on eBay, but it hasn't arrived yet!
When this story hits the MSM this weekend, it's going to do a number on the public perception of the NAR.
Public trust for the NAR has been slowly eroding (remember the ethics advertisements a few months back). Major economic indicators running contrary to the party propaganda are just more nails in the coffin.
I'd give an arm (appendage not mortgage) to see the NAR Buy Now! ad run on a page opposite a bearish story on the housing starts/permits decline.
I find this a useful place to read. But the groupthink does get kind of funny. I think you underestimate the flexibilty of the American homeowner/investor/skilled worker to adapt, and quickly, to a changing situation. Somewhere a few weeks back someone posited what I think is the best guess for what will happen to residential real estate. Measured nationally, flat nominal prices and thus declining real prices for a few years. We'll see, but I am beginning to think that the ever tougher zoning regulations, particularly in well-to-do areas on the two coasts are going to provide a real value buffer against steeply falling nominal prices. I do agree as you said that the unskilled folks are in deep trouble, but that has little to do with housing and more to do with technology and globalization.
I think you are underestimating the impact of a weak dollar and increasing exports on our economy. Lastly, I think falling gas prices have a far greater psychological impact on most consumers than flat housing prices. Why? Because they see the former each week while the latter only touches them every 5-7 years. Liquidity remains a wild card. As long as people can refi out of their ARM increases, it looks to me like this "Bubble" never bursts, but just stays where it is until incomes catch up.
What does all that mean? I think we will see, and are seeing, the soft landing.
We'll know in a year or so who was right. Sorry this is so jumbled.
You see, Mr. Stanley in the WSJ piece cited by Bob in MA above is actually right. It would be constructive if builders were giving top priority to cutting their inventory. But their major objective in the west is to "monetize the dirt."
Banker and CR, the most important thing I know about economics is that Economic Cycle Research Institute (ECRI) correctly forecast each of the past three U.S. recessions months ahead of time and they have never issued a false call. You can check out their website:
vsfv:
Silicon Valley including Palo Alto, San Mateo, have been producing more small and large remolding construction with some knockdown new SFH.
My electrical contractor friend in San mateo the past 8 years has been busy doing remodeling projects for professional real estate flippers. He has had up to 15 employed fulltime.
Another group has been buying cheap older housing in 99-02 doing either a big remodel or new SFH but living in them for the required two years then selling to get the tax benefits.
Be interested to see how this part of bay area construction business does in a slower RE appreciation market.
Banker, It's just not that complicated. There just aren't nearly enough potential homebuyers left who can afford to buy the supply of homes for sale at these levels. The horror of the circumstance is that because of the role funny loans has played in this bubble, even a 25% price drop in PK's "zones" won't be enough to deflate the bubble.
The alternatives we face are easy & they have nothing to do with ingenuity: either wages go up BIGTIME (& I'd love to hear someone make that argument), home prices in the "zones" some 40% (or more), or the FED continues to encourage huge credit expansion for the next 12-15 years to allow wages to catch up & household debt to burn off. The only thing I KNOW is it will be quite some time before home prices go up from here, so you tell us, what's the incentive to buy?
The American homeowner/investor/skilled worker definitely has the ability to adapt, witness the last election. The distribution of the benefits of globalization are more important than the total sum of benefits. For the most part, their future fate will be determined by global macro imbalances just as has their recent reality. We like to believe our ability to handle challenges is exceeded by none. I have a feeling we will soon have the opportunity to prove American resourcefulness.
As for zoning, I believe it is minor relative to the liquidity issue. Much of it is a pre-existing condition for the experiment so I would expect it to have less impact on the relative final outcomes. Those are just my gut feelings.
banker,
those exports are financed with your imports which are far greater..remember the old adage when the u.s.economy sneezes the whole world gets a cold. china's imports are decreasing even in manufacturing equipment which was their main driver for imports over the last few years. the eu's projected growth is anywhere between .5-2% which means imports from the US are not going to be high. the main growth in imports have been from boeing and that is cylic.
pipeline demand is a great indicator of future sales in any business.
If permits suddenly increase significantly then the soft landing concept makes sense or even if the SFH permits stayed relativly constant that would change my opinion about whats ahead but instead the pipeline of new housing starts looks close to 01.
At least in this situation you have seen a big warning flag, do what you want with it.
