The argument being presented is a false one - it's not between "The Sky is falling" and "Everything is okay"; these arent the only choices, but it's being presented like it is by those who want to willfully ignore the signs of the bubble.
The reality is that housing price increases have dissipated rapidly and have reversed somewhat in the face of rising inventory. Doesnt mean that houses will become worthless - just that they'll be worth less for many tommorows than they were at the pinnancle of the market.
At least that's my Opinion. Something that those in the "There never was a bubble, and it's certainly not popping" camp cant seem to admit.
This is becoming the rightwing tactic of choice. When individuals and inmstitutions warn of problems as they start to develop (and some take extreme positions) the record of warnings is used to "disprove" the problems. Thus Iraq is a success because the civil war is not the worst possible civil war (yet) and so on with issue after issue.
The right insists all is wonderful and that the only negative is those who worry who with ungood thoughts do things like debase the dollar or otherwise upset the faith based reality.
I agree- the far right wil do any thing
to 'secure' us from 'enemies' that are fleating and oblique- somthing they have done so well for nearly 40 years. Too bad they have failed to secure us as Americans from a future that is becoming bleak.
The revisions have been consistently downward in recent months. Every single report since October, they have revised the previous months down, some substantially. Recall, that October was a peak of above 1.4 million when it was first released. Now, look at where it is.
There is a reason for this. Commerce has good, timely information from big builders, who make about 30% of the volume. The information from the zillion small builders is patchy and delayed. Big buidlers have been increasing their share and are probably doing so rapidly in a down market, thanks to their marketing strength and their business model (a point made by Dryfly too). The little builders are probably getting killed. So, as better and more complete data trickle in from small builders the Commerce Department revises the old data and these revisions have been turning out negative.
Another point to keep in mind. In February, new home sales actually went up in the Northeast and Midwest (modest amounts to be sure and within the range of error). So, it cannot be blamed on winter weather. Actually, February was also unusually storm free. One widely publicised blizzard in the eatern seaboard, which came on a Sunday and did little damage becasue it was followed by dry and warm weather that melted the snow quickly. Usually Febraru has anywhere between 4-5 storms (not just snow). Of course, january was the warmest in 100+ years. So, the sales for the last two months would look a lot worse were it not for the weather.
A point about the MBA applications. Applications are donw 20% from their summer peak, but that may understate the actual decline in home sales. More applications are likely be rejected now versus summer as appriasers find it difficult to come up with comps and underwriters become a wee bit reluctant (both of which are happening).
Nonetheless, the biggest bubble in American history has consistently proved naysayers wrong. It has come back a few times despite pronouncements of its death. As I said before, home sales data in the winter months are flaky. We have to wait till the spring months are over before we nknow the diagnosis.
I think the good weather in January brought many buyers out a little early this year. Some of the Jan sales were at the expense of Feb. Sales of existing homes also fit this pattern as Feb closings were up dramatically.
What does it mean? too early to tell... not reliable enough data. Wde must wait for the March data for a better picture.
It is always very risky to draw conclusions from a single data point. Too much possibility for aberration.
Looking at the data over the past few years I think one can easily conclude that 2005 was the peak for this cycle. However, while 2006 is likely to be slower, it should be an ok year for most of the local real estate markets. By 2007 I would expect the growing inventory combined with some desperation to cause stronger downward price pressure in many markets.
I agree - this is a very strong trend, not a blip. It's imprudent to rely on only one set of data, but if multiple peices of data are fitting into a logical hypothesis over a longer enough period of time you will eventually get the clue that the hypothesis might be right.
As for January - when it was January I remember reading about the "warm weather recovery" that was to take place my March or April. We'll see if it happens.
Big builders have been increasing their share and are probably doing so rapidly in a down market, thanks to their marketing strength and their business model (a point made by Dryfly too). The little builders are probably getting killed.
Not to blow my own horn but my guess is this is true. The kill is I know a number of small builders like that - neighbors of my father. They used to exclusively be sub-contractors to the large builders but as the big builders' margins are tighter they dump some of this pain on their subs... some of the subs bid lower while others pass up work.
