Industry Needs To Control Speculative Building: NAHB
The homebuilder data should be out by now. “U.S. home builder sentiment declined in March, the National Association of Home Builders reported on Wednesday, in response to rising mortgage rates. The NAHB/Wells Fargo Housing Market index slid to 55 in March, seasonally adjusted, from February’s downwardly revised revised 56.”
“NAHB Chief Economist David Seiders attributed March’s slight downshift to eroding affordability conditions as well as a gradual withdrawal of investor demand in some areas. ‘Rising interest rates and high rates of home-price appreciation have raised the bar for homeownership to beyond what some families can reach,’ he noted. ‘Meanwhile, a retreat of short-term investors from certain markets is helping restore equilibrium between supply and demand.’”
“Builder confidence declined in all regions but the Midwest in March, where it rebounded seven points to 39 from an exceptionally low point of 32 in February.”
“Here’s some builder related news. “In an electronic message to members last week, NAHB economists pointed out that the inventory of units completed or under construction also is at a record level. Furthermore, they noted, sales that are subsequently cancelled never get back into the government’s inventory estimates, ‘and it’s clear that cancellations have been on the rise, too,’”
“In February, NAHB surveyed nearly 500 single-family builders about unsold inventories. Excluding units not-yet-started but including units handed back buy buyers who have changed their minds, more than a third of the respondents said their inventories were higher than six months earlier, while less than one-fifth said their inventories had come down over that period.”
“One of five builders reported that their cancellation rates were higher in January than six months earlier, while only 8 percent said their cancellation rate was down over that period. In addition, a supplementary NAHB canvass of about 30 large single-family home builders showed that, in January, cancellation rates (cancellations as a percent of sales backlog) were up by about one-third, on average, from historically low levels of a year earlier.”
“‘That trend, if it continues, accentuates the need for builders to control speculative building during the period ahead and to employ incentives to support sales and limit cancellations,’ the association’s economic department warned.”
“Avatar Holdings Inc. today reported net income for 2005. The number of units sold declined by 19.9% due to several factors, including establishment of sales policies intended to reduce the backlog, institution of programs to discourage purchase by speculators, and a generally weaker residential real estate market. Avatar Holdings Inc. is primarily engaged in real estate operations in Florida and Arizona.”
“Tarragon Corporation’s homebuilding pipeline at year-end 2005, which includes sites owned or controlled by the Company not yet in active developments, grew to more than 8,800 homes in 30 communities, more than double year-end 2004 levels.”
“CEO William S. Friedman commented, ‘Some of our markets are returning to historically normal levels of housing sales activity. We have, for example, noted a marked slowdown in certain investor-driven West Coast Florida markets. Our guidance for 2006 assumes continued sluggishness in these West Coast Florida communities and moderate sales levels, in line with historical norms for the remainder of the market.’”
I can’t find the NAHB details, which they usually include in the press release. The weakest component for many months has been the traffic. To be updated should they make that available.
Industry needs to play CYA. The irrevocable damage is in the pipeline.
yep, in a mania, overproduction has to happen, or else it wouldn’t be a mania! too bad it got to this degree, c’est la vie!
Look on the bright side — if the overproduction had never kicked in, then maybe LA prices could have continued increasing at 23% for ten more years, and affordability would have dropped down to 1%!
LOL
What a shock? That they might stop specualative building. What had to happen? Did they have to get pounded like a boxer having both eyes closed, and then hit with a bat to figure out he is hurting? We’ll be having excess inventory for a long time. Especially when speculators walk and cut the losses, leaving behind new home ghost towns.
Great work Ben. Can’t say it enough.
I’m confused by the assertion that the new home for sale stats aren’t as bearish as they look. The person says that only one in four, or so, of the homes listed as inventory are acutally completed. A much bigger percentage (about half) is under construction. How is that a good thing? It means that not only is TODAY’S supply of completed homes on the market high, but there is no end in sight to the amount of supply coming down the pike. There will be more and more homes coming that just haven’t finished construction yet. To me, that’s bearish not bullish.
Picture the Asian beaches just before the December 26th, 2004 tsunami. I guess there was no oversupply of water just before hand — in fact, the water first disappeared from the beach, a veritable shortage!
