Housing Slowdown Continues Apace

Last week, we looked at 4 charts reflecting the general problems facing the housing industry.

Yesterday, WSJ Market Beat reviewed the companies getting pressured by changes in the Housing market:

"Housing stocks are getting hit hard today
after two different companies — Standard Pacific and Technical Olympic USA
warned that demand was slowing and said they expected orders to fall sharply.
Friday, Standard Pacific said orders plummeted 41% in April and May — one of
the biggest such dropoffs reported by a home builder of late. But its
announcement followed similar bad news from Pulte Homes, Hovnanian Enterprises, Ryland Group and luxury
builder Toll Brothers, all of whom
have reported hefty pullbacks in demand and cut earnings guidance for 2006. And
shares of all have dropped since peaking in about mid-January. Coming into
today, the Philadelphia Stock Exchange Housing Index was down 12% this year,
compared with a 3% gain for the S&P 500; the housing index is off 2%
today.

Several analysts said today that Standard Pacific’s announcement
was worse than expected and that the cumulative affect of the industry warnings
suggests real estate could experience more than just a mild decline from
previously lofty heights. "What the industry is going through appears to be much
more brutal than most had anticipated even just a few short months ago," A.G.
Edwards analyst Gregory Gieber wrote in a comment. "Last year, our view was that
it would be a soft landing, but as 2006 started to roll forward our concerns
grew and we abandoned the soft-landing view for one of a ‘sweating-palms or
white-knuckle rough landing.’ But over the past month or so, we have come to
fear that even that revised view was likely too optimistic."

One possible cause for pessimism is an overhang of available
housing. In the past several years, according to the U.S. Census Bureau, about
four months’ worth of supply was available for sale on average, at any given
moment. But in the three months leading up to April, about six months of supply
was available. The National Association of Realtors said last week that its
index of pending home sales fell 3.7% in April and is down 12% from a year
earlier."

Source:
Money Pit
David A. Gaffen    
WSJ MarketBeat, June 5, 2006 11:49 a.m.
http://online.wsj.com/article/SB114950874608271382.html

WSJ MarketBeat
http://online.wsj.com/article/marketbeat.html

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What's been said:

Discussions found on the web:
  1. Bob A commented on Jun 6

    XHB is another way to look at it. down 3% today after two prior days of similar losses. Some of the components approaching longer term trend but others have a long way to go.

  2. S commented on Jun 6

    Barry — it appears most, if not all, links in this post to quote details (TOL, TOA, etc.) are broken.

    S

  3. KirkH commented on Jun 6

    A lot of people look at housing the way you have at inflation. The fundamentals are so out of whack that this simply shouldn’t be surprising unless, like most journalists, you think the NAR is unbiased.

    How can anybody look at this graph and think soft landing? Is it because a reversion to mean would likely mean a full on depression for America?

    I too believe in the resiliency of the American economy. But if you look at the labor numbers it’s becomming clear that the median worker is having a pretty tough time even as productivity and profits boom. If this is a boom time and they can’t find work what are they going to do in the midst of a recession?

    Is it possible that productivity is so high now that unskilled workers will soon be unemployable? If so how are they going to pay off their 50 year adjustable rate zero down negative amortization no documentation stated income loan?

  4. ac commented on Jun 6

    So if new home orders are dropping 30%-40% what are the implications for employment? Is it possible to forcast a rough number of (direct) layoffs that will result from the major builders losing that kind of business?

  5. Tom Womack commented on Jun 6

    [soft landings]

    House-price graphs tend to level off in surprising ways: http://www.housepricecrash.co.uk/images/graph-house-prices-1975-2006.gif [don’t worry about the address, the data’s from a reputable building society] is the British one, which you will notice climbed at an inordinate rate and then flattened out.

    The rate-of-change graph plummeted from 15% YoY towards 0% towards the end of last year, but then started climbing again; house prices grew at the rate of inflation averaged 2004Q3 to 2005Q3.