Faced with this choice my father's neighbors tend to 'pass up' the marginal sub-contract work and instead either do a renovation or a 'spec build'... so far they've made better money doing that then taking 'bad contract work'.
My guess is the 'spec option' is going to go away for a while... maybe forever if the business continues to integrate & consolidate.
:::::::::::
A question you might ask is if new construction has been increasing all through 2004-2005 then why are sub-contracts so much tighter? One would think it would be like commercial projects where there is a shortage of workers & capacity?
From what I am told it is MUCH EASIER to find & train labor for the residential side then it is for the commercial side of real estate. There are still bottlenecks - electrical & plumbing - but the skills required in residential are in general less difficult to master.
Result has been a flood of 'newbie' sub-contractors & their crews and can be evidenced by the constantly increasing employment numbers in construction... a lot of that growth has been in residential. There are more people bidding the work thanwork needing to get done.
Two things to watch... (1) what happens if the build declines (then sub contract pricing really erodes) and (2) what happens if the small builder option goes away due to increasing price competition from big builders?
It will not be good to be a small builder if this happens. That is where you'll see the lay offs.
dont forget tho that in urban settings the small builder will remain essential. none of the big boys can take on the necessary in-fill projects to redevelopment the cities. of course they can get the big city changing projects, but the continually needed infill build-to-suit and spec building will have to be done by outfits with lower overhead, specialized knowledge of the neighborhoods and better labor flexibility.
at least i hope so.
i also challenge the notion that residential build is easier than commercial. maybe what i'm thinking is rehab/renovation/infill work vs. new commercial construction. rehab and reno work is often more challenging because each condition is unique and you can't make money doing the same 400 offices worth of drywall.
i wish i could find more skilled foremen for my residential projects. i'd increase my project flow by 3 for each qualified one i could find at $75k/yr.
and one last thing. in DC inventory is way up, prices have moderated and sales are down.
however, just today we're having an open house for 16 condo units that are cheap by virtue of being small. the demand for these has been pretty impressive so far, we sold 2 this week before the first open house.
i will let you know how it goes over the next few days.
Regarding mortgage applications, I'm seeing a significant increase in refi apps with scenarios that just aren't doable such as those wishing to get out of their ARM loans but just don't have the equity to do so. I'm also seeing more and more appraisals come in lower than the applicants estimate of value. On top of that the office I work in is about 50% smaller in terms of staffing. The ratio of closed loans to applications is lower due to a greater number of declines.
The price of homes especially in coastal bubble markets have gone up to far and to fast. A nice fall in prices is good to correct the excesses that have developed the last several years.
I feel very confident to say that the peak is already in and we are turning over now. How fast and how far down is anyone's guess. But I suspect as lenders get burned with these riskyy exotic loans, fast money will dry up and put the speculators out of business. Also higher rates will continue to make affordability off the chart for most first time buyers.
I will not play this spec game to buy a house. I watch the others roll the dice with their financial future.
Infill is an artifact of the housing bubble. Without the market to justify these projects they won't happen. Same for the urban downtown renniasance and condo conversion bubbles.
A bubbly market does add to infill and other conversions of property.
However, it also occurs in a normal growth progression as the marginal infill lot becomes more worthwhile as the next best lot becomes further and further out.
the repopulation of the city and reurbanization of america will happen in both up and down markets.
I agree. Especially if 'Peak Oil' is for real... then people will have to live in one of two places... (1) inner urban areas close to work (offices & light mfg) & services... (2) in rural areas close to resources (farms, mines, forests) and mega-factories unsuitable to urban locales.
Converting suburbs to be like one or the other will be one helluva a growth industry. I doubt the mega-builders will be up to this task either with the possible excption of new new developments & infrastructure.
I think the February drop in new home sales possibly only represents the explosion of long interest rates at the end of Feb, and in March. If it is true, March figures will be much lower.
However if the whole thing turns into a recession, the FED will ease soon and the housing market will be revitalized.
IMHO the inflation data is the most important since only CPI can stop the FED from easing thus reinflating the bubbble.
