Property Worsens: Beginning, Middle or End?
A few quick words on yesterday's Housing data: Of course, it was god-awful. Despite the incessant bottom-calling by the clueless, spin-miesters, and industry insiders, we are nowhere near the end of the cycle.
If we are lucky, this is now the middle -- as opposed to 2nd year of a decade long slump.
As to yesterday's data -- it was a mixed blessing. The manifest problems in Housing are twofold: Prices are too high, and inventory is too great. These are of course, related. Once prices come down further, the supply problems will begin to clear up. So the enormous drop in permits/starts is, perversely, a good thing.
Let's go to the data:
• New construction of homes in the United States fell 10.2% in September (seasonally adjusted 1.19 million units)
• The drop in housing starts was the 4th consecutive monthly decline.
• We are now ar the lowest level for new home construction since March 1993.
• Starts of single-family homes fell 1.7% to 963,000 (annualized);• Construction of large apartment units plummeted 34.4% to 228,000.
• Building permits fell 7.3% to a seasonally adjusted rate of 1.23 million -- the lowest level since July 1993.
So there is no bottom anywhere in sight. The scary question is whether we are in the 5th/6th inning, or the 1st/2nd inning.
For a real good read, Dan Gross goes postal on Treasury Secretary Paulson: Dan claims that the subprime collapse didn't bother the Bush administration until Wall Street bankers started whimpering: Protecting Paulson's Pals.
Lastly, considering how much denial there was for the longest time, I found some of the Wall Street economists comments at Real Time Economic terribly amusing. This crowd has not yet begun to panic . . .
Housing Starts amd Completions
chart courtesy of Calculated Risk
>
Sources:
New Residential Construction
(Building Permits, Housing Starts, and Housing Completions
http://www.census.gov/const/newresconst.pdf
New construction falls 10.2% to fewest housing starts since '93
ALEJANDRO BODIPO-MEMBA
Detroit Free Press, October 17, 2007
http://www.freep.com/apps/pbcs.dll/article?AID=/20071017/BUSINESS07/71017022
Protecting Paulson's Pals
Daniel Gross
Slate, Tuesday, Oct. 16, 2007, at 5:52 PM ET
http://www.slate.com/id/2175724/
Economists React: ‘Horrific’ Housing
October 17, 2007, 10:25 am
http://blogs.wsj.com/economics/2007/10/17/economists-react-horrific-housing/
Standard & Poor's Ratings Services Reviews Ratings on Certain U.S. Residential Mortgage-Backed Securities Issued in 2007 http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-17-2007/0004684220&EDATE=
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Comments
I hear alot of "Foreclosure Ads" urging people to get in on the great deals available now...My guess is plenty of people will "get in too early" before the bottom is in...
BTW, in order to combat the massive price increases in food cigarettes and hospital care, I have taken to the following:
eating "apparel" as source of nutrition...
smoking "electronics"...
hitting the "used car lot" for Medical Care
Posted by: SINGER | Oct 18, 2007 7:53:49 AM
The listing of Countrywide's REO (foreclosure) inventory on their website continues to increase and appears to have accelerated over the last few weeks. They continue to add new listings at around 100 per day. Using this as a real-time indicator, a bottom has yet to be found.
The way, asset-backed securities as measured by Markit.com have dropped dramatically again over the last few days, credit spreads are starting to widen again. Credit crunch redux, anyone?
Posted by: W.Edwards | Oct 18, 2007 8:13:02 AM
"The way" ==> "By the way"
I really wish there was a way to edit stuff that's posted by numbskulls like me who don't check what they've written closely enough!
Posted by: W.Edwards | Oct 18, 2007 8:16:46 AM
Your readers might also benefit from CR's earlier post on housing, recessions and (especially) the long-run price adjustments process:Housing Bottoms: Residential Investment vs. Existing Home Prices
( http://tinyurl.com/2dqyt7 )
If you read thru and think thru this post you'll see that the timelags are enormous because housing is a very sticky market and the outlook would be for continued downtrends before flattening until '10 ! At least in my interpretation.
With Paulson just this week finally coming out and admitting the problem is much worse than public policy statements have implied maybe reality is setting in. Wessel's Capital column in today's WSJ is worth reviwing as well for those with subscriptions. It's literally in only the last couple of weeks that reality (big R) is setting in.
We have a long...long way to do.
Posted by: dblwyo | Oct 18, 2007 8:25:37 AM
It's the bottom of the 2nd, with no outs!
Posted by: Justin | Oct 18, 2007 8:29:05 AM
We haven't had much of a price adjustment, really. So maybe we're in the third inning.
What's gonna be real interesting to watch is how the Fed tries to kick start this thing if it goes on too long/deep. Bernacke doesn't strike me as a 1% guy. But maybe Greenspan wasn't in the early days either.