    The UK has been concerned about a housing bubble for a while: http://news.bbc.co.uk/1/hi/business/1803810.stm is four years old now.

    I don’t know whether the US market is even more screwed up than the British one – I’d not be completely amazed if some of the coastal city markets were even more over-valued than London, though I have the impression that the US isn’t in the British situation of having had prices rise to a fairly high level country-wide.

    The UK market is such that many people with spare capital in London have bought for rent property in, for example, dodgy parts of Liverpool; it used to be that some parts of the country had starter homes for $80,000 but this is no longer the case.

  6. Robert Cote commented on Jun 6

    Let me rephrase the situation. This isn’t a housing bubble, the housing bubble is a symptom of a financial problem. When you could buy stocks on margin, sometimes in excess of 100% we had this 1929 thingy. This time we have houses bought on margin, sometimes in excess of 100%. The definition of insanity is doing the same thing over again and expecting a different result. The financial bubble won’t cause a depression, we learned that lesson but as it continues to pop innocent people will get caught in the sticky mess. The homebuilder stocks are way down but that is almost divorced from the homebuilding sector. The sector is intertwined with about a fifth of the economy. The financial sector is intertwined with 100% of the economy. I wish it were a housing bubble.

  7. Mauro commented on Jun 6

    Barry and comenters,

    are prices of office space as overvalued as homes ? I understand that corporate profits were growing while wages were not. So prices had to grow faster than home prices, to make it over-valued. Could it be that office prices were pulling home prices ?

  8. edhopper commented on Jun 6

    I would think that office would track closer to rents and not home sales. Rents have remained relatively stable during this boom.

  9. Larry Nusbaum, Scottsdale commented on Jun 6

    “are prices of office space as overvalued as homes?”

    Not at all, Mauro. In fact, commercial real estate, strategic real estate and specialty real estate is still very much in high demand and I have seen office vacancies get much better in the past 18 months.

  10. Larry Nusbaum, Scottsdale commented on Jun 7

    “The link below re-hashes much of the stuff we’ve learned from Barry. Consequently, IMO the most interesting thing about the article is that the author, a senior exec at PIMCO, has decided housing is so overvalued where he lives that he sold his house to become a renter!”

    AND, ANYONE WHO DID THIS OVER THE PAST 6 YEARS, AS SOME SILLY ATTEMPT TO “TIME THEIR MARKET” SCREWED THEMSELVES. WHEN DOES HE GET BACK IN, IF EVER?

  11. Larry Nusbaum, Scottsdale commented on Jun 7

    “Apartment rents heading higher in ’06
    Forecasts show biggest jump since 2000 as buying homes becomes harder; increased demand stems from higher mortgage rates, home prices.”
    (SEE BARRY’S RANDOM LINKS ON MAIN PAGE FOR THIS)

    THIS GOES TO TWO POINTS THAT I HAVE MADE IN THE PAST:
    1. If people were dumb enough to sell their homes in order to rent and push up rental demand, it only strengthens the landlord’s (owner) position.
    2. People assumed prices would have to drop in “overvalued” real estate markets over the last several years……NOT IF RENTS GO UP.

  12. S commented on Jun 7

    Larry:

    The guy who decided to sell his house to become a renter is not Joe Sixpack. He is a senior exec at one of the largest, most prestigious fixed income asset managers in the U.S.

    In that capacity, I assume he has access to market research, resources, information, and data that the average person just can’t get their hands on. His decision to sell is much more informed than the average guy. That’s telling.

    Another reason why I think his decision to sell says alot about the state of his local housing market is that, given his employment situation, I assume he’s very near the top of the income strata. It seems very unlikely to me that he decided to dump his home because his ARM resetting will create a financial hardship for his family.

  13. Larry Nusbaum, Scottsdale commented on Jun 7

    S: If he is not moving to another state, what is the point? And, just because he is in the fixed income business how does that research advantage help him make more informed real estate decisions?
    Wall St is awash with great research that hasn’t protected a soul in the recent market collapse of 200-2003.
    So, I ask, when does he get back in? We are talking about his home…….

