New SF Home Construction An All-Time High
CNN Money has this breaking story. “The pace of home building soared to the highest level in nearly 33 years in January, according to a government report Thursday that showed a real estate market that continues to top expectations.”
“The Census Bureau reported that housing starts reached an annual pace of 2.28 million homes in January, compared to just under a rate of 2 million homes in December. Economists forecast that housing starts would come in at an annual rate of 2.02 million in the month.”
“Building permits came in at an annual pace of 2.22 million in January, compared with the 2.08 million pace in December. Permits were expected to edge down to a 2.07 million.”
“The Commerce Department reported Thursday that building activity was up 14.5 percent last month when compared to December. The 14.5 percent rise in construction activity in January followed a 6.9 percent drop in December. Analysts had been expecting a rebound but the actual rise was far above their forecasts.”
“For January, construction of single-family homes rose by 12.8 percent to an annual rate of 1.819 million units, an all-time high.”
“Some economists have expressed concerns that once home sales start to slide, the big price gains could turn into sharp declines in prices in some areas, bursting the speculative bubble in much the same way that the stock market bubble burst in early 2000.”
“Builders may also have stepped up construction to try to close agreements before buyers can back out, economist Chris Low said. ‘There’s a sense of urgency in construction,’ Low said. ‘If builders have approval for a project, they’re going to try to move ahead as quickly as possible.’”
“Home order cancellations increased the first two months of KB Home’s fiscal year and net orders for new homes are lower than a year earlier, the sixth-largest homebuilder by stock market value said in its annual report on Feb. 10. ‘If the current trends do not improve, we may be required to moderate our revenue guidance,’ KB Home said in the report.”
Even with prices falling from 3Q2005 to 4Q2005, they are still extremely high. There’s no reason to think that slowing construction and slowing prices will occur simultaneously.
As long as there’s profit, the builders will keep building. In some markets, prices could drop 50% and the builders will still have room for profit, though not as much as in recent years.
I bet we’ll see surges of construction throughout 2006 as each builder races to complete houses and get them to market before its competition.
IT’S CALLED THE: “OHhhh $H!T !!!” principal
Woo hoo! More for us.
Lets see, home sales are basically down, inventories are up and there is a boat load of new housing coming into the market. I wonder how the housing starts and new building permits are actually going to sale????
What we need is data on spec houses versus those built on contract. I suspect that many if not most are spec houses but I don’t know if that is the case. Anyone have any data on this?
Like the new car dealers - 0% interest for 5 years - then the loan adjusts! YeeHaa - get along little doggies
Not too surprising. Looks like the builders are still trying to cash in. The builders have a lot of margin to play with - the cost to build a home and their cost of the land (which they likely bought at a low cost years ago) has not changed much in the past 5 years. If the builder’s cost was say $200K and they were selling for $500K, they can even sell at, say $250K and make the profit that they used to 5 years ago. I have a good builder friend who told me that during slow times, he is even willing to sell homes at cost, just to keep his good contractors and workers employed.
They only people that will get screwed are the “specuvestors”, and I for one have no sympathy for them. Keep on building! : )
I agree, most of the big HBs will be OK through this because they have so much margin to play with.
The smaller developers and mom & pop operations will feel it most and probably go belly up.
Flippers are going to get killed as the HBs continue to bomb the prices to keep their volumes up.
I don’t think the big builders will be okay. I think they are going to see a sharp drop off in sales, leaving them with huge inventories. Some will lose their liquidity and go bankrupt. It is not as if selling houses in a glutted market is just a matter of price. We will get to a point where there just aren’t enough buyers. We are actually already seeing that. When inventories are sky high and sales numbers falling, we are already there. So no matter how low builders set their prices, they won’t be able to sell all these new homes they are building, IMHO.
Don’t forget the screwed HB stock owners, who will hold the bag of worthless shares which Robert Toll and his likes diluted with company share repurchases while diversifying away their personal holdings of company stock.
I don’t see how repurchases of company shares would cause dilution - in fact, I would expect the inverse to be the case. Less shares outstanding == negative dilution (saturation?)
