Housing Starts? Stabilize THIS!
Housing Starts plummeted today to the lowest level in 6 years, as builders continue to work out from under a massively bloated inventory of unsold property.
September starts were also revised downwards by 16%, from 5.9 to 4.9%.
The WSJ observed:
"The slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades had powered a housing boom that pushed sales of both new and existing homes to five consecutive records.
In a sign that starts will likely continue to fall, October building permits dropped 6.3% to an annual rate of 1.535 million; the last month permits rose was January. Economists expected permits would be up by 0.1% to 1.640 million. Permits decreased a revised 5.2% last month to 1.638 million, compared with an earlier estimated 6.3% drop to 1.619 million.
The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate. Housing is expected to continue acting as a drag over the next year but analysts believe the adverse effects of falling sales and construction cutbacks will not be enough to pull the country into a recession.
The October 06 Housing Starts were the weakest since July 2000, with Starts down 27% from the same period a year ago.
At present, the Housing situation will exert a much greater drag on Q4 GDP -- even more of a drag than the negative 1.1% of Q3.
Bloomberg quoted Phillip Neuhart, an economist at Wachovia, who said: "This is a shocking number. The market is going to remain weak well into next year.''
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Sources:
New Residential Construction
Census Bureau
http://www.census.gov/const/www/newresconstindex.html
New Home-Building Activity Falls to Lowest Level in 6 Years
JEFF BATER
WSJ, November 17, 2006 9:17 a.m.
http://online.wsj.com/article/SB116376991880226234.html
U.S. October Housing Starts Drop to Six-Year Low
Joe Richter
Bloomberg, Nov. 17
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqOnuC2sR5.M&
Friday, November 17, 2006 | 10:10 AM | Permalink
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Housing is so 2003. How 'bout that NMX.. :)
jb
Posted by: James Bednar | Nov 17, 2006 10:25:50 AM
I called that last month.
Posted by: Cherry | Nov 17, 2006 10:32:06 AM
A housing bottom will be found when home builders start imploding. The majority of them have not learned from the other big cyclical industry (oil) that when times are fat to hold on to that cash and not spend it like the market for your commodity will go on forever. Many major oils have not deeply invested their cash positions in new production. that keeps prices stable.
Home builders were increasing starts well into the fallout of demand and prices. Now they are cutting back after the fact but it is alraedy too late. The cost of complting the existing starts plus the lack of future revenue is going to bite them and that is why their stock prices have plummeted. Its taken a bite out of their balance sheets.
The housing market may be stable when it comes to prices on existing properties, but not stable for the building industry. I'd say at the most existing home prices could fall another 10-15% from here going into 2008 and a long flat to rising trend for 3-5 after that.
Posted by: anderl | Nov 17, 2006 10:39:20 AM
If fixed residential construction was down 17.4% in Q3, what do you think it's going to be in Q4 with starts plummeting? How in the world is GDP going to be the "consensus" 2.5% when we know the absurd auto production number from Q3 will reverse and residential construction will be down huge again? I'm in Roubini's camp, we're looking at 0-1% in Q4 and then as the lagged effect on consumer spending starts kicking in next year, outright recession.
Posted by: joe | Nov 17, 2006 10:40:47 AM
Residential completions lag starts about 6-9 months. Since residential construction peaked early 2006, and has since dropped off a cliff, expect residential construction employment to drop like a rock in January or February 2007.
Posted by: PW | Nov 17, 2006 10:49:10 AM
Time for the Conference Board to drop permits from their index of leading indicators. Plunging permits and a 50bips inversion of the yield curve is too much dour news to bear.
Posted by: rjf | Nov 17, 2006 10:55:27 AM
I just saw David Lereah on CNBC and even he was surprised by the starts number. He looked rather pale. It was interesting to see the NAR's senior cheerleader, I mean senior economist talking very negatively about the market.
Posted by: GerryL | Nov 17, 2006 10:59:08 AM
Alright folks -- rumor about hedge fund trouble and the dollar is crossing the wires. Anyone have more news?