Bailey:
I think you have laid out a good case as to why the soft landing, income catch-up theory is most likely incorrect. Anyone who believes that we will see significant wage inflation is a dreamer. Even if we did it would still take several years of absolutely flat housing prices, which is even more unlikely. Most of those making the soft landing prediction have a vested interest in seeing that happen. Their theory basically flies in the face of reality. In a nutshell, they believe that this time it will finally be different.
But if housing starts have dropped off a cliff, and interest rates may start going down again, shouldn't there be a new 'shortage' of housing developing, and a new frenzy to get in at low monthly payments? In which case housing construction should start heating up again, and these workers shouldn't be unemployed for very long? I just don't know what to make of some of this.
Historically a strong relationship between housing demand and employment has existed. Yet California has record low employment but RE YOY sales and building permits falling.
The extent of this fall has shown up in lower tax recepts:California legistative analyst comments:
"The real estate industry, which includes developers, contractors, real estate brokers, title companies and financial institutions, make up 15 percent to 20 percent of the states private sector economy. The slowdown in this industry was the largest single factor in a sharp decline in personal income growth, resulting in a drop in withholding tax payments from over ten percent in the first half of 2006 to less than five percent in the third quarter, Hill reported."
Hey, CR, watch out for those eBay crystal balls--a lot of them are cheap knockoffs from India or China, and not properly calibrated for Western free-market capitalism.
Ok, then with permits 6.3% less than the previous month, it would be reasonable to assume that, everything else being equal (same mix of SFH and multi-unit projects), we can expect November's starts to be lower than October's, oui?
Saw some goober on Bloomberg argue that October's numbers represent the bottom. Didn't sound right to me.
winjr, the numbers bounce around, so it's hard to predict the level of starts in November. This month was so low (1.486 million) that starts might bounce back a little next month. I think the bottom for starts will be around 1.1 million and happen in '07 or '08.
One thing is sure: some "goober" will pronounce the bottom every month! Eventually they will be right.
On permits & such - if I recall there was a pretty riotous thread a few weeks ago on this subject and Bruce W (who used to issue them) said there was a lot more to this than just the permit-build cycle.
The pipeline really starts way before that, with land acquisition, zoning changes, land prep and then finally build. Some of this might go in parallel (say land prep & building permits) but the actual start to finish project for a large builder in a large multi-unit development (maybe a couple hundred homes each phase) could be years. The permit is the cherry on the sundae, lot's went into the bowl first.
The question is do the builders have to (and do they have the cash to) build out all these potential units to get their sunken investment back out - or are they just screwed?
Having worked with developers and big homebuilders for my professional life, I can tell you that when the permit is pulled, construction begins. Holdups in the city or county building/planning departments are usually the bottlenecks to starting construction. Oftentimes we start w/o the permit.
Also, some anecdotal evidence. Spoke to a big framer in my area (Orange County, CA) about how busy he was. He responded that 6 weeks ago he had 400 employess; today only 60.
Point is bobby, the megabuilders have a whole lot of time & money already in the developments BEFORE they pull the permit... I mean they don't go and pull permits then start looking for land to buy & prep. And they don't buy & prep land a lot at a time.
However (from what you say & Bruce W on an earlier thread) once the permit is actually pulled for a specific unit, the clock starts in earnest.
Yes/no?
That is one reason this thing could drag out longer than anyone anticipates - continued build out might be the only way the mega-builders dig themselves out of their sunken cost whole... that is if they have the cash &/or bankable equity to borrow cash to pull it off.
Given those two forces, we might see the permitting & starts REALLY drop off if a couple of the bigger builders hit a cash crisis & can't continue their build outs.
Charlie Stromeyer, you wrote: "Economic Cycle Research Institute (ECRI) correctly forecast each of the past three U.S. recessions months ahead of time and they have never issued a false call. You can check out their website..."
One of the problems I have with ECRI is that they include stock market prices among the variables they use to calculate their leading indicators. My guess is they also use stock prices to decide whether or not we are in for a recession, too. So, on a side note, anyone who thinks that ECRI data might be helpful for trading US indices, from my point of view, it's really not.
"That is one reason this thing could drag out longer than anyone anticipates - continued build out might be the only way the mega-builders dig themselves out of their sunken cost whole..."
dryfly, I think relevant to this point is last week's builder conference, at which Ara Hovnanian mentioned that many builders were putting up homes because it's easier today to sell a home than it is to sell a an empty lot. That would certainly suggest to me that those sunken costs are material enough that builders aren't confident they can carry the costs indefinately.