Here is an illustration:
- Robert Toll diversifies out of 1m shares of company stock:
07/21/2005 1,000,000 TOL Proposed Sale (Form 144) estimated proceeds of $56,330,000.00
- Just for good measure he diversifies out of another 1m shares four days later:
07/25/2005 1,000,000 TOL Open Market Sale
proceeds of $57,050,507.60
- TOL stock price drops by about 50% shortly after this rather large diversification, but to avoid the appearance of an all-out crash (http://tinyurl.com/7r8fg) the company buys back shares on the ride down out of a huge cash pile that could otherwise have been payed out as, say, dividends to shareholders.
Maybe dilution is the wrong term; how about sterilized insider sales?
innneresting….. things that make you go hmmmm.
Curious as to how long it takes to build a track home. By the time they hit the market, I’ll probably be able to buy one for a third of what the developers were planning to sell them for originally.
Have to love their enthusiasm, though. RE agents and homebuilders are like Buzz Lightyear - “How can you be sure that the prices will be higher in the future? …I’m Buzz Lightyear, I’m ALWAYS sure!”
Not eveyone is so excited. I am starting to hear serious concerns about overbuilding in Arizona. I have never faulted builders for making a living, but they have been overdoing it for several quarters now.
They are building like madmen here in gilbert az. Every weekend I see a bunch of sign twirlers dancing around like a prostitiute on the corner. They are getting very greedy with prices.A new home that sold for 175k two years ago has doubled in value. I really don’t see their costs changing that much. They are making oodles of money.
er… doubled in price. no doubling of value.
These guys will build themselves into bankruptcy. What I love is the press acting like it’s a good thing that the “[P]ace of home building soars in January, easily topping forecasts, as the real estate market hangs tough in face of slowdown. ”
Yeah, all indicators say that the builders should slow the pace of building, but in stern defiance to any rationality, they build at an unprecendented pace. Instead of saying the market is “hanging tough” in the face of a slowdown, the article should have said the builders’ expectations of continued success is irrational given the market conditions.
But isn’t the housing starts number and building permits number a good thing? They are no indication of sales volume, therefore added to the already exploding inventory?
Lingus,
We are waiting on the sales numbers. But with this huge increase in starts, the inventory will almost certainly be a new record.
New and existing home sales are shown on the Feb calender. Anybody know when they are to be reported?
I meant to say “aren’t” shown on Feb calender.
I believe new homes sales are to be reported on the 27th and existing home sales on the 28th.
Just as everyone suspected they will keep building no matter what the market dictates. That is there business model. All this talk the last few years about how this time it will be different, how they are only building what is pre-sold. LOL.
Yeah, I remember reading a couple of years back in the paper how it was different this time because the builders were more conservative since the last bust and only built to demand. Total B.S.
Not to mention that:
ONCE YOU START FRAMING A HOUSE… it isn’t good “PR” to leave it like that- even though the market is crumbling as they pound nails.
In a way, these guys HAVE TO continue building (i.e. FINISHING) what they have started.
The reason the building starts are up is because developers realize that they are at the top end of a long slide downwards. So they will speed up their production to get prices at the top of the slide, rather than wait. They know that now is the time to get the most.
Let us all remember how Cisco kept making huge amounts of networking equipment in the tech boom - how Cisco would offer financing to all these tech startup firms so they could buy their routers and networking gear. But in the end when it all blew up, we saw huge stockpiles of networking gear sitting in Cisco factories. No matter how much money Cisco loaned to others so they could buy their equipment, in the end it all came crashing.
It never ceases to amaze me how short people’s memories can be. They were building like mad at the end of the last SoCal bubble too. Many of those homes sat vacant for YEARS.
It is good for all of us who have cashed out and are waiting, of course. The more they build, the greater the overhang of inventory.
Deb, I’m sure you remember all the vacant homes in the AV and the IE…those areas just started recovering a couple of years ago…
Did they overbuild in the SFV last time around?
Not on the huge scale of the antelope valley, but many small spec builders (groups of 2-5 homes) were stuck. They tried to hold out for the price they “needed”. Many ended up in foreclosure.
JM Peters built a beautiful set of a dozen or so homes in Westlake Village in 1990 for $900K+. The last of them were sold by the financing bank by 1993 in the $700’s. Of course, now those homes are just under $2M. JM Peters was purchased by KB and exists as their luxury home division.
