Housing Market & the Economy

Yesterday, we noted how the unusually warm January weather (amongst other factors) played a large role in the US Retail Sales. Today, we look at Housing — the potential impact of weather there.

Recall back in August 2005, we noted that Housing had begun to cool. The 1st of our 5 factors was an uptick in the Housing Inventory.

The unseasonably mild weather last month — it was  the warmest January on record in the United States — likely boosted January’s housing starts above normal (we’ll get a New Home Starts report today). That will only add to the growing inventory of new homes, on top of similar increases of existing homes for sale.

Anecdotal evidence should always be put into context, and never relied on exclusively to draw economic conclusions. But I cannot help but be struck by the overwhelming number of "For Sale" signs (three on my block alone) and the ubiquity of weekend "Open House" signs (complete with balloons) all over my corner of suburbia.

Rex Nutting observes that we’ve already seen the impact the of January’s warm weather on other seasonally adjusted data:

• Employment in the residential construction industries increased 0.8%, while total hours worked in construction increased 2.2%;

• Retail sales jumped 2.3% in January, including a 3.4% increase in sales at building materials, hardware and gardening stores;

• Utility output plunged 10.2% in January, the largest monthly decline on record.

He expects more of the same for the Housing Starts.

But Supply is only half of the equation. With inventories of new homes rising, and lots of existing home inventory on the market, Nick Godt asks "How about demand?"

"On Tuesday, star homebuilder KB Home warned of an increase in the number of canceled home orders and of a drop in new-home sales in the first two months of the year. Likewise, Toll Brothers last week warned that new orders for homes had dropped by 21% in the first quarter so far.

And the mood remains gloomy in the industry. On Wednesday, the National Association of Home Builders (NAHB) said its housing market index remained at a two-year low of 57 in February. Both the NAHB’s buyers traffic index and its future expectations index dropped by a point."

So Real Estate is cooling. What’s the big deal? Its been above trend for so long, a reversion back to the mean is expected, right?.

Um, not quite: The issue going forward will be the loss of the prime economic engine in this post bubble, stimulus dirven economy.

Back in May of last year, we brought to your attention the news that Half of New Jobs Are Real Estate Related. Now, we see early signs of what will happen as we slide down the other side of that mountain:

"Washington Mutual Inc., the largest U.S. savings and loan, said Wednesday that it was laying off 2,500 support employees in its mortgage unit.

The Seattle, Washington-based company said it was also reducing the number of mortgage processing offices to 16 from 26 and sending some of the work to “lower cost domestic and offshore locations.”

That’s just one part of the Real Estate complex. How hard will the slowing RE market impact real estate brokers, contractors, durable goods, related retailers (Home Depot, Lowes, Bed Bath and Beyond) ?

We’ve beaten the RE as the key to the economy drum for so long, that we forget many people only wised up to this recently. As far back as December 2004, we observed that Housing was the economy’s biggest driver. As is often the case with a secular trend shift, it has gone on longer and stronger than most expected.

I expect by the 3rd Q of this year, we will see a very significant impact of slowing real estate more fully felt by in the macro economy. More so than the new Fed Chief envisions. If I’m right, his job is going to get a whole lot more difficult by then . . .


UPDATE February 16, 2006 9:49am

New Housing Starts surge 14.5%:

"The Commerce Department said Thursday that housing starts increased 14.5% to a seasonally adjusted 2.276 million annual rate. The double-digit increase carried starts to their highest mark since March 1973, when groundbreakings reached 2.365 million. December starts were revised to show a decline of 6.9% to 1.988 million; originally, starts were seen dropping 8.9%. (emphasis added)

But January’s huge gain was expected to be more of a blip caused by unusually mild weather. The U.S. had its warmest January on record, with an average temperature of 39.5 degrees, 8.5 degrees above the 1895-2005 mean of 31, according to the National Oceanic and Atmospheric Administration.

Indeed, starts rose most strongly in the regions which are typically the coldest in January, soaring 23.7% in the Midwest and 29.2% in the Northeast. Starts jumped 16.9% in the West, while the South posted a more subdued 8.7% gain."


UPDATE February 18, 2006 5:49pm

Jeff Matthews points out that KB Homes is seeing a surge in order cancellations amidst a cooling real estate market.