Builder have huge costs sunk into a project prior to pulling the actual house permit. The costs include things like land, consultant fees (architects, engineers, etc), and site development (mass grading, roads, utilities). These are huge dollars running into the millions. Definitely hard to walk away from or even delay starting construction. And don't forget the substantial pressure public homebuilders are under to meet quarterly and year end closings that were projected much earlier. This pressure is huge, don't underestimate it.
Another thing to consider is the small homebuilder. These guys do a TON of building and definitely don't have the cash reserves of the big guys. Once they buy their lots, they are committed. To not build would ensure financial hardship. They have to keep building to keep revenue coming in or else they are out of work. IMO, these are the guys who will set the market in the future.
You can see from the chart that (except for June 1967) the RFI/GDP ratio bottoms during a recession which makes sense. What is the best predictor of RFI, e.g. is it housing starts or the price of wallboard?
Charlie Stromeyer, I've posted my version of that chart several times. Falling RI is probably the best predictors for recessions. The dip in the mid-60s didn't lead to a recession because of the huge buildup for the Vietnam war (pull up GDP data at the BEA and you will see a surge in defense spending in '66).
Now you want the best leading indicator for RI? Oh my ... on the way up, watch speculation. On the way down, focus on fundamentals - like I've been doing recently. That tells us RI has further to fall.
As an aside, my chart of RI vs. Recessions also shows that non-RI trails RI (both up and down). That is an important point.
watch out for econometric models like the ecri. i don't know for sure, but it may include measures of market liquidity: interest rates, credit growth, credit spreads, etc. these measures are all jumping now -- we STILL in a full-fledged liquidity boom (thanks to the Fed and the BOJ!).
the problem with liquidity/ confidence-driven indicators, of course, is they can turn on a dime.
Some of you keep saying that people will make it through and things will stay flat.
So let's say they do. A flat economy will mean flat wages at best. If home prices stay high but flat, what good will it do 5 years later for people who want to buy but haven't had much of an economic boost? Life's just getting more expensive...a flat economy really means inflation in the long run...more costs, less pay.
If the housing market stays the way it does, there will be no improvement whatsoever for prospective buyers.
sweet. the sooner the better imo.
be careful what i wish for i know but the closer that bottom comes the better.
for me anyway
There's a cliff at the end of every driveway.
I'm not sure what it means, but by region the drop in starts was largely concentrated in the south. Though I suppose that shouldn't be a surprise really, since Florida and Atlanta have seen such crazy overbuilding and enormous inventory buildups.
What is the past relationship between housing starts and the business cycle (recessions)?
how west is holding is a big surprise..may be big bad numbers are on the way
A drop of around 20% on new home sales and housing starts has been a pretty accurate leading indicator of a recession in the past, and we have now blown through those levels. Publicly at least, the Fed is still driving with both eyes firmly on the rear-view mirror, looking to slay the inflation dragon. I wonder how much longer the equity market, the Fed, etc can maintain the delusion of a soft landing?
One might expect that starts would hold up the best in the South, based on weather conditions. I haven't looked to see whether state by state data are available, but a fall of the cliff should certainly be expected for Florida.
The WSJ has one of their Econimists React columns on this. Five of six seem to interpret the number as unambiguously positive:
Since January, housing starts are down 34% and permits have fallen by 30%. Pretty dismal numbers, right? Actually, we see this as an unambiguously good thing. The faster builders address their bloated inventories and bring the pace of home construction down, the quicker the housing correction will play out and the economy can return to a more normal footing. -- Stephen Stanley, RBS Greenwich Capital
Implying if the number had gone up 5% they would have all told us how bad it was? People look back at things like the tech bubble and ask, how could the market not see this for what it was?
I'd say this analysis answers that question.
SAM, it's no big surprise if you live in the northern Rockies, where there is plentiful land for building, and $450-500K buys you a custom-built palace and all the clean air and water they can soak in. What Californian isn't going to want that? By next spring, after a few more reports like this morning's, they'll realize that they can drop their price by a hundred K, pay cash for two or three times the house they've got, and STILL have a nice chunk of change in their pockets.