  14. Larry Nusbaum, Scottsdale commented on Jun 7

    “In that capacity, I assume he has access to market research, resources, information, and data that the average person just can’t get their hands on. His decision to sell is much more informed than the average guy. That’s telling.”

    THAT “RESEARCH” HAS BEEN TELLING PEOPLE TO SELL (and rent) FOR OVER 5 YEARS. WONDERFUL.

  15. edhopper commented on Jun 7

    “1. If people were dumb enough to sell their homes in order to rent and push up rental demand, it only strengthens the landlord’s (owner) position.
    2. People assumed prices would have to drop in “overvalued” real estate markets over the last several years……NOT IF RENTS GO UP.

    On the other hand if speculators (40% to 60% of the buyers in the last two years according to some surveys) can’t sell their overvalued properties they will need to rent them out to avoid hemoraging money. Thereby depressing the rental market.

  16. jkw commented on Jun 7

    If someone sells their house to rent, someone else has bought their house. There are then 3 possibilities:

    1. The new owner lives there instead of renting.
    2. The new owner rents the house out to somebody else.
    3. The new owner leaves the house mostly vacant (normally as a vacation house or condo conversion).

    The first two are far more common than the third, which means selling to rent has only a tiny affect on the rental market.

    People who sold their homes over the past few years to rent were ignoring the history of real estate. Real estate prices adjust slowly, so it is easy to time the market. The smart thing to do if you already owned in 2000 was to wait until it was clear that prices had topped and then sell your house for 5% below the going price. The housing market peaked somewhere between August and October in many parts of the country. 9 months later, you can still easily get just 15% off the peak (which would still give you a gain over 100%). Compare that to stocks in 2000, where holding for 9 months past the peak would have wiped out most of your gains. The smart move now is to sell while prices are still high.

    Rates and mortgage standards are going up. House prices cannot climb without substantial wage inflation. The entire price run-up was a mania that was driven by banks giving out loans to anyone that asked for them. There is a limit to how far you can stretch a fixed monthly payment to get a larger mortgage. Once you reach that limit, easy financing won’t drive prices any higher. And if many people stretch for the initial payments on a mortgage that will have significantly higher payments in the future, they will all have to sell before their payments go up. If everyone has to sell and financing is harder to get, prices will fall. There’s supposed to be something like one trillion dollars of ARMs resetting this year, and more than that next year. There are only two options now: house prices fall or inflation goes substantially higher (8-10%). Right now it looks like the Fed is pushing for the first option.

  17. Larry Nusbaum, Scottsdale commented on Jun 7

    Let’s face it, you have reading about the real estate bubble for 5 years (as well as real estate frenzy).
    So, JKW, based on
    “The smart thing to do if you already owned in 2000 was to wait until it was clear that prices had topped and then sell your house for 5% below the going price. ”
    To date, prices haven’t topped. Unless you think they did at some time in the past 5 years AND YOU WOULD HAVE BEEN WRONG. On the other hand, many people must feel that prices are topping right now because there is an enormous home inventory glut. So, if this is the time, you will be selling 5% below the top but along side a billion others.
    IT’S YOUR HOME, FOR HEAVEN’S SAKE! WHY RENT AND MAKE SOMEONE ELSE RICH?

  18. S commented on Jun 7

    Larry:

    The point is he is a financially savvy person who, due to his position as a senior exec at a firm that runs literally hundreds of billions of dollars, may have an informational advantage.

    I can only assume he is acting economically rational in his decision to sell and rent. By that I mean that after he considered the tax implications, the hassle and costs associated with moving, and all the other material transaction costs involved in real estate deals, he decided that selling his home and renting has a postive expected economic outcome. Taking it a step further, because those frictional costs are so large and he will be facing them again when/if he decides to buy back in later, I can only conclude he is anticipating a GINORMOUS adjustment in home prices to justify the sell/rent decision. Of course, this all hinges on my assumption that the decison is based purely on economics. The context of the article leads me to think that is a reasonable assumption.