The inflation is a global phenomenon, I guess it is worth watching China more closely these days as they are preparing to increase their domestic demand, the Japanese are doing the same, too.
Only if China, Japan and Europe increases domestic consumption significantly can inflation and long term rates increase and that will be the end of the housing market in US.
Wait for the revision.
David Lajaunie | 03.26.06 - 9:44 pm | #
The revisions have been consistently downward in recent months. Every single report since October, they have revised the previous months down, some substantially. Recall, that October was a peak of above 1.4 million when it was first released. Now, look at where it is.
tea | 03.25.06 - 6:18 pm | #
I suppose revisions might 'save the day' and considering the magnitude of this drop my guess is this revision, this time, would be 'up' and not down. But I doubt it will be a significant & story altering revision 'up'... more likely minor.
Regardless I agree the situation is volatile and it would not surprise me to see next months numbers MUCH better if for no other reason that the big builders ramp up incentive, put the gun to the heads of their salesmen & push the inventory off the books whatever it takes... like GM did last summer with SUVs.
Its seems that would be true generally, since 30 to 60 day escrows would put the house-hunting and purchase decision in the middle of the Thanksgiving/Christmas holidays.
Call for submissions, I invite everyone to contribute:
I want this to be a one-stop shop for the hard facts relating to the bubble. If you have some interesting info, links, ideas, anything - please share them and they will form part of this page.
You know the saying about economists:
If you laid them all end to end, they
would not reach a conclusion.
The argument being presented is a false one - it's not between "The Sky is falling" and "Everything is okay"; these arent the only choices, but it's being presented like it is by those who want to willfully ignore the signs of the bubble.
The reality is that housing price increases have dissipated rapidly and have reversed somewhat in the face of rising inventory. Doesnt mean that houses will become worthless - just that they'll be worth less for many tommorows than they were at the pinnancle of the market.
At least that's my Opinion. Something that those in the "There never was a bubble, and it's certainly not popping" camp cant seem to admit.
Thanks for your blog - it's always informative!
If you find yourself being more pessimistic about the housing market than Chris Thornberg, please consider a visit to your GP.
"If you find yourself being more pessimistic about the housing market than Chris Thornberg, please consider a visit to your GP."
I would love to - anyone want to give me a job with health insurance?
"It's funny, but not re-re" - Kim Jung Il in Team America: World Police
This is becoming the rightwing tactic of choice. When individuals and inmstitutions warn of problems as they start to develop (and some take extreme positions) the record of warnings is used to "disprove" the problems. Thus Iraq is a success because the civil war is not the worst possible civil war (yet) and so on with issue after issue.
The right insists all is wonderful and that the only negative is those who worry who with ungood thoughts do things like debase the dollar or otherwise upset the faith based reality.
Patriot
I agree- the far right wil do any thing
to 'secure' us from 'enemies' that are fleating and oblique- somthing they have done so well for nearly 40 years. Too bad they have failed to secure us as Americans from a future that is becoming bleak.
We had the pleasure last night of seeing the new indy movie "Why We Fight", and would recommend it highly.
CR,
The revisions have been consistently downward in recent months. Every single report since October, they have revised the previous months down, some substantially. Recall, that October was a peak of above 1.4 million when it was first released. Now, look at where it is.
There is a reason for this. Commerce has good, timely information from big builders, who make about 30% of the volume. The information from the zillion small builders is patchy and delayed. Big buidlers have been increasing their share and are probably doing so rapidly in a down market, thanks to their marketing strength and their business model (a point made by Dryfly too). The little builders are probably getting killed. So, as better and more complete data trickle in from small builders the Commerce Department revises the old data and these revisions have been turning out negative.
Another point to keep in mind. In February, new home sales actually went up in the Northeast and Midwest (modest amounts to be sure and within the range of error). So, it cannot be blamed on winter weather. Actually, February was also unusually storm free. One widely publicised blizzard in the eatern seaboard, which came on a Sunday and did little damage becasue it was followed by dry and warm weather that melted the snow quickly. Usually Febraru has anywhere between 4-5 storms (not just snow). Of course, january was the warmest in 100+ years. So, the sales for the last two months would look a lot worse were it not for the weather.