"Starts of new homes plunged 14.6% last month to a seasonally adjusted annual rate of 1.486 million, the lowest level since July 2000, the Commerce Department estimated Friday."
No, seriously -- this is just a return to more "normal" conditions. It couldn't possibly get any worse, even though we've been saying that for the last six months.
I'm with you Bob -- it's a little late in the game for people to be trying to find the silver lining on this one. The damage is already built in, the only questions left are how much and how rapidly it will unwind (hopefully not too much nor too fast).
Great summary and graphs, CR. Keep up the good work!
Dear Bob
Couldnt help but notice that not one of the economists asked for comment by the Wall Street Journal (Economists Find Some Hope In Digging Through Housing Data - WSJ.com
Mentioned the possible effect on employment.
great graphs, CR: back to 01 construction employment levels, that will be a big shock. Interesting that completions peaked in Feb-Mar 06 and the effect seems to be hitting the food chain quickly. (home depot, williams-sonoma, framing lumber). No wonder the Fed minutes showed concern about housing.
Had an interesting discussion today with a friend of mine who is a subcontractor. He's done extraordinarily well the last 3-4 years... had as many as a dozen teams of 5-6 workers out there working overtime on good margin jobs for some of those mega-builders... little overhead so not much fixed cost risk. He was printing money.
Things are real slow now because he refuses to take jobs at a loss just to keep busy. There are still jobs out there but the pipeline is emptying - he can see that. He bids the remaining jobs at a reasonable margin & if he loses the work, fine, spends more time with his family & grand kids.
He lives in a house on about 15 acres he built himself over 20 years ago (paid off) and has a couple million in the bank to boot. He told me flat out he can wait this thing out if it takes a decade as long as he doesn't throw good money after bad. Let others do that.
However his workers are struggling & big time. He keeps in touch & calls them back when he has work (he hasn't completely shut down yet - just slow). Many are offering to work for less if he'd just win the bids. Even with that the margins suck he says - nothing he can do.
He lives in one of those fast growing exurbs - in a county that was for a while had one of the fastest growth rates in the country. Not anymore.
But I know this guy real well - he really could drop to zero and last a decade and have more net worth at the end than he does now (he has invested wisely and doesn't spend money).
It will be interesting.
Even with starts slowing nationally, Silicon Valley is still producing plent. Santa Clara Co. shows the following thru Sept'06:
this
Homes Sold: 1192
y-o-y volume: -32.2%
New permits last 12 mo.s: 5,358
= 4.5 Mo.s' Supply! =====^^^
New permits since Sep'02: 23,264
=19.5 Mo.s' Supply!!!! ===^^^^
Maybe they're not making any new land around here, but they are clearly still making more than just a few new houses!
For all the latest Silicon Valley news, please visit:
http://www.viewfromsiliconvalley.com
Thanks!
Theres this in the AP report;
The only region showing strength was the Northeast, where construction jumped by 31 percent.
There is no way that is correct. It is either an error or an anomaly due to some weird stat.
The overall numbers should be much lower.
Starts in the NE region took a sharp dive last month.
jb
Let me guess, you guys have called five of the last two recessions, right.
kett82, It's strange that those economists didn't mention the coming job losses. It appears the impact of the housing bust is ahead of us, not behind us. The bulk of the housing related job losses haven't happened yet (completions are near record levels), and any impact from the loss of MEW is also ahead of us.
I don't know what they are thinking about.
ron and all, just a technical note: The BLS started breaking out residential construction jobs in 2001 - that is why my graph only goes back to '01. Before 2001, residential was just part of overall construction, so any comparison between construction jobs and completions, for earlier periods, is muddled by nonresidential construction jobs.
dryfly, those in construction that planned ahead will be fine. I have several friends that have been through this before and have been savings as much as possible - they will be fine.
I feel bad for the skilled workers that probably won't be able to use their skills at other jobs. This is going to be tough on them.
Best to all.
banker, I haven't made a call yet, although I think the odds of a recession are uncomfortably high.
The overwhelming consensus is for a soft landing. Maybe they are right. But I'm leaning towards Roubini's view.
I still remember late '94 when I was one of the few bulls in town. I went against the consensus and predicted a soft landing and a booming stock market. Got that one right, and I can tell you it's more fun to be an out of consensus bull, than an out of consensus bear.
Many people predicted the '01 recession, so I take no credit for that call.