    Those are the main reasons why I thought it noteworthy that he had decided to sell his home and rent.

  19. jkw commented on Jun 7

    I hate people who argue about facts without looking them up. Right on the NAR web page, they give you price data for the country and many regions:

    http://www.realtor.org/Research.nsf/Pages/MetroPrice

    Prices peaked late last summer and have been declining ever since. Unless you think that record inventories, rising rates, and news stories about prices dropping will somehow not matter, prices will continue to drop. Some regions already have YoY price drops.

    Calling a top in the real estate market is easy. Wait for interest rates going up at the same time as prices start to drop. Then sell. You can even wait a few months without losing much.

    IT’S YOUR MONEY FOR HEAVEN’S SAKE! WHY OWN SOMETHING DROPPING IN VALUE BY $3,000/MONTH?

  20. Larry Nusbaum, Scottsdale commented on Jun 7

    Freddie Mac reported this week the home values increased by 8.1% in the first quarter of 2006 over the same time last year.
    “IT’S YOUR MONEY FOR HEAVEN’S SAKE! WHY OWN SOMETHING DROPPING IN VALUE BY $3,000/MONTH?”
    Because, it didn’t? Because it hasn’t? Because, it’s not a stock? Because it doesn’t matter? HOW ABOUT BECAUSE IT’S YOUR HOME…….

  21. Larry Nusbaum, Scottsdale commented on Jun 7

    In the two markets that I know, according to the NAR article not only was the quarter over quarter increase substantial, but the first quarter over the last quarter of 2005 showed an increase (ever so slight) in both SFR and condos. Thanks for the stats!
    Btw, if I buy a stock in 2001 for $20 and it climbs steadily to $55 by December of 2005 and today we find it at $52.75, would that be considered a “price peak” in December and now danger below?

  22. Larry Nusbaum, Scottsdale commented on Jun 7

    In the two markets that I know, (San Francisco & Phoenix/Scottsdale)according to the NAR article not only was the quarter over quarter increase substantial, but the first quarter over the last quarter of 2005 showed an increase (ever so slight) in both SFR and condos.

  23. jkw commented on Jun 7

    The median value of a house in the US dropped by $7,400 from 4Q05 to 1Q06 according to the NAR. That is an average of almost $2500/month. If you look at historical data, you should expect the rate that prices drop at to accelerate some, so the median house price probably is dropping by over $3000/month now.

    The housing price trend has turned. The percent change from a year earlier has dropped every month and will continue to do so for a while. The price run up in the first half of last year was so large that the annual change won’t be negative until late summer. It won’t go above inflation again for several years. It may stay negative for 2-3 years. During that time, house prices could drop 10-20% in most of the country, and 40-70% in a few areas with excessive speculation (where the speculators outnumber the residents).

    A 10% drop in the national average would be $20,000. That wouldn’t be worth moving for. But if you live in one of the bubble areas, a 10% drop would be at least $50,000. Many of the bubble areas are like to have prices drop by $100k-$200k. That is certainly enough to justify moving twice and renting for a few years. That’s more money than most Americans make in 3-4 years.

  24. Larry Nusbaum, Scottsdale commented on Jun 7

    jkw: Did you use the word bubble? So, you expect real estate prices to decline (rapidly) this year by 40-50% (because 10% is NOT a financial bubble)?
    OK. If it easy for you to know when to sell at the near top, when do you buy back in? Just curious.
    *does this guy really think that what happens in Miami matters in San Francisco or Seattle or what happens in Boston really matters in Salt Lake?*
    The US is one real estate market, right?

