House of Pain

The WSJ’s MarketBeat has an excellent summary on the Housing Starts data, titled House of Pain. The WSJ notes 4 relevant factors (note table of rising inventory, at lower right):

1. The Fed was right. So far, the Bernanke Fed has been subject to criticism for its "transparent" communication style, but as far as economic predictions go, they’ve been reasonably solid. In its midyear update the Federal Reserve said it expected "the associated easing in house-price appreciation will likely temper gains in household wealth, which, over time, may be a factor in damping consumer spending."

To this point, that seems to be happening.

It remains unclear whether the vaunted soft landing the greater investment community is hoping for will really come true, or whether its expectations that inflation will indeed tail off as the economy slows is just another one of Goldilocks’ dreams, while hungry bears move in for the kill.

2. Consumer spending is going to slow. Northern Trust estimated that the housing boom has been responsible for about 33% of employment growth during this expansion, and home-equity withdrawals accounted for about $600 billion in consumer spending in 2005 (the Fed estimated it at around $800 billion).

"It’s a very large amount, and it’s going to be reflected in consumer spending," said Asha Bangalore, economist at Northern Trust. "Households now are not tapping as much, and there is no buffer available for household savings as personal savings is negative. With mortgage rates resetting, you see how hard-pressed households are."

3. The slowdown is everywhere. On a year-over-year basis, starts are down 19% in the Northeast, 16.6% in the Midwest, 14% in the West, and 10.7% in the South, where prices are cheapest (the average sales price in the South was $197,300 in 2005, the cheapest of the four regions).

4. Things could correct faster than expected. While starts are down 13.3% on a year-over-year basis, building permits are down 20.8% in that same time period. "Perhaps some solace can be taken from the fact that builders are cutting back on new supply at a time when demand is weakening. This may help to shorten the recovery period in the housing sector, where the market has shifted rapidly to a buyer’s market from a seller’s market in short order," wrote Omair Sharif, economist at RBS Greenwich Capital.

That remains to be seen — as of June, 6.1 months of new supply was on the market, which remains near a 10-year high.

Rising Inventory graphic via

Good stuff . . .


House of Pain
David A. Gaffen
WSJ Marketbeat, 10:46 a.m. August 16, 2006

Rising Inventories Weigh on Home Prices
James R. Hagerty, 08/15/06

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  1. lindsey commented on Aug 17

    As a housing industry newshound I’ve been all over this, and I thank you for a very good summary. FYI, the top of the graph which explains that it is the percentage of homes with price reductions is cut off.

    As the numbers pour in, it’s going to get harder and harder to call this a soft landing.

  2. italldepends commented on Aug 17

    I agree. Won’t feel like a soft landing to most real estate brokers and construction workers. Etc. Like the House of Pain Cramer reference. He is so outrageous. Last night’s Burger Pawn rant made me laught out loud. Wow, can he be funny. But sometimes NOT.

  3. HT commented on Aug 17

    The question that is hurting me a bit financially, is when does this ‘trickle through’ hit the market’s “zeitgeist”? Is it damn the torpedos and let the rally run for a month, or start being more aggressive on downside play?

    Gold has been up for last two days, but as other posts of mine had noted, there was a nice trade there for awhile–dovish fed, gold up and vice versa. These last few days might just be noise.

  4. Bob_in_MA commented on Aug 17

    Re point 4. Things could correct faster than expected.

    On the one hand, the housing start and permit stats indicate a huge cut back in building, but if you pick some of those markets and see what developments the publicly traded builders have going, for instance, here’s KBHomes in Las Vegas, it’s rather astounding.

    Thirty years ago, home building was a business for medium and small private businesses. When the market turned they simply laid people off and stopped building for a while. But now a much larger percentage of builders are publicly traded and they really can’t stop building. Some of them will probably manage the turn by moving to stronger locations, etc., but some may get burned badly.