Maybe I'll be wrong this time; I've been wrong many times before. But I try to post why I think something will happen with plenty of data - and also to provide a historical perspective. That is the best I can do for now; I've ordered a Crystal Ball on eBay, but it hasn't arrived yet!
Best Wishes.
When this story hits the MSM this weekend, it's going to do a number on the public perception of the NAR.
Public trust for the NAR has been slowly eroding (remember the ethics advertisements a few months back). Major economic indicators running contrary to the party propaganda are just more nails in the coffin.
I'd give an arm (appendage not mortgage) to see the NAR Buy Now! ad run on a page opposite a bearish story on the housing starts/permits decline.
jb
CR,
I find this a useful place to read. But the groupthink does get kind of funny. I think you underestimate the flexibilty of the American homeowner/investor/skilled worker to adapt, and quickly, to a changing situation. Somewhere a few weeks back someone posited what I think is the best guess for what will happen to residential real estate. Measured nationally, flat nominal prices and thus declining real prices for a few years. We'll see, but I am beginning to think that the ever tougher zoning regulations, particularly in well-to-do areas on the two coasts are going to provide a real value buffer against steeply falling nominal prices. I do agree as you said that the unskilled folks are in deep trouble, but that has little to do with housing and more to do with technology and globalization.
I think you are underestimating the impact of a weak dollar and increasing exports on our economy. Lastly, I think falling gas prices have a far greater psychological impact on most consumers than flat housing prices. Why? Because they see the former each week while the latter only touches them every 5-7 years. Liquidity remains a wild card. As long as people can refi out of their ARM increases, it looks to me like this "Bubble" never bursts, but just stays where it is until incomes catch up.
What does all that mean? I think we will see, and are seeing, the soft landing.
We'll know in a year or so who was right. Sorry this is so jumbled.
Keep up the good work.
Banker
BTW, I missed 1994's rush
"I think falling gas prices have a far greater psychological impact on most consumers than flat housing prices."
Flat house prices -- in your dreams. Mr. Banker, would you like to sell me a put on my house? Suppose I lived here:
Sacramento Real Estate Statistics: Priced to Sit: How Flippers Get Into Trouble
or maybe here:
Sacramento Real Estate Statistics: Priced to Sit Part II: DR Horton
You see, Mr. Stanley in the WSJ piece cited by Bob in MA above is actually right. It would be constructive if builders were giving top priority to cutting their inventory. But their major objective in the west is to "monetize the dirt."
So they will -- and devil take the hindmost.
Banker and CR, the most important thing I know about economics is that Economic Cycle Research Institute (ECRI) correctly forecast each of the past three U.S. recessions months ahead of time and they have never issued a false call. You can check out their website:
ECRI | Home
Both they and I now have a neutral view of the U.S. economy.
vsfv:
Silicon Valley including Palo Alto, San Mateo, have been producing more small and large remolding construction with some knockdown new SFH.
My electrical contractor friend in San mateo the past 8 years has been busy doing remodeling projects for professional real estate flippers. He has had up to 15 employed fulltime.
Another group has been buying cheap older housing in 99-02 doing either a big remodel or new SFH but living in them for the required two years then selling to get the tax benefits.
Be interested to see how this part of bay area construction business does in a slower RE appreciation market.
Banker, It's just not that complicated. There just aren't nearly enough potential homebuyers left who can afford to buy the supply of homes for sale at these levels. The horror of the circumstance is that because of the role funny loans has played in this bubble, even a 25% price drop in PK's "zones" won't be enough to deflate the bubble.
The alternatives we face are easy & they have nothing to do with ingenuity: either wages go up BIGTIME (& I'd love to hear someone make that argument), home prices in the "zones" some 40% (or more), or the FED continues to encourage huge credit expansion for the next 12-15 years to allow wages to catch up & household debt to burn off. The only thing I KNOW is it will be quite some time before home prices go up from here, so you tell us, what's the incentive to buy?
With the starts vs completions chart, it appears nothing will stop starts from hitting the 1,000,000 mark over the next year.
Banker,
The American homeowner/investor/skilled worker definitely has the ability to adapt, witness the last election. The distribution of the benefits of globalization are more important than the total sum of benefits. For the most part, their future fate will be determined by global macro imbalances just as has their recent reality. We like to believe our ability to handle challenges is exceeded by none. I have a feeling we will soon have the opportunity to prove American resourcefulness.