  25. Larry Nusbaum, Scottsdale commented on Jun 7

    jkw: I recently attended a Mutual Fund seminar in which most of the 200 attendees were older (45-70).
    The speaker asked people to raise their hands if they plan to sell their homes and move into a rental unit.
    About 3 hands went up.
    How does a real estate bubble pop if everyone remains in their home?
    Btw, there is no financial bubble until it pops and there has never been a real estate “bubble” in the US.
    Lastly, what are the chances that even if someone were to buy a house today that it would be worth less in 5 or 10 years? Now, ask the same question about any stock……..or about the S&P 500………….

  26. jkw commented on Jun 7

    Your roomful of anecdotal evidence means nothing. Inventories are at 10 year highs. This means lots of people are trying to sell homes. They just didn’t go to your seminar.

    There have been many real estate bubbles in this country. Housing has mostly been cyclical with a cycle of 10-30 years, although the rapid inflation of the 70s prevented nominal prices from dropping significantly for that cycle. Housing does not drop rapidly except under very extreme conditions. House prices dropping 40% in a year would require something awful like a plague killing off half the population. Housing bubbles don’t burst in a year. I expect inflation-adjusted house prices to return to their 1999-2000 levels over the next 3-4 years. In some markets, this will require a 40-70% drop. In some markets, it will be less than a 5% drop. High inflation would allow nominal prices to remain where they are.

    Timing when you buy back in is easy. Real estate slumps typically last at least 5 years and have nominal price increases of 1-2% per year, so you just wait for a year or two of prices going up after they fall.

    The real estate market is local. The mortgage market is not anymore. This means that a bursting real estate bubble in Miami or Phoenix will affect housing throughout the country. The sub-prime lenders will go bankrupt when the bubble pops. The better lenders will have larger losses than they want to accept, so they will be stricter about making new loans. The MBS market might get scared and sell-off badly, raising mortgage rates for everyone. For a fixed monthly payment, a 1% change in interest rates leads to about a 10% change in mortgage amount. So as rates go up, houses become less affordable everywhere.

    The chances for a house price decline depends on the location. A condo in Miami will almost definitely be worth less in 10 years than it was last summer (in real dollars). A house in some small town will probably be worth the same amount in real dollars. You can pick your expected rate of inflation. Whatever it is, you would be financially better off buying TIPS/I-bonds than real estate right now.

  27. D. commented on Jun 7

    Larry:

    Historically, price charts have always shown a hockey stick movement in the beginning of an implosion.

    On resales, the median price does not truly reflect the increase in a house it only reflects what’s sold. The crap is not selling, so of course it’s not bringing down the median price.

    As for new homes. Builders will add on luxuries for cheap before cutting prices. This also holds up the median price.

    To really know if prices are holding up, one must look at comps. And from what I’m seeing, prices are down. I know for a fact my home is down from the peak. And anyone telling me the opposite is full of hot air!

    And in my book it’s a bubble for many reasons but I’ll stick to one good one. Leverage.

    30% of those who refied last year have 0 equity. If prices drop by 10%, 50% have no equity.

    -10% on 0 equity is a much larger drop than -10%. In my book this is much larger than the tech bubble.

  28. Larry Nusbaum, Scottsdale commented on Jun 7

    D.: Fact is there has never been more real estate equity than ever before. And, I was shocked at what a high % of outstanding loans are 30 year fixed rate. It’s very high. And, according Gary K., household balance sheets have never been in better shape.
    Unlike a stock that can lose value and never regain it, a real estate purchase will always be cured by time.
    Everything else you said about your market is good information as every market in the US is different. As the chart from the NAR showed Phoeinx/Scottsdale is not trending down. My opinion is that my market has peaked already. But, that’s not what the stats say.
    jkw quoted national median price in which THERE HAS NEVER BEEN A DOWN YEAR, YEAR OVER YEAR, SINCE THEY KEPT THOSE NUMBERS. NEVER.

  29. Larry Nusbaum, Scottsdale commented on Jun 7

    “Timing when you buy back in is easy. Real estate slumps typically last at least 5 years and have nominal price increases of 1-2% per year, so you just wait for a year or two of prices going up after they fall.”
    EVEN IF THIS WAS ACCURATE, 1-2% IS HARDLY A BUBBLE.