“CEO William S. Friedman commented, ‘Some of our markets are returning to historically normal levels of housing sales activity.”
So tell me…if markets are “returning to historically normal levels”, why are the builders on an all out tear to keep building? Is it just me and my basic understanding of college econ 101, but doesn’t DEMAND have something to do with this?? Really…someone explain this to me. Are their land costs so high and their construction loans so fully loaded, that they just can’t help themselves? Can they discount significantly enough to attract any buyers and still maintain a profit?
My guess is that all the CEOs have convinced themselves they are sufficiently smarter and wiser than all the other CEOs, so their business won’t be affected, while everybody else will be bankrupt by October. Unfortunately for them, only 50% of CEOs are above average. At most.
Look these guys are in the midst of the eye of a hurricane. Where all is calm, except their stock prices are dropping while they stammer about “how they will meet next quearter EPS”.. The quote is accurate looking at the today’s index data and mortgage application/refi’s, we are back to 2002 & 2001 levels, traffic and overall indexes..i.e. “normal”
But the inventory is not at unbeleivably low levels as it was then. Since the big boys tried to “corner” this local- /regional-/ national- market shares, at least another hundred / thousand builder spec. builders have popped up…such as the Domino’s Pizza guy’s “Ave Maria, Fla.”
The builders are building FAST to A) complete projects committed IROC, B) complete before the “depositors cancel” and they can resale in the Springtime when the market is stronger (hope springs eternal)to wait list folks.. C) Like the speculators many have over committed their resources and need more cash to purchase more land at 150% more than the land they are currently developing. One must “complete a sale before escrow funds are released.
Can they see it -YES…do they beleive it -YES. But just as with the Dot com anal-ists and brokers….they ALL to person beleive they could beat the crowd out “Greater fool Theory”
Excess Profits bring Ruinous Competition !!!
Catherine
What amazes me is that they seem to be building less desirable homes. Right next to busy roads, shared driveways, tiny tiney yards, very small rooms, or way the hell out there 1.5 hour commutes! If I were a builder, I think I would want something to make my new houses more attractive, like a decent sized lot.
PS - My name is Catherine too, only with a “K”
I like Kate lol
Wait.. my name is Tom though
my kats name is tom - Thomas. But he still won’t come when you call him or do what you want him to.
I noticed smaller rooms in new homes more than a decade ago and was very disillusioned. I suspect that the builders and architects are building primarily for families with young children (thus the smaller 2nd and 3rd bedrooms). Or, they figure that those additional bedrooms would be used for an office, workout room, sewing room (or whatever your hobby is), etc. But the lack of creativity in design is really sad, shoddy materials…you can have it. If I had the money, I’d buy an old house any day and rehab it… wiring, piping, etc that would make it viable for modern use.
BayQT~
When you are building homes for speculators, your customers are not even thinking about how livable the home actually is.
You’re right. But I’m not talking about during a housing boom where speculators and flippers are of an abundance. I’m talking about before the word “flipper” was even used. A lot of those houses had smaller 2nd, 3rd and 4th bedrooms.
BayQT~
Exactly! My wife and I have seen several condos which are too small for us, and we’re both under average height and weight — so who is going to buy these things and actually live in them? Midgets? Yet they sell out quickly, so you know that perhaps as much as 100% of sales are to speculators.
And I’ve seen separate bedrooms beside each other which should be combined into one room…but then the condo couldn’t be marketed as a “3 bedroom” and priced up accordingly.
What a difference a year makes! Tarragon’s latest Boynton Beach, FL apartment to condo conversion project isn’t selling very well. They paid $74 million for the 360-unit Via Lugano and are offering the apartments for prices ranging from 180’s into the 300’s. So far they’ve taken reservation deposits on only 31 units - it looks like the poor schmucks who are buying into this project will have renter neighbors for a long time to come. Contrast that with last year’s mania when Tarragon sold out the 380-unit Yacht Club on the Intracoastal in nearby Hypoluxo, FL within a few days for prices ranging from 190’s to the high 500’s in some cases. Tarragon paid $67 million for that complex.
Some of them may have to continue to build because it’s already a done deal…bought and paid for, city approved, and possibly have even begun preliminary infrastructure work. I’m not in construction, but we all are familiar with contracts. And if you back out, it will cost you.