As for zoning, I believe it is minor relative to the liquidity issue. Much of it is a pre-existing condition for the experiment so I would expect it to have less impact on the relative final outcomes. Those are just my gut feelings.
banker,
those exports are financed with your imports which are far greater..remember the old adage when the u.s.economy sneezes the whole world gets a cold. china's imports are decreasing even in manufacturing equipment which was their main driver for imports over the last few years. the eu's projected growth is anywhere between .5-2% which means imports from the US are not going to be high. the main growth in imports have been from boeing and that is cylic.
Banker:
pipeline demand is a great indicator of future sales in any business.
If permits suddenly increase significantly then the soft landing concept makes sense or even if the SFH permits stayed relativly constant that would change my opinion about whats ahead but instead the pipeline of new housing starts looks close to 01.
At least in this situation you have seen a big warning flag, do what you want with it.
Bailey:
I think you have laid out a good case as to why the soft landing, income catch-up theory is most likely incorrect. Anyone who believes that we will see significant wage inflation is a dreamer. Even if we did it would still take several years of absolutely flat housing prices, which is even more unlikely. Most of those making the soft landing prediction have a vested interest in seeing that happen. Their theory basically flies in the face of reality. In a nutshell, they believe that this time it will finally be different.
But if housing starts have dropped off a cliff, and interest rates may start going down again, shouldn't there be a new 'shortage' of housing developing, and a new frenzy to get in at low monthly payments? In which case housing construction should start heating up again, and these workers shouldn't be unemployed for very long? I just don't know what to make of some of this.
Historically a strong relationship between housing demand and employment has existed. Yet California has record low employment but RE YOY sales and building permits falling.
The extent of this fall has shown up in lower tax recepts:California legistative analyst comments:
"The real estate industry, which includes developers, contractors, real estate brokers, title companies and financial institutions, make up 15 percent to 20 percent of the states private sector economy. The slowdown in this industry was the largest single factor in a sharp decline in personal income growth, resulting in a drop in withholding tax payments from over ten percent in the first half of 2006 to less than five percent in the third quarter, Hill reported."
Hey, CR, watch out for those eBay crystal balls--a lot of them are cheap knockoffs from India or China, and not properly calibrated for Western free-market capitalism.
Perhaps dc1000 can answer a question for me (but, please, anybody feel free to chime in):
What is a home builder's typical lag time between when a building permit is obtained, and when contruction begins?
winjr, good question and here is your answer: Average Length of Time from Authorization to Start
2005: For buildings with 1 unit it was 0.9 months. For buildings with 2+ units, it was 1.7 months.
Best Wishes.
Thanks, CR!
Ok, then with permits 6.3% less than the previous month, it would be reasonable to assume that, everything else being equal (same mix of SFH and multi-unit projects), we can expect November's starts to be lower than October's, oui?
Saw some goober on Bloomberg argue that October's numbers represent the bottom. Didn't sound right to me.
winjr, the numbers bounce around, so it's hard to predict the level of starts in November. This month was so low (1.486 million) that starts might bounce back a little next month. I think the bottom for starts will be around 1.1 million and happen in '07 or '08.
One thing is sure: some "goober" will pronounce the bottom every month! Eventually they will be right.
Best Wishes.
On permits & such - if I recall there was a pretty riotous thread a few weeks ago on this subject and Bruce W (who used to issue them) said there was a lot more to this than just the permit-build cycle.
The pipeline really starts way before that, with land acquisition, zoning changes, land prep and then finally build. Some of this might go in parallel (say land prep & building permits) but the actual start to finish project for a large builder in a large multi-unit development (maybe a couple hundred homes each phase) could be years. The permit is the cherry on the sundae, lot's went into the bowl first.
The question is do the builders have to (and do they have the cash to) build out all these potential units to get their sunken investment back out - or are they just screwed?
Having worked with developers and big homebuilders for my professional life, I can tell you that when the permit is pulled, construction begins. Holdups in the city or county building/planning departments are usually the bottlenecks to starting construction. Oftentimes we start w/o the permit.
Also, some anecdotal evidence. Spoke to a big framer in my area (Orange County, CA) about how busy he was. He responded that 6 weeks ago he had 400 employess; today only 60.