Posted by: Mr. Beach | Nov 17, 2006 11:08:22 AM
But the CONSUMER can never die.
They'll find a way to buy all those houses, Barry, they will. If we just dig down deep and give it the ol' college try -- we can do it. We're Americans, dammit. If we can't buy 1000s of houses no one wants -- what good is it all?
We're Americans, Barry. We spend money we don't have and we're going to throw this housing recession out on its ass.
The CONSUMER will never stop spending. Never -- not until they throw us in jail for failure to pay. Then we might stop. Just a little.
Posted by: ari5000 | Nov 17, 2006 11:12:11 AM
Speaking of over-supply, Santa Clara Co. shows the following thru Sept'06:
http://www.viewfromsiliconvalley.com/id66.html
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 new houses!
For all the latest Silicon Valley news, please visit:
www.viewfromsiliconvalley.com
Thanks!
Posted by: vfsv | Nov 17, 2006 11:39:18 AM
Never underestimate the consumer.
That's what I learned when I read about people pitching tents 10 days in advance in front of circuit city to buy the new Playstation 3.
Their resolve is amazing!
Posted by: Michael C. | Nov 17, 2006 11:40:20 AM
A prime example of how real estate can be highly localized.
A new development in Orance County, CA selling ~$700k condos has a wait list of over 100 people. In their 1st phase release, none cancelled.
Posted by: Michael C. | Nov 17, 2006 11:45:17 AM
"This is a shocking number." Was he living in a cave?
How can anybody who actually gets paid to be in such a position claim such ignorance of the reality going on around him. As if the reality from which this number was generated was somehow invisible from all of us until the number was released. Amazing.
Posted by: Bob A | Nov 17, 2006 11:47:02 AM
From Tony Crescenzi at RM:
-----------------------------------------------------------------
The inventory adjustment process will last probably into 2008, but it should be shorter than the one that gripped the housing market in the early 1990s. Here are the main reasons for this:
Inventory-to-sales ratios are lower today than they were at their peak in 1991. For example, the inventory-to-sales ratio for new homes is today at 6.4 months of supply, compared with 9.4 months in January 1991.
The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.
More of today's inventory burden is "professionally" managed. This is mainly because the nation's largest home builders control a greater share of the housing market than they did in the early 1990s. The large homebuilders have the capital to hold on to inventory better than smaller builders, who are more likely to liquidate at much lower prices in order to raise capital.
This particular factor is a bit weak at the moment because of the recent strength of the stock market. The fact is, however, that since 2000 the equity risk premium has increased, making alternative investments look relatively more attractive, including real estate.
Demographics are more powerful, meaning that household formation is higher today than it was in 1990. The key homebuying years are ages 25-29 and over 45 (for second homes). In 1990, the number of people turning 25 actually fell, owing to the fact that fewer people were born in 1965 than in 1964, the last year of the baby boom. This is not the case today, as the number of people turning 25 will be increasing in the year ahead. Similarly, the number of people turning 45 will be increasing much more than in the early 1990s.
Urban sprawl continues to increase, with suburbia high on the list for new households looking for a place to live.
None of this is meant to say that the housing market will be strong in the months ahead. I mean only to show that there are a number of factors that will help to prevent an implosion in housing demand. So long as that is the case, the erosion in home prices won't be substantial relative to the amount that they increased in recent years. Although the negative effects from construction are likely to slow in 2007, the impact of other housing-related categories will increase.
I am sure many of you disagree.
------------------------------------------------------------------
Posted by: Michael C. | Nov 17, 2006 11:49:32 AM
A prime example of how real estate can be highly localized.
A new development in Orance County, CA selling ~$700k condos has a wait list of over 100 people. In their 1st phase release, none cancelled.
Was a non-refundable deposit required, or was it non-binding no-deposit?
jb
Posted by: James Bednar | Nov 17, 2006 11:49:44 AM
>>>Was a non-refundable deposit required, or was it non-binding no-deposit?<<<
Non-refundable. From my visit, you would think it was 2004 all over again.