Comment by Ben Jones
2006-02-16 06:24:13
Not eveyone is so excited. I am starting to hear serious concerns about overbuilding in Arizona. I have never faulted builders for making a living, but they have been overdoing it for several quarters now.
I with you Ben. This doesn’t look good. The Street.Com had anarticle that argued we should not be lulled into false hope with a pick-up in permits. Ulitmately, as many here have stated, this could drive supply even higher. Add in the X factor of speculation and it could take a long time to absorb the supply. Looks the HB’s have started the race to the bottom.
So what? You didn’t buy. Keep building savings. Maybe you’ll pay cash when the time comes.
the downside of all this building is that productive capacity isn’t used somewhere else in the economy to bolster our competitiveness in the world. so as everyone focuses on the red hot housing market asia and other countries continue to close the gap by investing in productive capacity which further hastens our position in the world. stupid stupid stupid.
NYT: Outsourcing Is Climbing Skills Ladder
What will the lost decade do to the US economy? Until the market crashes hard, the US will keep losing whatever advantages are left.
Outsroucing will continue until the COSTS of doing business are the same here as they are over seas.
My prediction? Dollar Collapses, and inflation initially takes off and then Deflation sets in.
It will be a very painful correction.
‘”The story comes through loud and clear in the data,” said Marie Thursby, an author of the study and a professor at Georgia Tech’s college of management. “You have to have an environment that fosters the development of a high-quality work force and productive collaboration between corporations and universities if America wants to maintain a competitive advantage in research and development.”‘
Hah. Why would you waste your time studying engineering, medicine, or science when you can just borrow and leverage yourself to the hilt in front of the next big wave of liquidity and collect a six-figure profit for producing NOTHING?
Your claim is based on a view that the nation’s resources are limited, and therefore, can only be allocated to one activity or the other.
That clearly is not true, since it’s obvious that neither Apple or Google, or biotech or software development, currently lack for investment, or any resource because of high levels of homebuilding?
Besides, would you be complaining if auto production were at all time highs? Both produce consumer items, and while cars are consumed in 5 to 10 years, home can provides shelter for a lifetime.
Furthermore, continued high levels of homebuilding will help homes become more affordable in the decades ahead.
Furthermore, are
You can stick a fork in GOOG. It recently came to light that much of their vaunted earnings came in the form of interest earnings on billions raised in stock offerings which were planted in fixed income investments. I will take the return on a Vanguard Treasury bond mutual fund any day over handing over my money to GOOG’s fixed income mutual fund operation.
I wasn’t recommending its stock. But, the fact that it has raised billions, proves my point that housing hasn’t crowded out investment in other sectors of the economy.
The fact that some high-profile companies have a wealth of investment doesn’t prove your point at all.
Is home building up, or are project being cancelled? Are prices up or down? Is inventory up or down? Are sales up or down? I follow this story closely and hard to read the tea leaves at the moment. JQ Public will probably start tuning this out for a while.
According to the Idaho Statesman, the housing boom continues around Boise: According to another article last weekend, 30,000 new homes are in the planning process for the area while the population growth in the area is only 2% a year. This article also discusses the 15,000 new jobs created, but they don’t talk about the relatively low wages the jobs pay. Most of the growing employers are call centers that pay $9-$14 an hour and the people who work their have already been priced out of the market- unless they use exotic home loans. If them boom continues in Boise, I predict a situation like Phoenix that may turn ugly.
Brandon,
Been meanin got toalk to you but since I’m overseas I can’t always time it. I moved from Boise 1 year ago, seems it got crazy after that.. Even the realtor I’m dealin gwith there thinks it’s forever a 10 dollar wage town, except for Micron and the hospitals.
This article leads me to believe they accepted the fact that there’s an endless suplly of loand and thta’ll keep prices in chekc somewhat.. If you look at the tracker over the last 6 months that seems to be the case for mid and upper homes. What’s your take? I wante dto buy when I left cause I have 2 kids in college there, but I thought it was too expensive then for the area..