Not coincidentally, I get an email from David, who thinks that all these Housing starts are a way builders lock in extra dollars as these order cancellations surge:

"Everyone is citing warm weather as the reason for the January jump in housing starts. Based on my daughter’s  experience buying a house from a major builder in 2005, I have a slightly more cynical interpretation. She was  required to put down about 1% ($5000) when she initially signed and reserved her place in the que. When the house was "started" she had to put up another 6% ($30,000). (I believe this is a fairly standard payment schedule).

Is it possible that the builders are racing to increase the walk-away price for the buyers currently in their build queues?"

More than possible: In fact, quite likely . . .


Hot month, hot home building 
By Rex Nutting, MarketWatch
Last Update: 6:20 PM ET Feb 15, 2006

Shelter Glut Could Prove to Be Bubble’s Demise
Nick Godt
The Street.com, 2/15/2006 5:14 PM EST

Washington Mutual to Cut 2,500 Jobs
THE ASSOCIATED PRESS, February 16, 2006

Unusually Mild January Gets Hammers Swinging
Housing Starts Soared 14.5% Last Month As Record Warmth Helped Spur Building
WALL STREET JOURNAL, February 16, 2006 9:27 a.m.

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  1. David Silb commented on Feb 16

    I remember some time back I commented on Miami Real Estate and how values were way out of whack with real wages locally and someone here responded that I was not accounting for growth and there would always be demand for housing blah blah blah.

    Today CNBC gave some stats that housing starts are the highest since i don’t remember when… If this is true supply of housing will quickly outstrip demand.

    Just like Barry my neighborhood is full of For Sale signs, Open Houses on weekends, minus the balloons (I feel cheated) and lots of advertisements from realitors.

    My wife pointed out that on the Plastic Surgery Show Dr. 90120 (I know, if not for the interest of discussion here I would NEVER bring it up. Imagine my embarrassment) That one of the happy go lucky Doc’s is strapped with TWO mortgage’s because they bought a house before they sold their 1st home so the doc works even harder to cover his two mortgages. Never sees his family (sound familiar) and complains he’s tired, stressed and is questioning what is he “doing” with his life and is it worth “it”. Luckily for him insecure women abound and as long as he can physically operate he has an endless supply of patients.

    But I Digress….

    The house two streets over from me was a house on the market for $1.5m to sold $785K. If that’s not telling then I do not know what is.

    People are going to take a real bath and I wonder what “pie in the sky” plan our elected officials will come up with when the bankrupcies start rolling in. People are going to be ruined when selling heats up.

    Any thoughts? Am I right. Wrong. Or over exaggerating?

  2. RogerThat commented on Feb 16

    It feels like justice to me. It’s not like this is unprecedented. Fools, the greedy, and their money have always been easily parted it’s just sad that some of the fools in this case are first time home buyers who believed the “Get in before it’s too late, real estate never goes down” line.

    All they had to do was a little research about the early ’90s to know their realtor/mortgage broker was full of it.

  3. jj commented on Feb 16

    I like all the talk about a “soft landing”. Reminds me of the old joke about the difference between a recession and a depression. In a recession your neighbor losses his job, in a depression you lose your job. So…. in a “soft landing” housing values go down somewhere else, in a “hard landing” your house value goes down.

  4. Emmanuel commented on Feb 16

    …and who exactly are the folks who are going to buy all these McMansions under construction? Unsold inventories are pushing up to half a year, so do they want to bring it up to an entire year?

    Quick, wake up Bernanke! Instead of a savings glut, maybe he can now talk about a housing glut. Whether his political masters will be happy though is an entirely different matter.

  5. D. commented on Feb 16

    Either they’ll be bulldozered or converted into clinics.

  6. David Silb commented on Feb 16

    Good points to all. I can safely say for the first time hear we have a consensus view.

    Summation: Housings in for a correction. How bad, how good; unknown. Agreement: data favors downward push.

    Hold on the economy is in for a ride.

  7. zanzibar commented on Feb 16

    Spring should provide a good indication about the demand side of the equation as it is the seasonally strong period for housing sales.

    Clearly sales have stalled since late last year. Will it pick up this spring?