This is a nice neighborhood and buyers appeared strong. Either they were starter families or older mom and pops with sizeable cash looking for an investment. None of that Florida flipper garbage.
...at least that's what it seemed. I realize this is way out of the norm. But wow on how different it is.
Posted by: Michael C. | Nov 17, 2006 11:53:45 AM
Last year in Las Vegas I noticed that just about every apartment complex was converted over to condos for sale. I just saw a large banner on one of those complexes today "Luxury condominums for rent"
Does anybody know of a bubble anywhere in history where the public piled into an asset class like they did in housing or the Nasdaq that didn't end in a hard landing. Off the top of my head I can't come up with any. I wonder what that says about the chances of a soft landing this time.
Posted by: Gary | Nov 17, 2006 11:57:25 AM
greenwich capital has very very good research regarding US housing (issued this week) ...try to find it
Posted by: GER | Nov 17, 2006 11:59:46 AM
anderl wrote:
"The housing market may be stable when it comes to prices on existing properties,"
I wouldn't call back-to-back monthly YOY median declines, the first in 15 years, a sign of stability.
Posted by: winjr | Nov 17, 2006 12:13:49 PM
Gary, Jeremy Grantham at GMO deems an asset bubble to be a 2 standard deviation move from the mean. I believe he has identified 29 of these in history. 28 have mean reverted, i.e. crashed. He says there's a chance that the 29th bubble - the US housing market - won't do so, but that it would really have to be "different this time".
Posted by: joe | Nov 17, 2006 12:14:36 PM
The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.
You're looking at the wrong numbers on interest rates. It makes no difference what level they are at. What matters is how quickly they are changing. The early 90's were a falling rate environment. We are now in a fairly stable rate environment (with occasional ups and downs). In a falling rate environment, a fixed monthly payment buys a more expensive house as time passes. In a flat rate environment, a fixed monthly payment buys a fixed price house. So in the early 90's, waiting 6 months lowered the cost of buying a house by 3-5% without a price cut. Now, to get the same drop in cost, the price has to fall 3-5%.
A I have said many times before, house prices are going to fall back to their inflation adjusted 2000 levels within the next 3-4 years. The only unknown is how much of the 30-40% price drop will be from inflation and how much will be from nominal price drops. We'll be lucky if prices don't overshoot on the way down. A graph of inflation adjusted house prices looks like a bouncing ball, and there is no reason to think things are different in this cycle.
Posted by: jkw | Nov 17, 2006 12:15:07 PM
But what does it matter? Dow up 20! Let's buy!
Posted by: MarkM | Nov 17, 2006 12:42:10 PM
One would think a decline this large ought to make the Fed reconsider their (apparent) assumption that there will be little spillover from real estate dis-inflation into the general economy, not so?
WRT David Lereah, "You can't make somebody understand something if their salary depends upon them not understanding it." - Upton Sinclair
Posted by: RW | Nov 17, 2006 12:48:39 PM
>>>A graph of inflation adjusted house prices looks like a bouncing ball, and there is no reason to think things are different in this cycle.<<<
I pulled up just what you are referring to -
Graph of Inflation-Adjusted Housing Prices.
I'm not sure I would use the term bouncing ball for that chart. I do see how prices stay within a range for its own particular cycle.
But at least from the chart, when housing prices break the cycle, they enter a new range for a long period of time. It seems this is what happened starting in 2000.
So from the chart, things ARE different in this cycle. If this were a stock chart, it shows that past breakouts only retraced about 25-50%. To go back to 2000 levels would be a full retracement. Back to 2004 levels seems more likely, where some of the gains by early home buyers in this cycle are protected.
Posted by: Michael C. | Nov 17, 2006 12:55:19 PM
Hi Barry, A question and a comment. If the Fed lowers rates will that solve the housing problem? Why not sell the excess housing to the illegal imigrants! Dave
Posted by: David Price | Nov 17, 2006 1:22:20 PM