    There is an old saw, home prices only fall when there’s a jolt to local economy. But ironically it’s a slowdown in housing that itself is likely to provide the jolt, and it could turn into a self-perpetuating drag: housing starts and home sales fall, hurting the job market, prices stop rising, equity withdrawals fall driving down consumer spending, faced with falling demand, business spending falls, home prices begin to actually fall just as artificially low teaser rates expire, defaults jump up…

    One of the really big dangers and a reason why this turn will be worse than in the past is that 30 years ago, almost everyone had a 30 year fixed mortgage and had 20% down. In real terms, the payment actually falls slightly each month. If hard times hit a family 5 years into a mortgage, at least the payment was probably a lower percentage of their income and savings.

    Today, 30%+ of mortgages have rates that will increase, sometimes substantially, over several years, and 30%+ have NO money down. Sub-prime mortgages have gone from 10% of the market to 25%.

    Thirty years ago, lots of people had to really scrimp, beg and borrow from relatives to buy a house. But if their wages even just kept up with inflation, their real payment continually fell. Now you have people stretched to the limit to make their teaser rate….

    Maybe these worries are exaggerated, but so far they are being born out.

  5. glenn_in_MA commented on Aug 17

    Bob, Ditto that…you obviously know what you’re talking about or maybe it’s just that I agree with everything you say. Not only will the RE market fall harder than most think, the downswing is going to last a lot longer too. The scary thing is that this buyers market is just starting to develop in earnest and it won’t end until exhaustion and capitulation set in a few years from now (2008, 2009??). I remember well when this occurred in the late 80s/early 90s…it’s when I bought my first house. The sellers were financially devastated but sold at a huge loss anyway to stop the pain. And I don’t believe a FED easing will stop it…not unless they go back to 1% and that is not going to happen. Consider how much FED easing it took to stop stocks from falling. Problem is houses are not stocks. You can always decide to stay put and use your house for shelter rather than an investment.

  6. advsys commented on Aug 17

    Bob_in_mass makes a great point. Usually housing slows down as part of an economic slowdown. This time it may very well be the catalyst for the slowdown.

    One of the reasons that housing has to be thought of as a bubble. An asset class that is way out of whack with its norms.

  7. Mark commented on Aug 17

    LEI out now (10am) and the biggest component leading to the “surprise” drop was housing. I wonder if Philly Fed numbers this afternoon put the knife into this rally as traders refocus from “tame” inflation to slow growth (falling earnings).

  8. j d ess commented on Aug 17

    Thirty years ago, home building was a business for medium and small private businesses.

    Agreed on this point. Anyone know what percentage of the market is inventory from publically traded companies?

    I remember reading an AP article in April stating at that point while new home sales were up 5%, prices were down 7+%. I read even more recently of 10% going to realtors on new homes. Seems these companies incentivize like crazy to dump inventory and get out of the way. Will this make things better or worse? My guess is better in the mid- to long-run (1 – 4 years), but nasty in the short (6 mon).

  9. edhopper commented on Aug 17

    The Myth of the Buyers Market.
    Last year sellers asked outrages prices for their homes and made buyers beg.
    Now sellers are asking the same outrages prices, but are humble and conciliatory.
    This does not make it a buyers market.
    When homes are selling at real valuations based on affordability and historic means (which is 40% – 70% below current prices) THEN it will be a buyers market.

  10. S commented on Aug 17

    Not sure if you all saw the release from the National Association of Realtors that came out Tuesday. The NAR claims the national median single family home price increased 3.7% in the second quarter.

    Interestingly, 37 of the 151 statistical metropolitan areas reported year over year double digit price appreciation.

  11. Craig H commented on Aug 17

    Am I the only bearish trader here who is loving this rally?

    I didn’t think I’d get another go around with AMD over 20 and they’re getting it close to 25. And who thought we could have gotten another shot at AAPL at 70 (fingers crossed for 75) this year?

    And how nice of them to take the homies up when they’re due to begin their next round of earnings warnings in a couple of weeks.