  8. Bobby commented on Feb 16

    People underestimate the wealth created in the stock mkt from 1995 -2001. Then rolled into real estate when interest rates plumetted to 1%. I’m sure there will be some speculative bubbles on a micro scale in places like South Beach or Las Vegas. And inventories may rise from non-existent levels to normal levels. But the economists who are calling for a real estate bubble have been doing this since rates started rising in 2002. Now we are near the end of a rate increase cycle. At worst, prices on a macro level will go sideways as rents catch up to mortgage payments. There are still many places on the coasts where rents exceed mortgage pmts enabling people to buy for positive cashflow.

    Later this year we’ll welcome the 300 millionth citizen to the US. That number is expected to reach 500 million by 2050. These people are going to live where the jobs are. NYC, SF, LA, CHicago, Houston, Miami. Prices are low compared to where they will be in 10 yrs. Good luck.

  9. Larry Nusbaum, Scottsdale commented on Feb 16

    Good points to all. I can safely say for the first time hear we have a consensus view.
    Summation: Housings in for a correction. How bad, how good; unknown. Agreement: data favors downward push.
    Hold on the economy is in for a ride.
    Posted by: David Silb | Feb 16, 2006 2:32:41 PM


  10. wcw commented on Feb 16

    Housing’s eased already. Check your comps for the last three months.

  11. Estragon commented on Feb 17

    I don’t entirely understand this fixation on housing prices per se. Prices only really matter for first time buyers and last time sellers. For everyone else, what matters is their ability to carry the costs.

    Rental vacancy rates appear to have peaked around Q104. It follows that declining vacancies will eventually press rents upward, and this will flow through to CPI via the owners equivalent rent. Also, if average heat costs are lower, the adjustment to OER for utilities may also be lower (ie higher OER). FWIW, core PPI increase today seems to be more in the intermediate and final goods than in primary goods. All this makes me wonder if the stars aren’t aligning for some upside surprises in core CPI coming, along with a ramp in mortgage rates. Irrespective of where nominal house prices go in the next few months, the cost of carry relative to incomes looks like the main risk to the economy at the moment.

  12. D. commented on Feb 17

    “Prices only really matter for first time buyers and last time sellers. For everyone else, what matters is their ability to carry the costs.”

    Prices have gone up so much in our area that it’s keeping young couples with children out of our neighborhood. And our schools are half empty.

    These young couples are moving off island to new and cheaper areas forcing the government to spend our budget on new school construction.

    In our area, the scholl are in desperate need of repair but why fix them when they’re half empty and the budget is not there?

    To make matters worse, since our area is now considered an area populated by “wealthy familes” the government doesn’t care about fixing our public schools. Us rich supposedly have money to send our kids to private shcool despite our school taxes doubling in the last couple of years. The government loves this because it only foots 60% of the cost instead of 100% when you send your child to private school.

    The problem is that many households bought before the run-up in prices meaning they are not necessarily richer than they were before.

    This bubble is negatively affecting all groups except those who flip, downgrade or only live for making a quick buck.

  13. estragon commented on Feb 18

    The reaction to housing price changes by new entrants to the housing market certainly will affect others, particularly as their relative numbers build with time. This is probably the single biggest self-limiting factor to house price increases.

    That said though, your lack of young families may have other causes. The area I live in went through a similar problem in the 80’s, but that was a period of very stable pricing here. The root cause was that the area was developed mainly in the 50’s and 60’s, and was populated initially by young families. Many aged in place, with the result that by the 80’s the kids had grown but much of the housing was still occupied by the original generation of owners. Many schools were closed or repurposed. The situation has reversed to some degree now, but will likely never reach the enrollment levels seen in the 60’s and 70’s.

    Your area may be different, but if your politicians are pinning it all on house prices, you might want to consider finding new policitians rather than waiting for the housing market to turn ;-)

  14. maccade commented on Feb 19

    In our area price doesn’t seem to matter as 9-20 people move into a single house…park all over the yard….Seems to my they should have to pay more local taxes than the “normal” family as they are wearing out the utility structures (water/sewage).

  15. D. commented on Feb 19

    You are assuming and you know what that does.

    Part 1 – Politics

    In Montreal, hell will freeze over and housing WILL crumble before our politicians change.

