‘Builders Have Been Borrowing Demand From The Future’
CNN Money has this on home loans. “Mortgage applications fell last week as lower interest rates failed to spur demand for loans to purchase homes, an industry trade group said Wednesday. The MBA’s seasonally adjusted purchase mortgage index decreased 1.9 percent to 400.8 from the previous week’s 408.7. The index, considered to be a timely gauge of U.S. home sales, was also below its year-ago level of 440.0.”
A homebuilder had this report out. “William Lyon Homes today reported the Company’s 2005 fourth quarter and fiscal year operating results. The number of homes closed for the year ended December 31, 2005 was a decrease of 8% as compared to the year ended December 31, 2004. Net new home orders for the three months ended December 31, 2005 were 460, a decrease of 7%. During the fourth quarter of 2005, the average sales price of homes down 7% as compared to $570,000 for the comparable period a year ago.”
“During the last half of the fourth quarter of 2005, the Company began to experience some slowing in new orders in many of its markets, increases in cancellation rates and increasing pricing pressures from several of its competitors who initiated aggressive incentive and discounting programs.”
“This softening in the Company’s markets is continuing into 2006 as the Company’s orders have declined for the first eight weeks of 2006 by 31% over the comparable period in 2005. Cancellation rates have increased in this period in 2006 to 26% from 12% in the comparable period in 2005. The Company is also seeing increases in its standing and unsold completed inventory in 2006 as compared to 2005.”
In Phoenix, Arizona. “The Valley’s slowing housing market may mean the buyer is king again, but that didn’t stop new-home builders from raising prices for their houses last month. The average price of a new home in February rose 1.2 percent from the previous month. Builders were using incentives to keep buyers motivated. Those incentives ranged from 3.75 percent interest financing options, to free pools, to furniture allowances and free ‘option’ packages.”
“The average price of new-home sales that closed in January dropped to $306,000, down from $310,000 in December. RL Brown said he’ll be looking closely at sales activity in new developments in the far reaches of the Valley as an indicator of the local market’s strength. ‘They moved out there originally because they saved a lot of money (even if it required a longer commute),’ he said. ‘If the new buyers can’t save a lot of money, they may not make that same trade-off.’”
From The Street.com. “Ken Rosen, a University of California-Berkeley real estate professor and hedge fund manager, believes a 25% to 30% total drop in new-home sales is possible over the next three years, and that builders will be meaningfully hurt this time around. ‘It all depends on how much sales and orders slow and how much earnings are hurt by the margin squeeze we expect in 2007 and 2008,’ Rosen says. ‘I don’t believe that if housing activity is down 25% to 30% in the next two to three years … that (builders’) earnings can hold up at current levels.’”
“What the bulls don’t understand, Rosen says, is that builders ‘have been borrowing demand from the future over the last few years.’ Easy credit amid loose lending standards helped fuel much of the boom, he says.”
new topic : will you have a job by the end of 06 ?
unless it’s gov the answer may be maybe
I cruised by a new home development today and noticed they changed their price sign. It did have prices like from the low 200, mid 200 etc. Now all the prices are gone and it says 3 communities. They also changed their price wording on website eliminating words such as low or mid. I’m noticeing that home builders are starting to have more “quick move in homes” too.
yes.
Govt is laying off like crazy, Except the Army is looking cannon foder
Flat,
With all due respect, you seem to think the govt jobs are not going anywhere. I couldn’t disagree more. Many of these jobs (municipal, esp) are dependent on property and sales tax. Both taxes are dependent on the housing bubble, IMHO. While govt jobs may be somewhat more dependable than private-sector, they are NOT immune. There will be layoffs and pay cuts in govt jobs as well.
BTW, I know people who work in muni govt. All of a sudden, they are sending memos out about how they might have to scale-back some large projects that they have been working on in the past couple of years…”just in case” there is not enough funding. Thought that was interesting because prior to this, they were talking about all this “excess” money.
Been waiting for Jan 06 comparisons to come out. If I recall last January and February 2005 we had record rain falls in California. I recall the YOY #’s at that were down (sales) beacause of rain. This Jan and Feb 2006 have been the best weather in years??? Why are the sales up or even with last year?? I think this might be even uglier than it looks!