A point about the MBA applications. Applications are donw 20% from their summer peak, but that may understate the actual decline in home sales. More applications are likely be rejected now versus summer as appriasers find it difficult to come up with comps and underwriters become a wee bit reluctant (both of which are happening).
Nonetheless, the biggest bubble in American history has consistently proved naysayers wrong. It has come back a few times despite pronouncements of its death. As I said before, home sales data in the winter months are flaky. We have to wait till the spring months are over before we nknow the diagnosis.
I think the good weather in January brought many buyers out a little early this year. Some of the Jan sales were at the expense of Feb. Sales of existing homes also fit this pattern as Feb closings were up dramatically.
What does it mean? too early to tell... not reliable enough data. Wde must wait for the March data for a better picture.
It is always very risky to draw conclusions from a single data point. Too much possibility for aberration.
Looking at the data over the past few years I think one can easily conclude that 2005 was the peak for this cycle. However, while 2006 is likely to be slower, it should be an ok year for most of the local real estate markets. By 2007 I would expect the growing inventory combined with some desperation to cause stronger downward price pressure in many markets.
I agree - this is a very strong trend, not a blip. It's imprudent to rely on only one set of data, but if multiple peices of data are fitting into a logical hypothesis over a longer enough period of time you will eventually get the clue that the hypothesis might be right.
As for January - when it was January I remember reading about the "warm weather recovery" that was to take place my March or April. We'll see if it happens.
One month does not a trend make. Surely, cycles are inevitable. The bullish side of the housing market is clearly near an end.
Big builders have been increasing their share and are probably doing so rapidly in a down market, thanks to their marketing strength and their business model (a point made by Dryfly too). The little builders are probably getting killed.
Not to blow my own horn but my guess is this is true. The kill is I know a number of small builders like that - neighbors of my father. They used to exclusively be sub-contractors to the large builders but as the big builders' margins are tighter they dump some of this pain on their subs... some of the subs bid lower while others pass up work.
Faced with this choice my father's neighbors tend to 'pass up' the marginal sub-contract work and instead either do a renovation or a 'spec build'... so far they've made better money doing that then taking 'bad contract work'.
My guess is the 'spec option' is going to go away for a while... maybe forever if the business continues to integrate & consolidate.
:::::::::::
A question you might ask is if new construction has been increasing all through 2004-2005 then why are sub-contracts so much tighter? One would think it would be like commercial projects where there is a shortage of workers & capacity?
From what I am told it is MUCH EASIER to find & train labor for the residential side then it is for the commercial side of real estate. There are still bottlenecks - electrical & plumbing - but the skills required in residential are in general less difficult to master.
Result has been a flood of 'newbie' sub-contractors & their crews and can be evidenced by the constantly increasing employment numbers in construction... a lot of that growth has been in residential. There are more people bidding the work thanwork needing to get done.
Two things to watch... (1) what happens if the build declines (then sub contract pricing really erodes) and (2) what happens if the small builder option goes away due to increasing price competition from big builders?
It will not be good to be a small builder if this happens. That is where you'll see the lay offs.
dont forget tho that in urban settings the small builder will remain essential. none of the big boys can take on the necessary in-fill projects to redevelopment the cities. of course they can get the big city changing projects, but the continually needed infill build-to-suit and spec building will have to be done by outfits with lower overhead, specialized knowledge of the neighborhoods and better labor flexibility.
at least i hope so.
i also challenge the notion that residential build is easier than commercial. maybe what i'm thinking is rehab/renovation/infill work vs. new commercial construction. rehab and reno work is often more challenging because each condition is unique and you can't make money doing the same 400 offices worth of drywall.
i wish i could find more skilled foremen for my residential projects. i'd increase my project flow by 3 for each qualified one i could find at $75k/yr.
and one last thing. in DC inventory is way up, prices have moderated and sales are down.
however, just today we're having an open house for 16 condo units that are cheap by virtue of being small. the demand for these has been pretty impressive so far, we sold 2 this week before the first open house.
i will let you know how it goes over the next few days.