BayQT~
Yes, the current homeowners in the project are expecting a completed project and the developer advertised the completed project to induce sales .
I know some builders. It is ingrained in them to build, it’s in their blood, it’s what they do, if they’re not doing it then they have nothing to do. Until the lenders shut off the spigots, they will build regardless of supply or demand.
They also tend to have really big egos…
I was a small contractor in Toronto ( now quasi retired these last two years — still *might* do stuff for old clients since I have a very loyal sub base if I find the project interesting). Lots of restoration work on Victorians that I really enjoyed — this is restoration not renovation and the skills required are far higher than renovation and immeasurably higher than new construction ticky-tacks. .. costs reflect the skill set plus the material costs; 14″ white pine baseboards etc., deep real plaster crowns, 8′ high real panelled doors — you get the picture. Even at 2 to 3 times the cost of renos I really made little profit on these– labour of love. The bread on the table came from industrial and commercial and renos. During the early 90s slowdown I was constantly underbid on this latter work by larger companies in spite of my far lower overhead…. I just priced break even to keep my people employed without eating into my capital. One of the rules in this game is that large companies are in a short term winning position in a down market to bid at slightly over variable costs and ignore their fixed costs as long as their bankers kept covering this ‘nut’ — and it was in the banker’s interest as long as they saw an end to the slowdown. My 2cents.
Now that the residential real estate party seems to be over, it looks like Wall Street has moved on to REITs. Look at that DJUSRE! Every component cracking new highs daily, even when rates are up sharply like today. There’s even a party in Mortgage REITS. NO FEAR!
didn’t you know??
This March is the 16th time that (THE) “last rate increase” has arrived. Now counting at 15 rate increases in a row. As always Wall Street jumps the gun, no matter what the FED and the Markets are saying that “higher rates ” are still coming… Wall Street’s latest rally used this excuse at least 5 times since October that November, No - December, No January, No March was when the Fed is “one & done” and has yet to take one rally back!!
Besides these REITS have hidden profits called unrealized gains on their Balance Sheets…..aka Sears Holdings…{lets not mention its already in the price. But of course if they sold their assets ? where?how? would they pay a 8-12% dividend.? aka - double counting!
Oh yeah maybe buying distressed debt of auto part facilities!
Isn’t it amazing that with email, internet, blogs, fast computers, new workflow software, that our lives should be easier. Shouldn’t the grocery clerk be able to afford a condo? Shouldn’t a professional that builds things that greatly increase the effeciency of organizations be able to afford a cape cod?
Just looking at the forest and not the trees, you can see there is serious problems with affordability and society.
Affordability is regional. D.C. has been very expensive relative to many other areas for as long as I’ve been here (1981). By contrast, we easily bought a 3bd 2 car garage house outside Cinncinati in 1980. Here we couldn’t afford a one-bedroom condo in a bad area.
A win situation for almost all Americans would be to push more federal work out to small towns. With an internet connection, voice over IP, and other emerging technologies enable people to work anywhere. The government could decrease costs and increase jobs in small towns, and most importantly help make Americans more competitive in the global marketplace.
From an economic study. ‘Single-family housing permits are expected to increase slightly in Nevada and Utah, and remain at current levels in Oregon and Wyoming. Those states with fewer permits will register declines in the single digits – the largest in California. ‘Most analysts expect that what goes up must come down,’ Clark says. ‘The big questions are, how far and how fast will home building pull back from record levels in 2004 and 2005?’
“Avatar Holdings Inc. today reported net income for 2005. The number of units sold declined by 19.9% due to several factors, including establishment of sales policies intended to reduce the backlog, institution of programs to discourage purchase by speculators, and a generally weaker residential real estate market.”
In no particular order, of course.
“The number of units sold declined by 19.9% due to several factors, including establishment of sales policies intended to reduce the backlog”
Um, yeah.
Don’t you love it when the builders pretend like the sales reductions are intentional? “Um, yea, we wanted to reduce backlog so we could reduce sales. That was our plan. And since we’ve met our ‘plan’, we get our bonuses for the year. Yippee!”
Stage is being set for similar reports in 2007!. You read it here on Ben’s blog first!