Thanks
In Boise, people my age who are making $30-40K a year are having a tough time buying without really extending themselves. Many people will just keep renting as rent for a nice one bedroom apt is still $550-650 a month. You can even rent new houses for well under $900 a month as investors have put many on the market. There is still plenty of land around, so hopefully prices will stabilize. I think we do have a bubble as housing keeps going up and rents are staying flat. Some places are even lowering rent to compete with the flood of investment rentals.
This is going to be beautiful, the time lag is going to create even more inventory, dragging the housing price down further exactly when it starts crashing. The biggest reality TV on how to race to bottom is going to be more entertaining than ever, while we cash-rich renters just sit aside and watch it unfold. Nice.
of course let’s hope the sheeple don’t confuse strong building activity with a strong overall market. in fact it’s two forces moving in opposite directions.
Comment by Richard
2006-02-16 06:53:35
the downside of all this building is that productive capacity isn’t used somewhere else in the economy to bolster our competitiveness in the world. so as everyone focuses on the red hot housing market asia and other countries continue to close the gap by investing in productive capacity which further hastens our position in the world. stupid stupid stupid.
Exactly. Usually, when firms try to make profits by producing lots of things that have a very high price, that is a good thing (remember Adam Smith’s invisible hand?). But the problem is, if housing prices reflect an irrational bubble, then prices are too high and HBs will produce too much, and housing prices will crash to Earth.
The quicker that we do away with this bubble, the better for everyone.
More proof housing bubble isn’t stopping investment in “productive
capacity”:
“IBM to invest $1B on software over next 3 years
Last Update: 11:21 AM ET Feb 16, 2006
Before the opening bell, the Armonk, N.Y. computer maker and Dow component said it plans to invest $1 billion over the next three years on the development of information management software. The company also plans to have as many as 15,000 employees working on this initiative”
Would they invest $2billion if there weren’t a housing bubble?
thats not the right question. stock investors, hedge funds, etc would/should be putting money in other companies that would spend more on R&D. Without the bubble there would be more companies like IBM investing in R&D.
I too think this is a get ‘em up move ‘em out frenzy - if they have the plans and permits - they’ll build and discount at the same time.
Here’s another question-I have a hunch that putting a house up will allow a builder to take a bigger loss if the house never sells - as opposed to just trying to unload the land. Perhaps that’s why so many houses were built and sat empty? I.e. is it more profitable to build and let ‘em sit in a down market vs. unload land? if that is the case, what is happening makes more sense.
Today’s Marketplace Morning Report on NPR started off with the line “Bubble? What Bubble?” then went on to make a rather strongly-worded argument that the strong SF home construction numbers demonstrate the non-existence of a bubble. My opinion of the quality of journalism on this show is plumbing new depths.
Maybe the cozy relationship they have with one of their major advertisers, Fannie Mae, has clouded their judgment. BTW, since NPR constantly runs Fannie Mae advertisements on their shows, shouldn’t the IRS technically revoke their nonprofit status?
Why is American financial journalism so lousy? While Marketplace is citing which they believe rules out the possibility of a bubble, the Financial Times seems to have quite another interpretation of the current situation:
http://news.ft.com/cms/s/86d9b05e-9e52-11da-b641-0000779e2340.html
Sorry this got kinda long (first post evah,much lurking)
GetStucco you hit it on the head…. I wrote the ombudsman that they are doing their listeners a disservice by only presenting the bull story. I suggest everyone here do the same. They (the NPR people) are only trying to protect their own houses. Truth is, it is a small slice of poopulation who seem to be in the housing bear camp: renters with savings who are up on current events (read well educated). There are many willing ARMS out there to prop housing up.
in re:
Tech is increasingly outsourced (especially large scale software development), biotech is undercut by many things including public ability to pay for spiraling health care costs and bassackwards policy.
The way prices are going with homes the only people who will be able to purchase more than modest homes and still have money for their living expenses(let alone luxury items like boats or pool tables) will be a small force of corporate directors and up who manage a foreign workforce and the political hacks they support. A low wage domestic service sector will hate life. Professionals will get by OK, but given where energy prices are inevitably going will not enjoy an affluent lifestyle by today’s standards.
