‘Builders Recognize The Market Is Cooling’
The housing starts data is out. “Builders in the U.S. broke ground on the fewest homes since November 2004 as higher borrowing costs eroded demand, a government report showed. Housing starts fell 7.4 percent in April, the third straight drop, to an annual rate of 1.849 million from 1.996 million. Building permits, a sign of future construction, fell 5.4 percent to an annual rate of 1.984 million, the Commerce Department said.”
“The decline in starts ‘indicates builders are recognizing that the market is cooling,’ (researcher) Nigel Gault. ‘By the end of the year housing construction will subtract from economic growth, perhaps quite substantially.’”
“Starts fell in two of four regions. They decreased 9.7 percent in the West to an annual rate of 446,000. They rose 16 percent in the Midwest to 349,000, and fell 16 percent in the South to 863,000. Starts rose 9.1 percent in the Northeast to 191,000.”
“The number of homes under construction fell 1.6 percent last month to a 1.388 million pace from 1.411 million. Housing completions fell 6.6 percent, the biggest decline since June 2002, to an annual rate of 2.077 million. The number of housing units authorized, but not yet started, fell 0.5 percent to 232,500.”
“Slowing sales have caused inventories to pile up. The number of new homes for sale at the end of March was a record 555,000, the Commerce Department said.”
From Southern Oregon. “Four years ago, Matt Bryant says the forms were still on the foundations when buyers snapped up homes he built on speculation. Today, the owner of Riverdell Homes in Central Point says homes are nearly complete before buyers commit.”
“‘People want to see the actual finished product before they buy,’ Bryant says. ‘When the boom started, houses were sold in the first month or two.’”
“The brakes haven’t been slammed on, but the foot is definitely off the pedal for Jackson County homebuilding. Figures show building permits were issued in the first three months of this year, down 27 percent from the first quarter of 2005.”
“In Medford, 217 permits were issued through the first four months of 2005, compared to 124 this year. In Central Point, 100 permits were doled out by this time last year, and just 56 were issued this year.”
“Like most local builders, Charlie Hamilton, a Talent developer, is easing up on ’spec’ starts, begun without a buyer lined up. More importantly he says he’s keeping his houses in a desirable price range. ‘Interest rates are creeping up and there has been more product on the market, but we’re assuming things can’t go up forever,’”
“‘I think it’s a more realistic market right now,’ said Randy Jones, general manager of Mahar Homes of Medford. ‘I’m not seeing the panic, urgent-buying frenzy we’ve seen. During the past four months, we’re seeing more good end-users, not speculators buying homes to flip them for profit.’”
“The longer spec houses sit on the market during, the more builders shoulder the cost of rising mortgage rates that are now around 61/2 percent. ‘We haven’t had a problem selling our houses,’ says Mark Wickman. ‘Personally, as a builder I’m going to be careful about getting too many specs out in front of me and focus on pre-solds. I’m very debt-phobic and never get stuck way out there.’”
Am I the only one sick of the term “cooling”. It sounds far more benign than “falling”, which is in fact what the market is doing.
Saying the market is “falling” would not be very good for home sales…
You are not alone. Cooling is a euphamism. Declining or falling is appropriate.
David
http://bubblemeter.blogspot.com
How about the “market is toast “,or , “the market is void of greater fool buyers causing a serious need of adjustment “.
I like “the market is toast.” Succinct, easy to understand, short enough to be a Page 1 headline.
“Building permits, a sign of future construction, fell 5.4 percent to an annual rate of 1.984 million, the Commerce Department said.”
Does anyone have rough estimates of how far in excess of demand for new homes this 1.984 million figure lies? Because I thought that only about 1.3m or so homes sold per year, and there are quite a few used homes on the market, and demand has severely declined in recent months; thus I don’t quite get what the builders plan to do with all the excess inventory they plan to create. Can anyone reconcile these figures?
From the HB post yesterday:
‘The industry group expects new home sales to fall 12% this year from the record 1.28 million in 2005. They expect housing starts to fall about 7% from 2005’s record 2.07 million.’
The government says about 300k housing units become obsolete each year.
The population of the US is going up exactly 1.0% a year, or 3 million people. At about 2.7 +/- 0.2 persons per home that requires 1.1 million new homes a year, plus an extra 0.3 million to replace those that become obsolete, as mentioned above. So the normal construction rate should be around 1.4 million new homes a year.
Slight adjustment. New household formation is not at the national average but closer to 3.0 pers/hhld due to demographic shifts. Still only a 5-8% adjustement to your number.