Posted by: mh497 | Oct 18, 2007 8:34:25 AM
BR, should the drop in starts and construction be viewed favorably as it is a signal the industry is no longer adding capacity to a saturated market?
~~~
BR: I thought I wrote that above (para 3):
"As to yesterday's data -- it was a mixed blessing . . . inventory is too great . . . So the enormous drop in permits/starts is, perversely, a good thing."
Posted by: dan | Oct 18, 2007 8:38:10 AM
Silver lining: the quality of most homes built in the last ten years is so piss-poor, they will either rot away or need to be demolished soon enough. Inventory problem solved!
Posted by: L'Emmerdeur | Oct 18, 2007 8:38:19 AM
Barry:
I know that particular segment is in the toilet, but isn't this all just dramatized a little bit because of the all time record breaking pace of the UP side in the previous few years?
I mean, look at the graph you supplied. We appear to be a little more than half way to the historic low of the range (~ 900?) after an abnormally long uptrend that when all is said and done, didn't even set a record on that upper part of that range. So we had a longer period of rising starts and completions which is being followed by a more rapid decrease than usual of those same metrics. I'm not saying that it's great, but it appears to (so far) be well within the "normal" range for the metric. No?
Posted by: Mike G. | Oct 18, 2007 8:52:54 AM
Barry, not to change the subject, but what's your opinion on this SUPER SIV?
~~~
BR: I haven't done all that much homework on it -- yet.
Posted by: Justin | Oct 18, 2007 8:53:53 AM
For detailed historical perspective, Chip Case's papers:
http://tinyurl.com/ypjh3g
Peak to trough cycles have generally lasted four years. Three to go...
Posted by: hocus pocus | Oct 18, 2007 8:55:27 AM
I remember hockey games at the U of Wisconsin, where the crowd would yell, siv, siv, siv, when the opposing team's goalie would allow the puck in the net...how appropriate. This market should be close to 2003 levels at best!
Posted by: Justin | Oct 18, 2007 9:00:12 AM
All one has to do is look at what the underlying cause is that is applying all the pressure, mortgage resets. Take a look at any chart showing the coming resets and we KNOW we are still only near the beginning. Q1 and Q2'08 are going to be where the pain threshold gets tested as one or more of the mortgage insurers to fails. Not to diminish the pain felt by hundreds of thousands of homeowners to date, but so far, this is nothing. People need to get the fact that we are still in the early part of working our way through the mortgage resets with the most severe months still in front of us.
Posted by: Stuart | Oct 18, 2007 9:00:54 AM
I love Sandra Ward's interviews. Here's something I wrote earlier:
"I was cleaning off my desk, and I found an article from Barron's (11.13.06) that I had printed out. It was Sandra Ward's interview with Richard Arvedlund (Cyprus Capital Management). The title of the interview was called, "Recession: The Stage is Set". In the interview, he felt that the preconditions for a recession were set because of the state of the housing market. Specifically, he stated that "Whenever housing starts and permits drop by the rates o decline that have been exhibited--10-20%--it has always preceded a recession." He also notes that when housing leads the downturn (which happened in the late 70's and late 80's), it typically tends to last longer than people dream. He states that the average cycle is 3-4 years."
Posted by: Leisa | Oct 18, 2007 9:02:34 AM
A-Rod just cleared the bases in the bottom of the first.
Posted by: X | Oct 18, 2007 9:07:21 AM
WM, CFC, BAC, C, ETFC...I'd like to see what Q407 looks like.
Posted by: Owner Earnings | Oct 18, 2007 9:25:45 AM
Just based on the relationship between NAHB Housing Survey and Housing Starts alone there is no way we don't get Starts below 1.0 million by the end of the year 0.9 million is more likely.
This PDF walks you thru the relationship between the two
http://www.pbpinfo.com/economy/download/Housing_starts_survey.pdf
so yesterday's starts number of 1.2 million which was bad, is by no mean the bottom.
Posted by: Michael Donnelly | Oct 18, 2007 9:36:08 AM
Welcome to yet another round of:
"Oversubscribe the Repo"
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm
I guess the Fed is making plans for alot of shopping to occur this weekend- as the people who have no grasp of repo.s have "informed" me that thursdays are big because the shopping that goes on during a weekend so the brokers need alot of cash.....
I bet they do....seems they need about 15X the amount the fed is "offering"......
The fix is on.....
Ciao
MS
Posted by: michael schumacher | Oct 18, 2007 10:05:58 AM
Mr. Ritholtz,
"...we are nowhere near the end of the cycle."
And what cycle would that be? The "Manias, Panics, and Crashes" cycle? Will you finally acknowledge this was a huge bubble NAZ style?