Upshot here is purchase a moderate home which future demand will hopefully support, not one of the mcmansions 40 miles from town.
One thing for the discussion is:
What if inflation takes hold and home prices become cheap in relative terms? Taboot, this would only benefit owners because wages will probably not keep up. This is one thing I haven’t seen trotted out as a reason to buy right now… perhaps that will change.
Even though I think a substantial decline in home prices will precede steep inflation there are some signs inflation is coming soon: Ben’s comments, M3 discontinuation, oil bourse?, China currency pressure, US debt
I’ve got my hedge for that scenario;)
“I wrote the ombudsman that they are doing their listeners a disservice by only presenting the bull story.”
Could you please explain how to do this? I am a long-time NPR contributor who is thinking of ending my contributions, now that Fannie Mae has taken them over as a commercial broadcast station complete with regular advertisements and biased reporting.
Jeff Devorkin is his name, do it from their website :
http://www.npr.org/contact/
Click the Office/Service radiobox and select NPR Ombudsman from the dropdown.
I quit supporting NPR a while after 9/11(except KALW in SF), there was a right wing coup at the CPB, and they have been severly compromised esp w.r.t. corp sponsorship the fund drives are a shill IMO…
These days the only domestic radio news I can tolerate is Pacifica, the news is good. It does get hooky with some of the alternative health shows and politically may be too left for those who can’t handle the truth
sorry for the double post above, typical newb i guess
Barron’s is a US financial publication that does pretty well:
Coming Home to Roost
Sorry this got kinda long (first post evah,much lurking)
GetStucco you hit it on the head…. I wrote the ombudsman that they are doing their listeners a disservice by only presenting the bull story. I suggest everyone here do the same. They (the NPR people) are only trying to protect their own houses. Truth is, it is a small slice of poopulation who seem to be in the housing bear camp: renters with savings who are up on current events (read well educated). There are many willing ARMS out there to prop housing up.
in re:
Tech is increasingly outsourced (especially large scale software development), biotech is undercut by many things including public ability to pay for spiraling health care costs and bassackwards policy.
The way prices are going with homes the only people who will be able to purchase more than modest homes and still have money for their living expenses(let alone luxury items like boats or pool tables) will be a small force of corporate directors and up who manage a foreign workforce and the political hacks they support. A low wage domestic service sector will hate life. Professionals will get by OK, but given where energy prices are inevitably going will not enjoy an affluent lifestyle by today’s standards.
Upshot here is purchase a moderate home which future demand will hopefully support, not one of the mcmansions 40 miles from town.
One thing for the discussion is:
What if inflation takes hold and home prices become cheap in relative terms? Taboot, this would only benefit owners because wages will probably not keep up. This is one thing I haven’t seen trotted out as a reason to buy right now… perhaps that will change.
Even though I think a substantial decline in home prices will precede steep inflation there are some signs inflation is coming soon: Ben’s comments, M3 discontinuation, oil bourse?, China currency pressure, US debt
I’ve got my hedge for that scenario
It is more profitable to sell as many as possible before the downfall, which we all know will take perhaps up to a decade. What do you expect the builders to do when the bubble pops? Fire all their contractors and fold the company?
So what they are doing now is to unload as much reserve land as possible. Also, it is much harder to unload land than homes, because when RE heads down, loans on land is almost impossible to obtain, especially for individual consumers. Even for transaction among commercial builders, land value depreciates far more than a home.
“When the bubble pops?”
Get a clue. The bubble is popping as we write, and the builders are adding fuel to the raging bonfire.
In fact, frentic building in itself is a confirmation of the peak. These builders have been in this cyclical business for years, they absolutely understand how to play it. They are doing a calculated bet, so the unsold inventory you see post-bubble is not a creation of reckless carelessness, but a reckless calculation - see who heads for the door first.
Another reason for them to build frentically is to take advantage of easy project financing $$$ now, when RE heads down, money is extremely tight so fewer projects can get started.
If builders forsee an uptick in price, they don’t frentically build. Each builder only has a limited land reserve at a time, they want to phase it out to capture the uptick in price, if you can sell for 2M in 2008 rather than 2007, why build so fast to sell for lower in 2006?