    If there’s a recession and people are suffering, the separatists WILL blame it on the ROC (rest of Canada), call another referendum and people will leave, weakening the real estate market.

    Part 2: This real estate frenzy only affects first time buyers.

    Let’s look at some facts:

    1. New construction (McMansions and luxury condos) and housing close to downtown core have doubled in the last 3 years

    2. Starter homes have doubled

    3. Existing mid market homes are up 40-60%. First time buyers can’t afford them. Upgraders want the whole luxury package = McMansions.

    My parents want to downgrade to a bungalow and invest the difference but it doesn’t make sense because bungalows prices have gotten out of hand. Let’s not forget that bungalows on the island were built in the 50s and haven’t been maintained because they’ve always been owned by families with not much money. So if my parents want to downgrade, net net they would be out of cash. They’re stuck in their oversized home unless they move off island.

    85% of mortgage debt in the last 5 years has been taken on by 45+ and 35 and less homeownership has dropped. Never mind that more than 60% of current retirees don’t mind retiring with mortgage debt so they’ve been upgrading instead of downgrading. This means that on the island the only thing being built is expensive stuff, squeezing out the young workers and sending them farther away from their work.

    We’re a socialist country so our taxes are high but we see what is happening in the US. The trend has been housing and tax cuts. Our people want the same but don’t want to lose their scial benefits. The general mentality right now is to get the government out of our finances and let the market economy prevail so instead of zoning for affordable housing zoning is geared to bulding luxury stuff for the boomers on the verge of retirement. Ironically, the current market economy is pushing the workers farther and farther away from the buisiness core and retaining those about to retire.

    4. With new found equity people have been using HELOCS to finance car purchases. Cars on the road have probably doubled in the last few years. In Montreal, smog has finally reared its ugly head. We’ve NEVER had a smog problem but for the last 3 years we’ve been getting smog alerts like crazy.

    5. The ministry of education’s budget is being eaten up by new school constrcution for a multitude of new developments sprouting off island. On island, they’re cutting budgets. Public schools are so run down that people have been flocking to the private system. The government likes these because they only pay 60% per head instead of the annual 100% in public.

    One problem arising from all of this is that because the government condones this practice and looks at it on a long term basis, it helps to fund these private school constructions, further taking away money from the overall budget fro the public system on a short term basis.

    I went to apply to a few of these new private schools but they are so nouveau-riche it’s disgusting. They cater to the anxiety-stricken competitive parents

    In one of them, I had to put my daughter on the list at birth to get her into kindergarten. This school is now under invrestigation for cheating on provincial exams. Competitojn for ratings is so fierce that schools are willing to forgo their ethics. Another school wanted a biography of my daughter, she was 2 years old!

    The quality of these private schools are dubious because they end up hiring unlicensed foreigners and paying them less than the going rate. In Quebec, benefits for teachers are so advantageuous that the best teachers will always opt for the best areas of the public system or the long-time ivey league schools.

    6. We can’t get 15 or 30 years mortgages. The average Joe takes variable or 5 yrs. They might be cash flow rich today but what will it be in a few years when they refi?

    When you say that this real estate only impactd a few I can’t disagree more. Maybe it’s like that in your area but in Montreal, it’s creating huge dislcoations.

  16. Norman commented on Feb 19

    What housing bubble? The SF Chronicle today (02-19-06) post some Bay Area housing stats. From Dec 1987 to Dec 2005 the median house price grew at 7.7% per year; its resultant mortgage payments grew by 5.6% per year (mortgage rates down); Nominal GDP grew at 5.5% per year. Looks like house prices in this the most desirable of areas are cheap!

  17. Dru Nelson commented on Feb 21

    Norman: Are you insane?

    Bay Area prices are over the top. You are looking at at a 19 year average. Show me where I can buy on that 7.7% line and I’ll buy 10 houses. Otherwise, you can fight for the 1.2 million dollar, just “fixed up” tract house that was built in 1949 around the corner from me. Oh yeah, no contingencies.

    IMHO, based on the data above, the conditions are right for a major fall. But, as the last 5 years have shown, there has to be a catalyst that the government can’t control. I don’t see the pain yet. We had zero bank failures in 2005. People and markets tend to be irrational longer than you can hold your breath.

    Barry: keep the data coming.

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