Real Estate News Summary, Part 111, June - July 1992
Another S&L failure could result in some San Jose homes being sold for
almost $30K less than the last asking price. At an auction to unload the
homes, the opening bid on a 1-bedroom condo will be $68,600. The last
asking price was $98K. [San Jose Mercury News]
864. Kennedy-Wilson will auction 27 luxury single family homes in Patterson,
California. Minimum selling prices now from $95K; previous asking prices
$149.9K to $185.9K [San Francisco Examiner]
865. Kennedy-Wilson will auction 25 condominiums in Modesto, California.
Minimum selling prices now from $45K to $55K; previous asking prices
$71.5K to $87K San Francisco Examiner
From the USA Today. ‘Mortgage applications fell last week, reflecting lower demand for home refinancing as interest rates on long-term loans surged to a near four-year high..’We are entering the peak home buying season of spring, which is probably why higher rates did not have a larger impact on loan demand,’ said Douglas Duncan, chief economist at the MBA. What we are seeing is an orderly slowing of the marketplace,’ he said.’
For your reading pleasure… from MSN Money “Your Money” message board…
http://moneycentral.communities.msn.com/YourMoney/general.msnw?action=get_threads&all_topics=1
———————————————————————————
Thread Title: where isthe government help for the people?
Post:
From: pullandseal (Original Message) Sent: 3/15/2006 11:42 AM
I bought a 500k condo in Beacon Hill a little over a year ago. My payments are steadily getting higher and higher and I helpless. Looking back, I realized that I was not mature or rich enough to buy such an expensive condo. I don’t know how much longer I will be able to make the payments, my bank account is almost empty. Bottom line is that i’m in some trouble
What kind of government programs are out there to help people like me? God, I feel like one of those Katrina vicims waiting on their rooftop for government help!
The Gvt does in fact have help for you– It’s called a “Bankruptcy Filing.”
If you scan further down, you see that one of his questions is whether his parents can get back their 20% down payment. Lord. Clearly this guy is a complete doofus, but he should never have gotten this mortgage in the first place.
It’s gotta be a troll.
Heh. Maybe. $500K does sound like a cheap-ish price for a Beacon Hill condo at the peak of a housing bubble.
His parents had to be fools to give him the down payment without ensuring that he would be able to afford the total costs of ownership. My mom blew all her money over the years with one of my loser brothers through a series of giving him house down payments (2) and several car down payments. She wouldn’t even tell me because she was always embarrased about her poor decisions. He defalted on both houses and never paid her back any of the money. She is 82 and still working!…and loves it.
So, why should a hard-working taxpaying American Citizen like me who has 0 debt, owns a home (no mortgage), etc, have to bail out folks who can’t afford the lifestyle they chose?
Sadly, this is one of my biggest fears…a life of careful saving will net me the same standard of living as Mr. and Mrs. Howmuchamonth in the end because they’ll get all kinds of government help, and I’ll get nothing because I have “too many assets.” That’s going to make me boiling mad. However, people like me will be a small enough constituency that nobody will care.
>It’s gotta be a troll.
I’d have to agree, but I’m sure there are people out there in similar situations expecting some kind of bail-out. And if the local or federal government ever does bail out people like this, it’ll just encourage more of it, by taking away the risk for stupid behavior (like both insuring and de-regulating the Savings and Loan industry…remember that?)
It would have to be calamity for the feds to bail everyone. Yeah. I remember the S&L fiasco very well. Alot slime walked away with billions.
Didn’t they just increase the insurance up to 250k on some retirement deposits.
From what I remember, the feds insured the deposits, but didn’t regulate what the S & Ls could DO WITH the deposits. Want to speculate on real estate? Sure, use the deposits for that. We’ll gair-own-tee the deposits for you should you screw up. Want to do “dead horse” trades with another S & L to inflate the “value” of assets on your books? Sure, why not, we’ll pick up the pieces.
There should be no government help for those type of idiot people. It is called ‘take responsibility for your own actions.”
As far as homebuilders go, does it seem like they have attempted to build many ’starter’ homes for younger people that they could actually afford, or do they just build McMansions because they can make more per house? My father in SLC said that he hasn’t seen any newer starter homes anywhere near his area in the last 20 + years? Just some food for thought.
does it seem like they have attempted to build many ’starter’ homes for younger people that they could actually afford, or do they just build McMansions because they can make more per house?