But how do we incorporate a 68% average homeownership rate. Some of these 3million are children of existing households. I think this further reduces, although then the calculus gets more complicated with children leaving the home, getting married and then forming their new households themselves. Maybe a zero sum on that point?
Yes, but that does not move in a straight line. On average you need 1.4MM housing units per year, but buying a home is a HUGE decision, and usually the largest purchase anyone will make in their lifetimes.
If the market is sliding, and it is very difficult to afford a new home, sales could drop well below 1.4MM for the next couple of years.
Honestly, how many people do you know that absolutely NEED to buy a new home (absent divorcees, immigrants, moves for job, moves for school or health)? I don’t know any. When the psychology changes, and people believe it is a BAD time to buy, they will simply stay in their current living situation a bit longer–form the “household” later. Live with parents for one more year, have a roommate for one more year, rent for one more year, etc.
Overshoot the top, overshoot the bottom.
bet 1/2 of thenm are “pop ups” in hot metros- that will cool too
bet 1/2 of thenm are “pop ups” in hot metros- that will cool too
This monthly data is too choppy and the future sales data too uncertain to predict the actual overhang. Suffice to say; way up.
Remember also permits are not what gets built and includes replacement structures, see the south data for hurricane impacts.
In Florida, at least, there also is a lot of speculator-owned housing that is vacant but not yet for sale — particularly condos. I’d think that these units either represent a phantom addition to inventory or will subtract from demand when they are rented out. However, I have no feel for numbers involved.
All I know is that 555,000 new homes currently waiting for an owner in March translates into 11,100 per state
That brings AZ’s rough estimate total of homes for sale to over 57,000. I think our share of that 555,000 is quite a bit higher than 11,100 but it is a good place to start.
Someone metioned 1.6 annual million meets demand for all of the below:
1) new household formation
2) vacation homes
3) houses becoming obsolete
Some of what has until recently been attributed to “vacation home demand” will turn out retrospectively to have been “investment home demand.” When prices are obviously falling, you will discover that lots fewer wealthy folks approaching their retirement years will be interested in buying second (or more) homes.
Notice how all the anecdotal data of local actual starts and permits are down significantly yet the seasonaly adjusted national figure is only down 5.4%. Next sign; massive write downs of home builder inventory values crushing their debt/asset ratios and setting the stage for the next leg down.
You are turning more and more bearish on the HB’s.
No, I’m the one that says their stock values will get punished and with good reason. My only mild defense of the HBs is that I say they really did learn their lesson last time and are fully prepared for the last war. In this I’ve been right, notice that they’ve been allowing raw land options to expire so they aren’t stuck with empty lots for instance. I even called the front loaded rush to complete anything that had already broken ground. Next up, the layoffs and sub-contractor unemployment of construction workers. Again, another defense mechanism that they learned from last time when they were trying tobe vertically integrated and got stuck with staff costs.
Hey RC, enjoy your posts.
NJ contractor here. I’m already seeing the subcontractor slow down. Subs returning calls for service /small jobs; Big guys complaining that phone isn’t ringing for their type of projects;More and more day laborers standing outside the lumber yard.
All the subs driving around in $30,000 pickups still have payments to my knowledge and most have grow accustomed to eating and living indoors.
Yeah, saw those poor “kids” last time too. 23 years old just got married and signed a 6yr high interest rate truck loan paying extra for the light rack and roll bar. Now a tank of gas represents a whole days take home pay. Sad and he has no idea what’s coming. Why should he, all he’sever seen is good times.
I am 27 and all I remember is good times, but I am smart enough to know that it can’t last forever. When I talk to people in my peer group, they are convinced they really don’t need a savings cushion becasue they either bought a home that’s appreciated and can “take the equity” anytime (many don’t realize that adds to debt and will have to be paid back), or are relying on their parents to bail them out should something happen. But when will the perma-bull economy end?
I remember the last big crash in my area. It was the late 80’s. We went from a housing shortage to not being able to give a home away in just a matter of months. Most of those “subs” you see driving the new trucks are living hand to mouth right now, just a couple of paydays away from repo.There was a lot of money made in the last few years. Some will hold onto it, and some won’t.
Oddly, according the the Arizona Republic this weekend, builders in Arizona are suffering from a shortage of skilled laborers, e.g. plumbers and electricians. They are supporting training programs in prisons and will employ them upon release.
They should add security systems to that list.
Prison is good training ground for being a sub-contractor….now how will they achieve certified status when asked if they have ever been convicted of a felony?