Give me a ....... break.
The only good part of this blog is when you steal material from others. Get a clue!
~~~
BR: I may need to hire you. Occasionally, our firm needs to employ a professional asshole, and you fit the bill perfectly.
I mean that in a sincere way: Let's say I have corporate rectum needs -- are you capable of fulfilling all of the technical requirements of an asshole for hire? (I don't mean a lawyer -- I have enough of those).
Can you fill the needs of those who require an occasional extraordinary anus for business reasons? Cause if you haven't had this chat with your guidance counselor yet, let me save you the 45 minutes.
Your new profession awaits . . .
Posted by: million dollar watch | Oct 18, 2007 10:19:45 AM
Ok million dollar watch.....
WHy don't you tell us all what it is.....
Ciao
MS
Posted by: michael schumacher | Oct 18, 2007 10:27:13 AM
Million dollar baby, what is your problem.
You haven't contributed a bloody thing to this blog since practically day 1. All you do is sit back and bitch and ask questions of such stupidity that one almost has to believe they're rhetorical. You ask what cycle is being referenced.. Hmmm...Lets see now,...
1. "A few quick words on yesterday's Housing data"
2. "The manifest problems in Housing are ....."
3. "supply problems will begin to clear up"
4. "New construction of homes in the United States fell 10.2%"
5. "The drop in housing starts was the 4th consecutive monthly decline."
6. "We are now ar the lowest level for new home construction since March 1993."
7. "Starts of single-family homes fell 1.7% to 963,000 (annualized)"
Oh, ya, right. The trading cycle in postage stamps. Ya, that's it. LOL
Posted by: Stuart | Oct 18, 2007 10:31:04 AM
Story hitting the headlines about a Paypal money market fund blowup. Dotcom meets credit crunch - it's a clash of the bubble monsters!
Also, million dollar watch... what?
Posted by: L'Emmerdeur | Oct 18, 2007 10:33:31 AM
On the way home from work the other night I thought I heard Kudlow (on XM radio) mention he did not want the Fed to cut interest rates any further so as not to put any more pressure on the falling dollar..., thought the economy was in good enough shape... Somewhat interesting coming from him, in light of his rant's for the "Shock and Awe" last month, and now given what the fed futures and the yield on the 3 month T-bill would seem to indicate... and that the problems in the Housing/Construction market have been known for some time.
I'll have to (make an attempt) to catch Cramer. It would be interesting to here what PeeWee's take on the next FED move should be...
Posted by: John | Oct 18, 2007 10:37:59 AM
Barry,
We have many problems here in the U.S.A. and million dollar foreclosures in San Diego is minor in comparison to the erosion of the middle class standard of living.
The middle class has finally reached the point where they are better educated and their next step is to be more active in voicing their concerns.
They know that banks and insurance companies are in the business of making lots of money on "their" deposits and other service fees.
They know that when a bank starts to fail the government will bail them out. And when a hurricane rips through the assets of the insurance company the government will bail them out.
They also know that "the government" is just another word for "the taxpayer." And in turn for the taxpayer bailout, the taxpayer faces increased fees across the board (to further help the very companies we bailed out to survive). So they can do it to us again and again and again.
The middle class knows the upper class depends on it's generosity, so their way of living at the top isn't threatened.
Without the rich, the middle class wouldn't have jobs and they wouldn't pay the taxes required to provide the investor class a safety net.
And now, something worse is happening. Taxpayer money is being spent on contracts awarded to "American" companies that outsource middle class jobs offshore.
To the educated middle class person, it's easy to see that less American jobs equals less tax revenue equals less government contract awards. American taxpayers are virtually funding their own demise.
The good news is that if America goes down the drain because of the demise of the middle class, the upper class can still rely on their millions to survive. Anywhere in the world.
In most cases the American middle class has followed the rules: work hard, educate yourself and your family, invest in the future.
They didn't count on competing with globalization and third world wages less than ten times the American poverty rate.
How foolish it is to pay for a college education only to find that upon graduation, your field of expertise is now outsourced to a third world country for one third your previously expected starting salary. Sorry, the position has already been placed.
The middle class of America is too smart to let this erosion go the distance. Or at least I hope so. I for one still hear that "sucking" sound old man Perot spoke about.
Listen carefully to presidential candidate Huckabee's comments. He's the torch bearer on this subject. Without a strong, healthy, educated and prosperous middle class, America is nothing.
Posted by: TodaysMoney.com | Oct 18, 2007 10:55:31 AM
" I may need to hire you " LOL
That was very funny ! but laughing out loud, makes my co-workers wonder what I am up to.
Excellent way to make a point, kudos.
md
Posted by: Michael Donnelly | Oct 18, 2007 10:56:33 AM