I suspect they have done their marketing and “starter” homes for younger people probably did NOT float to the top or even in the middle. For any product, be it a house or a widget, it’s in your best (financial) interests to market to the people will buy it.
BayQT~
AND…some of the younger people (poor things) were suckered (or blindsided) into the voodoo loans to buy the McMansions.
BayQT~
The expectation now seems to be that everyone in the family should have his/her own bedroom and bath. If hubby and wifey must share a bath, they should at least have two sinks. And everyone seems to expect a “bonus room”. So McMansions are a must for families on the move!
Speaking of “bonus rooms”, one of DH’s aunts lives in a house that was built in the mid-1990’s, and she still refers to that undefined extra room as “the bonus room”, although it functions as a den or family room. I wonder, if you have a room that you don’t really know what to call it, does your house have more rooms than you really need?
I wonder, if you have a room that you don’t really know what to call it, does your house have more rooms than you really need?
Yep.
They used to be called the “Great Room”, too. And most of the houses with a Great or Bonus Room also had/has a den and family room. Sheesh! How many damn rooms do you need to just “hang out” in? A lot of families don’t “do” things together much anymore with kids stuck on computers, X-boxes, Playstations and such. And it seems that the more rooms you have, the more divided the family could wind up being. When my kids were growing up we took them to the park, swimming, and to other outings, as well as played board games. Family dynamics are really different now, and having so much room really doesn’t help.
Damn, I sound old. LOL!
BayQT~
Extra room does help! How else can you get away from your squabbling children or hide from your spouse when you need some quit time.
If you don’t have a McMansion you are compromising. If you say you don’t NEED one, you are just trying to justify you own small living situation.
I got two kids (one boy, one girl) and NEED a McMansion sized home, here’s why:
- Master suite, with retreat area and spa bath
- Boys bedroom, and bath
- Girls bedroom, and bath (can’t have her share with her brother can I?)
- Guest bedroom (they can use one of the kid’s baths)
- Exercise room (have to keep fit as I get old)
- Study/office (dad’s hang out space, smoke cigars, cover walls with my memorabilia that the wife won’t let me put up in other areas)
- of course the Formal’s areas, Dining Room & Living Room
- The Family Room, hub of get together’s
- The Game room (for the kids and their friends to hang out, pool table, etc)
- the Media room (darkened for optimal movie watching)
- the indoor Gourmet kitchen
- the Outdoor kitchen/patio (next to the pool of course)
- and finally the 4 car garage (2 car parking, one for storage, and the other for a large workshop)
There is my justification for a McMansion in a nutshell. I watch HGTV etc. and am convinced that is what I NEED not just want. (I hope you realize I’m being a little sarcastic…just a little though, I really do NEED the McMansion).
WSJ article… Don’t know if it has been linked yet.
“Millions Are Facing Squeeze on Monthly House Payments”
http://homes.wsj.com/buysell/mortgages/20060315-hagerty.html?refresh=on
I think this was already posted, but thanks for the reminder. Does anyone else think that graph suggests a bubble in subprime lending?
It is eerily similar to the HPI data from any major metro in the US…
hmmm … wonder if this crazy lending had anything to do with price appreciation
This is a ‘great’ deal for the lenders. Make the juice on the front end and get it again when the poor saps have to refinance and the only loans they can requalify for are the same 2/28 or IO. Is this a great country or what???
the gov is my wallet- so I say suffer
Sorry OT, but can anyone explain what kind of earthquake is shaking up Fannie Mae’s stock price today?
http://tinyurl.com/cw3zt
This view may offer some info: http://tinyurl.com/g263t
It appears that the visible hand is intervening to hold Fannie’s share price between $53.25-$53.50, short term. I wonder how far that price would fall without the plunge protection measures? (Hard to say when there is no balance sheet on which to base the conjecture…)
I’ve been watching FNM technicals with worden bros. for months and clearly, there is buying support not long after sellers liquidate. If it were actually a free market, FNM would have bottomed below $10 weeks ago.