I have spent some time reviewing the Q’s and K’s of some of these HB’s. The B/S are loaded with Debt and little cash. The SCF provide little if any free cash flow from operations, at a time when they should be generating significant cash. Time will tell.
I don’t see that regards free cash flow. I do see however some nasty valuations purported for land values and other supposedly hard assets. As we both know free cash flow is a very fungible number for HBs who can “plow back” cash into supply replacement, bonuses and such. They can stand some major sales hits for now.
I disagree, Robert. I think that the HB CEOs have figured out that the way to maximize their own gains is to build like maniacs for as long as they can to squeeze out every last dollar of revenue, cash out at the top, and then go bankrupt. Looks like TOL is on exactly that trajectory.
Don’t mistake stock price for company fundamentals. Yeah the Toll Bros cashed out a lot but still hold substantial positions. TOL will only collapse if their vertical lending unit has been writing and keeping bad paper. No way to know that until it happens like we see with the subprimes already. Remember however that TOLs unit serves TOL customers who are more upscale.
It is difficult to see how TOL will avoid bankruptcy. They continue to build in glutted markets. Their customers are less able to qualify for loans due to higher interest rates. Costs are soaring for materials. Insurance costs are rising, particularly in FL. Existing home inventories are zooming upwards which provide competition for them. And new homes are being discounted by other builders. The better paying jobs continue to leave the country for India and China. The sales numbers keep slipping and can reasonably be expected to slip at an even faster rate through the remainder of the year. Prices have held up better than expected but as inventory keeps building, the obvious result will be falling prices at a considerably faster clip.
TOL is a dead duck, IMHO.
“Remember however that TOLs unit serves TOL customers who are more upscale.”
TOLLs business model is to sell McMansions to McMillionaire wannabes. Given the period of rapid appreciation we have recently experienced coupled with a stunning abandonment of lending standards, it is too early to know how much of the demand for Toll’s product was generated by those who can truly afford to own it versus those who were only able to qualify due to extraordinary factors which are eroding as I type. Only after the tide is out will we figure out how much of Toll’s demand was generated by nude bathers versus the truly affluent.
” HB CEOs have figured out that the way to maximize their own gains is to build like maniacs for as long as they can to squeeze out every last dollar of revenue, cash out at the top” Too much has been made of HB executives selling their stock when it is high. All executives of thriving and declining companies do this. When your total compensation is millions of dollars you typically have a professional money manager. 1st rule is diversification. Even Bill Gates is continuously selling MSFT.
Outside of a handful of somewhat wealthy Portlanders the town of Bandon, OR (on the southern coast) is almost entirely reliant on the health of the CA bubble. As are Bend, Sisters, Medford and Ashland. For many years here the notion of having a second home or “cabin on the lake” meant exactly that. Simple, modest and easy to close down at the end of the season. As they bubble continues to unravel it will become increasingly difficult for sellers of 2nd, beach and mountain properties to entice buyers that will have long since abandoned “bigger is better” in favor of more manageable and efficient 2nd homes. This will be noted by their ragged appearance giving formerly cheerful vacation “hot spots” the vibe of a ghost town. Especially on the OR coast where the climate quickly takes a toll.
Is anyone else having trouble getting early price quotes on the HB stocks today?
Check out TOL’s early morning price movement. I never realized that it was possible for stock prices to “bungee jump”…
http://tinyurl.com/bcmj9
garcap,
You are not alone! “Cooling” also is a self flattering term in that it implies that after “red hot” progressing towards “white hot” even the center of our solar system can have cool spells only to be followed almost immediately by further violent solar flares. It also implies that the juggernaut we call the housing bubble isn’t losing steam at all, it’s just that the resources (building materials to mortgage brokers and realtors) are so in demand and so strained that buyers just need to chill out for a minute so they can catch their breath before the next incredible spike up in “our new permanently high plateau”. No sir, you are not alone.
Housing start activity:
http://www.xanga.com/russwinter
Thanks for the historical data, Russ!
If anybody has any long term data or charts on housing vs. stocks, housing vs. bonds, etc. (see the weekend thread for housing vs. gold, posted by John Law), I’d sure love to see them, this is a shoutout!
Who cares about the nuances of the announcements. The fact that they’re slapping up less stuff means less upward push on inventory and in the end, an exploding inventory is what is required to end the price acceleration.
ineventories already exploding for the most part. “Price acceleration”? LOL you sound like a realtor. Besides, price acceleration has also already ended in most/all bubble areas (if you take the time to check same property sales). There are plenty of other reasons for price deceleration (since you like fancy terms) to occur…never mind the fact that the builders are still building at near-record clips (duh! take a look at Mr. Winter’s post right before yours, all right?). C’mon, you must really work hard to be that ignorant, ling!