*aren’t
I agree…
Can you talk to my wife? She never agrees with me. LOL
This is true. The weather last year and the year before was abismal - record rain fall, etc. This year has been ideal.
NAR cannot ‘blame it on the rain’.
From The Street.com. “Ken Rosen, a University of California-Berkeley real estate professor and hedge fund manager, believes a 25% to 30% total drop in new-home sales is possible over the next three years, and that builders will be meaningfully hurt this time around. ‘It all depends on how much sales and orders slow and how much earnings are hurt by the margin squeeze we expect in 2007 and 2008,’ Rosen says. ‘I don’t believe that if housing activity is down 25% to 30% in the next two to three years … that (builders’) earnings can hold up at current levels.’”
YOU ROCK, KEN!
NY times article.
Don’t Fear the Bubble That Bursts
Sales of Existing Homes Near 2-Year Low; Consumer Confidence Ebbs
First article is great. Leonhardt speaking the truth.
If the sales numbers, and inventorys are at these levels in april this should fall apart fairly quickly. We’ve already seen huge cuts by the HB’s but they are still in profit mode. a few more months of this and they’ll be in damage control mode.
‘They moved out there originally because they saved a lot of money (even if it required a longer commute),’ he said. ‘If the new buyers can’t save a lot of money, they may not make that same trade-off.’
What a joke! A 20% downpayment (not high by traditional standards) would cost you over $100K in San Diego at recent price levels. With the home equity ATM broken down, how many buyers have that much cash to bring to the closing table?
I have noticed not many have any money to bring to a deal. It is all about credit. Seems like the ones who do have the most money for down payment are those who profited from boom.
But, but, I thought the housing boom was caused by a tight housing supply!
I’m also pleased to report that in Queen Anne (Seattle), I’m now seeing signs in front of our overabundant condo buildings, offering not to sell them, but to rent them.
Let the shills at the Times and the P-I keep screeching that rents are going up. As long as people have finally wised up enough to see through their bought-and-paid-for lies, everything will be fine.
I think it’s important to distinguish between the HB finances, will which probably do ok for awhile because of their costs, and the actual stock price.
The HB stock prices are showing increasingly bizarre interday movements. Take a look at toll, for instance — very little volatility along its interday trajectory suggests that some entity (or collection of entities) with a great deal of market power is tightly controlling the price movements in a manner inconsistent with classical asset price movement models (e.g., Brownian motion). You could strongly reject a model of Brownian motion using that minute-to-minute variation in prices. Somebody with good econometrics chops ought to take a close look at this…
http://tinyurl.com/c47e9
It truly is amazing how almost all of these “new” topics were discussed here many many months ago. “Borrowing from the future” has been discussed many times on this blog.
Everything which could be said has already been said at this point, but not everyone has had a chance to say it yet, and the data are just starting to fullfil the dire predictions. Party’s just getting started — come on in and join the fun!
Sorry, my post was unclear. By “‘new’ topics” I meant the MSM is suddenly identifying these issues as if they were new, when in reality the very astute people who either run this blog or contribute to it discussed them all 6+ months ago.
Believe me, I am firmly planted in my front row seat, beverage in hand, watching it all unfold. I think you and I agree that this will be a relatively quick crash once it’s clear the ________ (post Super Bowl, spring, summer, late fall, pick your favorite) bounce ain’t happening. And I don’t intend to miss any of it.
Yes, but we need to be patient regarding the new arrivals on the blog ( and there’s probably more of them every week). They will not know that the old stagers have hammered the MSM topic-du-jour to death way back when.
When I found this blog it was possible (because I did it, took about 2 weeks of evenings) to work your way forward through every thread and therefore know what had and had not been discussed at length. It would take a long time to do that now.
Ford and GM borrowed demand from the future and look what is happening. Thousands of layoffs. Could the same be true for Home Builders? Not sure. homebuilders are actually making money and have a lot more margin to play with versus the car builders.
The people they will be competing against are the flippers and speculators who used to be their best customers. Not any more. They will be pissed at the builders when they cut the prices and force the price drops. Some speculators may see price drops as temporary and buy thinkin it is “instant equity.”