This crazy lending was a HUGE enabler .in the run-up. Definately for the Bay area. How else could people making around $40 to 80K get mortgages from $500K to $1M loans. The math doens’t add up otherwise. And any simpleton should have been able to figure that out if they actually thought past the advertised $1M for $1700 per month bologna that was being peddled everywhere. Most of these type of people are now set up to be FBers, and they won’t know until it is too late (like knowing it was time to leave NO when the water was in your house and you were on the roof).
Yes, that article was posted before. However, keep reposting because going back to serve archives is not that easy, and many new people will see on the different posts. THis information is so important to get out - to try and help somebody from becoming an FBer. They will be thankful for the rest of their lives.
At least the people in your example have income. My real estate agent friend tells me (cheerily) about a couple she sold a 1.1M home to, here in LA, the husband is still in grad. school living off student loans, and the wife is pregnant and raising their child.
She is probably happy that she helped the couple “invest in the future”. However, she might want to change her name and go into hiding if/when interest rates go up…
After the bust, we will be able to afford previous 1M homes on 40 to 80 K salaries because the home will cost us around 25% of the previous owners purchase price….
Just smile and wave…
Furthermore, they noted, sales that are subsequently cancelled never get back into the government’s inventory estimates, ‘and it’s clear that cancellations have been on the rise, too
Does the government get *any* number right. This is sad if all the numbers are erroneous but somehow these experts use them in their
forecasts and claim that their forecast is accurate.
The only way to really do this is with disclosures that include lots of contextual information. If there is a reasonable system for identifying comperables and projecting values then that would help builders and buyers see spikes early on. Putting more legal restrictions on homebuilding will actually make things worse, so that is probably what politicians will do first.
Why do homeowners who are now in trouble want government help? If they could pocket up to $250K in profit without paying a single penny in taxes, then why should we have to bail them out when they loose money?
Did they share their profits with our government?
Shouldn’t they be now allowed to have up to $250K in LOSSES before we help with our tax dollars?
This is what’s most infuriating about this - I just KNOW we’ll be bailing out all these speculators who expected to make money, but now stand to loose their life savings. And our government let them pocket profits completely tax free.
Our govt will also let them pick our pockets in the coming bailout, but that will not be completely tax free…
Every day I buy a few more put options on the home builders. Starting in early April I’m expecting the pre-earnings season warnings to start. I have a feeling they are going to find themselves with a bunch of unsold homes as people walk away from deposits. The HB stocks pop up every once in a while, as they did yesterday, but then slowly sell off. Lower highs on every bounce show the trend is down and the big boys are liquidating; while they publicly tout the stocks as great values because the p/e ratios are in the mid single digits.
I’m renting at the moment..no worries about insurance, increasing taxes, increasing interest rates; and my rent is about 40% of the monthly cost of a similar apt/condo to what I’m living in. Condos in Denver are slowing decreasing in price according to the Denver Post reports of recent MLS figures
pump-’n-dump again!
Yes, here in the OC one place where speculation has imploded is in the Shady Canyon area of Irvine. In the local paper, the OC Register, the company behind the development was forced to buy a huge multiple page advertisement disguised as a story yesterday.
There are 2 reasons for the problem. The first is purely local. Word is now getting out that Lennar, a development company that recently bought the El Toro air force base for developing housing has switched gears. They are now negotiating to build an airport on the site. Hence the skyrocketing prices paid for zoned business land in the area. On the other side, the jet flight path goes right over Shady Canyon and the development company needs to sell everything now. (This presents an opportunity for buyers interested in the area who are not concerned with aircraft noise.) The second problem is contractual loopholes. Many projects in Shady Canyon/Turtle Ridge/Quail Hill are sold with a guarentee that they will not be resold for two years. The two years is almost up for many homes. This is a specuative bubble that resists market forces for legal reasons. As those legal forces diminsh, expect buying opportunities in those areas. Many of he spec homes have not been lived in. Again, the change in plans for the El Toro base provides buyer leverage. It is a good moment for the informed consumer to enter certain markets, including those I have listed.
This whole thing is SSSSOOO unbelievable. It is like a live soap opera - “As the Housing Bubble Turns ” - who will be the first (or next) to get F@CKED
The student $1.1M owners must have listed the fetus as the income earner - he/she will be paying for mommy/daddy’s stupidity for the first many years of his/her life. What a bunch of morons.