Point is bobby, the megabuilders have a whole lot of time & money already in the developments BEFORE they pull the permit... I mean they don't go and pull permits then start looking for land to buy & prep. And they don't buy & prep land a lot at a time.
However (from what you say & Bruce W on an earlier thread) once the permit is actually pulled for a specific unit, the clock starts in earnest.
Yes/no?
That is one reason this thing could drag out longer than anyone anticipates - continued build out might be the only way the mega-builders dig themselves out of their sunken cost whole... that is if they have the cash &/or bankable equity to borrow cash to pull it off.
Given those two forces, we might see the permitting & starts REALLY drop off if a couple of the bigger builders hit a cash crisis & can't continue their build outs.
Charlie Stromeyer, you wrote: "Economic Cycle Research Institute (ECRI) correctly forecast each of the past three U.S. recessions months ahead of time and they have never issued a false call. You can check out their website..."
One of the problems I have with ECRI is that they include stock market prices among the variables they use to calculate their leading indicators. My guess is they also use stock prices to decide whether or not we are in for a recession, too. So, on a side note, anyone who thinks that ECRI data might be helpful for trading US indices, from my point of view, it's really not.
"That is one reason this thing could drag out longer than anyone anticipates - continued build out might be the only way the mega-builders dig themselves out of their sunken cost whole..."
dryfly, I think relevant to this point is last week's builder conference, at which Ara Hovnanian mentioned that many builders were putting up homes because it's easier today to sell a home than it is to sell a an empty lot. That would certainly suggest to me that those sunken costs are material enough that builders aren't confident they can carry the costs indefinately.
To add to that comment, if stocks so much as sneeze, my guess is that it's very likely that the ECRI's indicators will fall off a cliff.
You are correct, dryfly.
Builder have huge costs sunk into a project prior to pulling the actual house permit. The costs include things like land, consultant fees (architects, engineers, etc), and site development (mass grading, roads, utilities). These are huge dollars running into the millions. Definitely hard to walk away from or even delay starting construction. And don't forget the substantial pressure public homebuilders are under to meet quarterly and year end closings that were projected much earlier. This pressure is huge, don't underestimate it.
Another thing to consider is the small homebuilder. These guys do a TON of building and definitely don't have the cash reserves of the big guys. Once they buy their lots, they are committed. To not build would ensure financial hardship. They have to keep building to keep revenue coming in or else they are out of work. IMO, these are the guys who will set the market in the future.
charts, actually, ECRI's long leading indices exclude stock prices. See the "Solution" section near the bottom of:
ECRI | Solutions | For Investment Managers
I'm not a subscriber of ECRI so I don't know if they also have other indices which do include stock prices.
CR, here is a chart of RFI/GDP from Guerite Advisors:
Housing's Softness Has Long Reach | Active Trader Update | Financial Articles & Investing News | TheStreet.com
You can see from the chart that (except for June 1967) the RFI/GDP ratio bottoms during a recession which makes sense. What is the best predictor of RFI, e.g. is it housing starts or the price of wallboard?
Thanks, Charlie.
Anyone have any insight into the ECRI leading indictors?
Charlie Stromeyer, I've posted my version of that chart several times. Falling RI is probably the best predictors for recessions. The dip in the mid-60s didn't lead to a recession because of the huge buildup for the Vietnam war (pull up GDP data at the BEA and you will see a surge in defense spending in '66).
Now you want the best leading indicator for RI? Oh my ... on the way up, watch speculation. On the way down, focus on fundamentals - like I've been doing recently. That tells us RI has further to fall.
As an aside, my chart of RI vs. Recessions also shows that non-RI trails RI (both up and down). That is an important point.
Best Wishes.
watch out for econometric models like the ecri. i don't know for sure, but it may include measures of market liquidity: interest rates, credit growth, credit spreads, etc. these measures are all jumping now -- we STILL in a full-fledged liquidity boom (thanks to the Fed and the BOJ!).
the problem with liquidity/ confidence-driven indicators, of course, is they can turn on a dime.
Some of you keep saying that people will make it through and things will stay flat.
So let's say they do. A flat economy will mean flat wages at best. If home prices stay high but flat, what good will it do 5 years later for people who want to buy but haven't had much of an economic boost? Life's just getting more expensive...a flat economy really means inflation in the long run...more costs, less pay.
If the housing market stays the way it does, there will be no improvement whatsoever for prospective buyers.
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