Not so fast! This will be a long slow process of where prices drop and inventory explodes. builders will continue to push inventory until it is no longer profitable. When will this breaking point be reached? Late 2007 and 2008. That is when the sh*t hits the fan.
Then what happens?
Then what happens….
Bankruptcies. Lawsuits. Repos. “Housing is a bad investment” headlines. No one wants to buy RE. People start saving. Conspicuous consumption becomes a bad thing. People start to like savings accounts, CDs, Bonds, Stocks.
Finally…
We on this board buy real estate.
…and do a little conspicious consumption on the cheap.
Actually the el-cheapo conspicuous consumption might precede the RE purchase. There’s going to be a lot of toys for sale Real Soon Now.
The trend is already established. It is just a question from here of where, not whether, the crash will attain a bottom…
“What the bulls don’t understand, Rosen says, is that builders ‘have been borrowing demand from the future over the last few years.’ Easy credit amid loose lending standards helped fuel much of the boom, he says.”
Yes, and what all the amatuer specuvestors don’t understand (yet) is, builders can easily slash prices and still turn a tidy profit. When your profit margin on a new home is 40-50% (because you bought the land years ago –before the bubble– and your construction costs have not risen significantly), that leaves a ton of room to cut prices and still make money. Mr. Specuvestor OTH is royally screwed.
Not unlike the amature day traders vs the hedge fund pros during the 2000-2001 bust.
Builders’ costs are wholesale. Flippers bought at retail.
The investors who bought builders’ stocks also bought at retail, and will sell at a discount. (Insiders sold at the peak!)
I’d also like to add that as things slow down, so will pricing pressures. Pricing power will become weak and materials, labor etc will also drop in price. We have more than a 40-50% drop before margins get squeezed. But if things slow, people work for less an hour. yes, consumer spending dries up, but it’s a sway to die a slow and painful death. I’d rather have it be quick and easy so we can pick up the pieces and start all over again.
This was from a realtor in ventura county. Any one agree with this???
What is next? Based on the “industry experts” plus my own evaluations, I am predicting a 5-7% increase in values this year.
If things go like they have for 2004 and 2005, we should see prices climb for the first 5-8 months and then creep downward for the rest. Overall, we are heading for the peak or plateau of this market. From this, expect strange market fluctuations. Ultimately, unless we see a major changes in the economy and/or interest rates, don’t expect major changes in house prices for the next few years. We will need the average incomes catch up with the average sale prices - this will take awhile!
This sounds to me like a Realty Times promotional piece. Lousy syntax, idiom and grammar. Another dishwasher turned Realtor. He’ll be back in the kitchen before long…
would you like fries with that…..
More like, could you want fries under this…
Ultimately, unless we see a major changes in the economy and/or interest rates, don’t expect major changes in house prices for the next few years.
Umm… I think the “major changes to the economy caveat” will be this guy’s out… Most on this blog have already foreseen this bit of the housing bubble downturn and prepared for it…
This may be a common trick that realtor chiefs use… I noticed it this morning in our local paper (in Victoria.)
“It’s looking like a strong year, I just don’t see anything on the horizon short term or long term into the year that is really going to affect us unless there’s something crazy happening in the world.
Cancellation rates have increased in this period in 2006 to 26% from 12% in the comparable period in 2005
This is a HUGE statistic- Better than 1 in 4 of new home purchases are being cancelled now. Awful news for HBs.
Sign of the speculators running for the gates
But, perversely, good for their stock prices (see the above link). Go figure…
Very good point about “borrowing demand” from the future. This is not just true of the builders. It’s true of the entire RE market. The RE frenzy of the past few years has effected just about every market to one degree or another. Take Minneapolis. Population growth in the Twin Cities is about 1% a year. Some recent years it has been 0%. Yet there has been a huge spike in new construction and sales activity? Why? Because it’s a boom and people get excited during booms.
With home ownership rates now at 70% nationally, there’s almost no natural demand left, especially when you remove the speculators. So markets with basically zero growth will go back to the sleepy RE markets they were before the boom.
IMO, many markets will stay dormant for at least 5 years while supply gets whittled down. Anyone who says price will stay levitated while this process unwinds is whistling past the graveyard.