Acceleration (in physics at least) can either be negative or positive. Deceleration is pretty imprecise although it does tell you direction. I have to agree with Lingus though. I was happy to see the builders plugging and chugging along, slapping up more and more units. This would cause prices to drop more quickly, but it seems to me that the damage has been done. Those new houses built this year will further engorge the market and cause further bloating down the road. This freight train cannot be stopped.
“Deceleration is pretty imprecise although it does tell you direction.”
And that pretty much sums up Ben Bernanke’s clever choice to use this term to describe the future dynamics of the housing market.
I’m really confused as to what is happening in my market. I live 15 miles east of Charlottesville, VA in Lake Monticello (Palmyra). Used to be a retirement community, they opened it up to everyone to fill the lots.. it’s pretty full now, like 90-95%. I had the chance to relocate from NoVA (Fairfax) and jumped at it since I got the same salary down here and housing was just nuts up there. Plus I hated the traffic, etc.
I got (what I think) was a great deal on a house me and my fiancee fell in love with, 3 BR ranch house, half acre, for $225k. Had to take out an 80/20 on it since I had no real savings, got a 5/1 ARM (5.725% on the 80) and 7% on the 2nd mortgage. Not thrilled about the ARM, but we don’t plan on being there more than 5 years.. and if worse comes to worse, we’d still be able to afford it, but things would be tighter.
Where I’m confused — Assessments are being done now, and word from the street/HOA is that to expect a 40% increase! FOURTY-PERCENT. That is just nuts, and I don’t know what they are basing that off of — the housing bubble in Charlottesville, where prices shot up similar to other cities around the US? They are building more out near us, numerous developments are in progress, with signs like SFH’s from the $500’s. I don’t know who down here has $500k, but I guess some people do. This is a pretty rural area too .. it’s a 10 minute drive to the grocery store, and the nearest Wachovia is in downtown Charlottesville, a half hour away.
It’s just really confusing to me. Shouldn’t prices be falling? Or is the bubble deflating in some areas and spreading outwards with the people fleeing the big cities for more affordable housing, driving prices in those areas up?
Patience in all things. The assessors are eager to achieve higher revenue, therefore the assessments will be among the last things to be adjusted. Prices, on the other hand, will respond to supply and demand. You’re saying that there is ample supply in your area, so it’s a question of demand and the sellers’ patience. If the sellers have the patience and money to wait out buyers, the prices will remain. If they feel the need to sell, they will soon adjust their prices.
Yeah.. I mean, I’m not going for 3-5 years anyway, so all my assessed value of my house really means to me is how much property tax I’m paying.
It’d be nice if it was higher after 5 years, but that just means the place I’ll want to move into will likely have adjusted by the same percentage.
I think prices generally are falling, but the current mix of sales skews it. There are less lower price properties selling relative to higher.
http://www.xanga.com/home.aspx?user=russwinter&nextdate=5%2f14%2f2006+23%3a59%3a59.999
Also the lenders have not tightened up on lending standards (see my earlier post) , despite the fact that they are taking loses on the mortgage trash they (or their hedge funds) hold. Anybody who owns 2005 and early 2006 mortgages now is underwater.
But, you have to wonder what firms like Ameriquest (largest subprime lender) are up to, given their big cutbacks. Anybody have a sense of their current lending practices?
OT, but interesting…Fannie Mae to [temporarily] Suspend Issuing Securities:
http://tinyurl.com/r3vmj
“Fannie Mae said Monday that it would temporarily suspend issuing certain medium-term debt securities until May 23…”
Just read the article — I don’t understand why it isn’t causing more excitement. Possibly out of ignorance, I laughed at the term “our regulators.” What have those regulators regulated in recent times?
We just put up a chart for housing starts and completions in the Northeast. The starts were flat, but the completions shot up a lot:
BubbleTrack.blogspot.com
Maybe this query should be in metals blog, but anyone know on average how much copper is used per new home built? The other day I heard a ballpark figure that 10% of world copper demand is used in construction in the US, and I’m guessing that might split into 5% residential and 5% other. I think global copper demand is 30 billionish pounds a year, so we would have 1.5 bil. for houses, and with housing starts around 1.8 mil. a year, that’s 800 pounds of copper per house. With copper at $4 a pound versus the normal $1.50, the cost increase from copper alone would be about $2,000.