Therefore, a reliable signal of RE peak is precisely the frentic building pace.
I tend to agree with this…
The builders, large or small, have significant lead costs invested in the start-up process of home-building. With all the organizational mechanics in line, they will build at the fastest pace possible on lots that have cleared the largest percentage of the development process - but will begin to seriously restrict new start-ups. I would guess that what currently in the pipeline will take 2 years to burn off. The comment about the HBs starting the race to the bottom is the best. The echoing impacts of the coming crush of new homes competing with the awakening fears of investors and IO owners will should start the inward spiril rolling.
waiting4bustinSV :
“Therefore, a reliable signal of RE peak is precisely the frentic building pace.”
Good stuff. Very good. Ben, this is one for the books when the analysis of this blog is completed. Lord, I swear I can smell a PhD in economics coming out of this thing.
I hope at least one of the regular posters here goes for it (Prof. Piggington, are you out there?)
An important short term leading indicator, from the MBA, is the mortgate application index, down 7.9% last week to 391.7. The closer this number gets to 300, the greater the chances are for a full-on crash.
Despite prima facie evidence of PPT kick starts in the HB stock prices on the news of the record pace of building, it doesn’t look like the Street is feeling the love anymore… (4F’s for HBs!) But maybe if the PPT is persistent, the Greenspan put will quickly morph into the Bernanke put, and everyone will be fat and happy again.
http://tinyurl.com/c47e9
Fannie Mae gets the best plunge protection of all. Once the PPT’s Cruciatus Curse strikes, Fannie’s stock price freezes within a narrow range for the rest of the day. I am suprised hedge funds have not figured out how to exploit this — write covered puts and calls which are just a bit out of the money on either side and close out the position at the end of the day.
Wait wait… we are seeing declines in re-sale and new home purchases and inventories increasing dramatically in many markets to the point we need to offer incentives…
So to counter ballooning inventory and decreased demand we build more homes ?
Have any of you ever gone to a new developer? They require a small deposit and a contract signed, back out and you loose your deposit… I had one builder who was going to sell us a townhome and all we needed was a $1000 deposit.
Here in Florida there are a number of builders who are now sitting on “inventory homes” and offering deals on “ready to move in” homes.
One thing that is an interesting developement is it seems the new communities being built in the Orlando area, new homes and town homes are actually cheaper than they were this summer. Maronda has one developement south of the airport offering townhomes in the 160s.
Yeah, when I bought in 2000, I just had to put down a 1% deposit for precon. That was $3000 for a $300K house, and if things went belly up, I wouldn’t suffer too much. Anyone requiring a bigger deposit are asking for too much.
Have any of you ever gone to a new developer? They require a small deposit and a contract signed, back out and you loose your deposit… I had one builder who was going to sell us a townhome and all we needed was a $1000 deposit.
Back in the day, that was all that was asked for with the offer…$1,000. What’s the going “good faith” money these days?
BayQT~
“Builders may also have stepped up construction to try to close agreements before buyers can back out, economist Chris Low said. ‘There’s a sense of urgency in construction,’ Low said. ‘If builders have approval for a project, they’re going to try to move ahead as quickly as possible.’”
IT’S CALLED: THE “OHhhhh $H!T !!!!” principal.
I’ve reviewed the financials and balance sheets for several homebuilders on marketwatch.com. One thing that struck me was how low their P/E ratios are. On the other hand, I also noticed that they are carrying mountains of debt — and the only assets they have to balance out that debt (and get them to positive net worth) is “inventory”. That includes built inventory and raw land, of which the homebuilders have lots.
Now, if a builder’s inventory is valued at $2 billion, then its $1.5 billion in debt doesn’t look quite so bad. But that $2 billion worth of land can quickly lose its value once the demand for houses slows — which could reduce the builders to negative net worth in a matter of months.
Thence the low P/Es.
Thomas,
Nicely struck. If Ben ever releases the transcript of this blog for public consumption, you will discover that a number of us have made posts over the past year along exactly the chain of reasoning you just stated.
GS
Dang. What I meant to follow the above post with was to say that today’s record number of housing starts could represent an effort by the builders to monetize a part of that massive and precariously-valued inventory.