  30. D. commented on Jun 8

    Of course there is more equity than ever before. It’s mathematics in its simplest form. You’re multiplying every house by the last transaction price!

    It’s like saying, when techs were peaking, there’s never been so much net worth in equities!

    All our valuation methods are comrpsised of multiplying all stock by the last transaction price. This is wrong because if everyone tried to sell at the same time, the price would drop! The last transaction does not represent all stock.

    Unfortunately, it’s the best valuation method we’ve come up with and that’s where the analyst comes into play!

  31. Larry Nusbaum, Scottsdale commented on Jun 8

    “It’s like saying, when techs were peaking, there’s never been so much net worth in equities!”

    It’s a bit different in that we really shouldn’t borrow money to buy stocks and we really shouldn’t buy real estate without leverage. However, as prices went up, Equity also went up.
    Does anyone really think that home equity can drop 50, 75 or 90% in real estate as it did in: CIEN, JDSU, MSFT, INTC, JNPR, LNUX, CPTH, PMCS, AMZN, YHOO, AOL, ETC?

  32. D. commented on Jun 8

    Well…

    Anybody who’s bought the same model house as mine in the last few years and put down less than 15% has already lost 100% of their equity! And the market has barely budged!!!

  33. D. commented on Jun 8

    “It’s a bit different in that we really shouldn’t borrow money to buy stocks and we really shouldn’t buy real estate without leverage”

    Didn’t you say we shouldn’t time the market; that we should buy for the long term because a home is for living?

    Well, over the long term, the mortgage does get paid off. Unless of course you keep it leveraged which is what you seem to recommend. So where DO we put our money? In more real estate?

    According to your argument, as long as one has a mortgage, one should not be buying securities because that would be buying on leverage. But paying down your mortgage is a bad investment because, let’s face it, without leverage real estate is a poor substitute for the markets.

    So that leaves you with constantly reinvesting in real estae, with leverage that is.

    Now imagine if everyone used this strategy… we’d all be mortgaged to the max and each one of us would own a few homes. If we are already building 2M homes per year with 1.5M in household formations, imagine the number of empty homes there would be!

    I always go back to what I have witnessed. Most of the rich I know made their money be being entrepreneurs. All the ones who made a killing in real estate timed the market.

  34. Larry Nusbaum, Scottsdale commented on Jun 8

    No, D, that’s not what I said at all. However, the real estate market does have 7-8 year cycles and I would rather buy when at the cycle bottom. But, as far as investment property I buy right and I plan to hold for at least two cycles for 15 years total.
    I know a ton of people who have become wealthy from doing just that. And, my point was, to always buy with leverage and of course the loan gets paid down over time.
    All of which has little to do with a principal residence.
    Your observation about wealth creation through entrepreneurial enterprises is spot on! I just wish more people believed it.
    I also don’t believe that the stock market is a place to create any wealth (except for the firms and their executives)

  35. john tyler commented on Oct 9

    well, like to say i told you so-but why rub it in.
    this is for all the quote “investors” who left the stock market for the next “big thing” who had no intent on living in the multiple homes that they purchased with the intent to “flip” them in two years for greedy profits.
    all these type people ie: realators,mortgage brokers,and just ordinary investors have falsely inflated the market by buying up inventory then to just “dump” the inventory onto the market when the interest rates started to climb.lets not forget all the greedy brokers who were setting up shop left right and center on every corner or spare bedroom at home.
    how about the dumb and generally younger crowd of people who left their jobs to be the “front men” aka
    the sales people for the greedy brokers who held the licence to do business.you got dropped like a lead balloon!!!!!!!!! now they prey on people with poor credit “sub-prime”.hey it`s where the money is…
    FOR THE LOVE OF MONEY IS THE ROOT OF ALL EVIL…..
    i have no pitty for you people. live by the sword-die by it.

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