I’d be surprised at 200 lbs all told in the average house including amalgams and brass, etc. BTW, how much copper do you want to buy from me at $4?
I’ve heard 400 lbs per average home.
10% work in HIC
20% of them will go= 2% off national employment #s= recession in 07
whooppee !
Humboldt county California (Eureka, on the north coast) up to 682 active listings. Despite the rise from the 500-525 listings from early April, anything that is priced below comps sells almost immediately.
Realistically, speculation from SF is supporting all this; my wife & I are two highly paid professionals and we could never afford a “nice” home in a good area here. We are renting in a $500-600K neighborhood for $1300/month…much cheaper than the equivalent mortgage even with 30%+ down. Even though more inventory should mean more competitive prices, people here are so hardnosed that they will not lower their prices; sadly, there always seems to be a greater fool to buy into this whole ordeal. Like I’ve said before, it is a world of difference between interior California and this part of the coast…in the central valley, a lot of panic selling and discounting is going on, whereas here all I read in the papers is about how great real estate is and how although the market has “cooled” locally, the price trend, year-over-year, is up. When is this going to end? I know I shouldn’t be jealous of people who take on more debt, but sometimes it is hard seeing people who make half what we do, own their own (large) home, have a boat, RV, expensive cars, etc. I just hope there isn’t a government bailout of these fools once the $hit does hit the fan (hopefully it will along CA north coast…I know it is elsewhere already).
If I could rent a $500-600K place for $1,300 a month, I’d rent forever and just bank my cash. We pay $2,000 a month for a similarly-valued place and are satisfied with that, relative to current interest rates.
I like Eureka - nice town and great motorcycle roads around those parts.
It’s hard seeing people with toys when you have none, but those toys are all debt-financed and will be an albatross around their neck later.
Like n2lca says, in a recession those toys can be bought for pennies on the dollar, literally.
I used to live in Eurkea & Fortuna. At some point the media will have to report on the story. It might even come out of a Reading (or another) newspaper/TV station.
Does unemployment still run at around 20%?
Anthony - keep renting, and saving. Then you can buy their own (large) home, have a boat, RV, expensive cars, etc from them for pennies on the dollar after the foreclosure/reposession, etc.
i’m in sonoma county and appraisals are now coming in flat yoy or a little lower,no panic here yet(EVERYBODY wants to live in the whine country),however the attitudes toward real estate has changed and the signs are all here…high inventory,rising foreclosures,longer dom,large disparities in price for similar homes,price reductions,etc
Actually, I think the unemployment rate in Eureka is quite a bit lower than that, but what amazes me is that Fortuna has a buttload of $900K homes–FORTUNA!!! And yes, they still ride horses up and down the streets every so often.
The sad thing is, people here seem much more complacent about the “bubble” than in other parts of CA that I’ve lived in recently. It is like Tom said about Sonoma…everyone just wants to live here (laugh). I really don’t think people can comprehend how much money 900K is! Another new home in the neighborhood I rent in had a prospective buyer look at it today…an old couple probably in their 70s. But, this house was a bargain at only $600K.
$900k in Fortuna?!! Sounds like the Bay Area effect. We are seeing the same thing in Southern Oregon. Equity rich folks moving in and pushing prices multiple times what a normal working person can afford. More and more grey hairs driving around in Mercedes and schools closing. I suspect the future will hold declines in our regions along with everywhere else, but we have the added difficulty of diffusion working against us. The North Coast is beautiful and people with money will continue to move there. Baby boomers are retiring and telecommuters are can import urban salaries and often a boat load of equity. There are millions of them and a few of us and ours is a desirable area. So, I do not know if our area will behave quite the same as other bubble regions, at least inthe near term, given the big exodus from the Bay Area. Sure hope I am wrong, because I would like to see yooung families afford to move back into town (Ashland).
My personal hope is that lower to mid level homes (150-300k) will not be appealing to rich, retiring exurbanites, because many can still easily afford homes in the $400-700k range. For the past few years, they have been buying the smaller homes as investments but I think that will slow greatly in the next year or so. I bought a funky 1000 sf 2 br 1 ba in 2003, and I hope to one day move up to a standard 1500 sf 3/2. That and a good garden are all I need. Let the rich crazies fight over those McMansions.
I should add that although I think $150-$300 k seem like pretty fair prices for lower to mid range homes, there are currently very few habitable homes in Ashland for under $300,k and a median of nearly $500k. So, purely a hypothetical, in the hope that things eventually return to sanity.