Regarding mortgage applications, I'm seeing a significant increase in refi apps with scenarios that just aren't doable such as those wishing to get out of their ARM loans but just don't have the equity to do so. I'm also seeing more and more appraisals come in lower than the applicants estimate of value. On top of that the office I work in is about 50% smaller in terms of staffing. The ratio of closed loans to applications is lower due to a greater number of declines.
The price of homes especially in coastal bubble markets have gone up to far and to fast. A nice fall in prices is good to correct the excesses that have developed the last several years.
I feel very confident to say that the peak is already in and we are turning over now. How fast and how far down is anyone's guess. But I suspect as lenders get burned with these riskyy exotic loans, fast money will dry up and put the speculators out of business. Also higher rates will continue to make affordability off the chart for most first time buyers.
I will not play this spec game to buy a house. I watch the others roll the dice with their financial future.
Infill is an artifact of the housing bubble. Without the market to justify these projects they won't happen. Same for the urban downtown renniasance and condo conversion bubbles.
A bubbly market does add to infill and other conversions of property.
However, it also occurs in a normal growth progression as the marginal infill lot becomes more worthwhile as the next best lot becomes further and further out.
suburban mass migration happened in up and down markets.
the repopulation of the city and reurbanization of america will happen in both up and down markets.
jimminy.
the repopulation of the city and reurbanization of america will happen in both up and down markets.
I agree. Especially if 'Peak Oil' is for real... then people will have to live in one of two places... (1) inner urban areas close to work (offices & light mfg) & services... (2) in rural areas close to resources (farms, mines, forests) and mega-factories unsuitable to urban locales.
Converting suburbs to be like one or the other will be one helluva a growth industry. I doubt the mega-builders will be up to this task either with the possible excption of new new developments & infrastructure.
I think the February drop in new home sales possibly only represents the explosion of long interest rates at the end of Feb, and in March. If it is true, March figures will be much lower.
However if the whole thing turns into a recession, the FED will ease soon and the housing market will be revitalized.
IMHO the inflation data is the most important since only CPI can stop the FED from easing thus reinflating the bubbble.
The inflation is a global phenomenon, I guess it is worth watching China more closely these days as they are preparing to increase their domestic demand, the Japanese are doing the same, too.
Only if China, Japan and Europe increases domestic consumption significantly can inflation and long term rates increase and that will be the end of the housing market in US.
There's a 12.4% +/- error rate at a 90% confidence factor for the Census Bureau data. That means a very small sample. Wait for the revision.
Wait for the revision.
David Lajaunie | 03.26.06 - 9:44 pm | #
The revisions have been consistently downward in recent months. Every single report since October, they have revised the previous months down, some substantially. Recall, that October was a peak of above 1.4 million when it was first released. Now, look at where it is.
tea | 03.25.06 - 6:18 pm | #
I suppose revisions might 'save the day' and considering the magnitude of this drop my guess is this revision, this time, would be 'up' and not down. But I doubt it will be a significant & story altering revision 'up'... more likely minor.
Regardless I agree the situation is volatile and it would not surprise me to see next months numbers MUCH better if for no other reason that the big builders ramp up incentive, put the gun to the heads of their salesmen & push the inventory off the books whatever it takes... like GM did last summer with SUVs.
Karevoll is correct about February when it comes to California, which is where he reports for DataQuick - the charts are pretty clear:
The Weird Months are Over
Its seems that would be true generally, since 30 to 60 day escrows would put the house-hunting and purchase decision in the middle of the Thanksgiving/Christmas holidays.
I suspect any data/opinions originating at DataQuick, as we've discovered their data is inaccurate for our local market.
Check out this Bubblicious Bench next to a condo building.
Call for submissions, I invite everyone to contribute:
I want this to be a one-stop shop for the hard facts relating to the bubble. If you have some interesting info, links, ideas, anything - please share them and they will form part of this page.
Global House Prices: Housing Bubble Facts and Figures
Housing Bubble Facts and Figures