  12. Barry Ritholtz commented on Aug 17


    I totally agree – anytime you get to put ’em out higher is a gift!~

  13. Alaskan Pete commented on Aug 17

    A/D has been fading on this rally since the beginning, and the “leadership” has been what? Homebuilders, retail, semis, tech…Meanwhile, over in the adults’ pit, yields are falling.

    On the positive side, the hi/lo on the Naz has turned around.

    Doesn’t exactly look like the stuff sustainable rallies are made of. (Yes, that is improper grammar)

  14. Blissex commented on Aug 17

    Reposting here part of a previous comment about a BusinessWeek article with comments on the numbers by the NAR:

    «The housing market turned in one of its worst performances in years, with existing-home sales falling 7%, to an annual rate of 6.7 million in the second quarter, according to data released on Aug. 15 by the National Association of Realtors. The results show a clear bifurcation in the market. States that had seen a big run-up in home prices are experiencing the most dramatics sales declines, while markets with strong economies and lower-cost housing are still seeing sales increases.
    “There’s a lot more merchandise and tremendous amounts of price reductions,” says Phyllis Haber, a realtor with Prudential Douglas Elliman on New York’s Long Island. “It’s crazy. It’s like someone waved a wand and everything changed.” New York saw sales drop 4.8% year over year.
    The big losers include California, Nevada, Arizona, Florida, and Virginia. All of the states saw sales fall by more than 20% from the same period last year.»

  15. Bob A commented on Aug 17

    the home prices problem… like a carelessly discarded cigarette butt smoldering in a pile of pine needles in a forest that hasn’t seen rain for months

  16. S commented on Aug 17

    I’m sure this from PIMCO won’t escape the bears attention:

    “In the first quarter of 2006, Freddie Mac data showed that 88% of refinancing was equity take-out refinancing, which is about the highest it’s ever been. Even more interesting, and something we’ve never seen before, was the fact that in more than 50% of the equity take-out refinancings, the homeowner refinanced into a higher rate to take out equity. So people continue to literally use their houses as an ATM machine.”

    OMG: 50% of the people refinanced into HIGHER rate mortgages? They can’t all be strapped for cash due to catastrophic medical expenses or whatever. To finance a remodeled kitchen or Caribbean cruise? Scary.

  17. Mike_in_Fl commented on Aug 17

    If you really want to see something scary, check out what the building permits data looks like in chart format (I posted it at my blog). It’s basically an unbroken, 15-year uptrend, followed by a swan dive the likes of which we haven’t seen in ages. Yikes!

  18. FinanceDork commented on Aug 17

    Re: The 50% refi into a higher rate – This # could reflect people refinancing from a low teaser rate thats about to reset. obviously the rate is going to be higher on a Fixed or more conventional mortgage.

  19. Bob A commented on Aug 17

    Some people are still refinancing because values have indeed still gone up in the 1,2,3 years since they purchased and they are simply taking out more equity over what they paid and what the current value is. But many, if not most of them, are failing to consider the possibility they are very likely soon to go underwater on their new LTV. And in many cases, as with people I know personally, the money is being taken out to pay off credit cards and bills for PRIOR spending in excess of earnings. So the money being taken out now does nothing to help the current economy. Of course they can still spend on the credit cards again now that they’re paid off.

  20. glenn_in_MA commented on Aug 17

    Let there be no doubt, when the chickens come home to roost, and they will, there will be a lot of miserable Americans….a consumer-lead economic system based upon asset appreciation and financial slight of hand can only last so long.

  21. Alaskan Pete commented on Aug 17

    BobA: I suspect you’re right, but they aren’t paying down those credit cards too much…look at the revolving credit spike last month.

  22. Mike commented on Aug 17

    Hurry to this site before Mr Watts removes his gaffe: You can read all the great advice for agents: “Please do not put a “price reduced” banner on your listings, and if you have one up, please take it down. It “falsely” advertises to the neighborhood that prices in the area are going down.” Here’s another: “If you have a listing where there are other (or many) for sale signs nearby, I would recommend that you call the other agents and see how many of them will remove their signs from their listings. At the very worst, rotate your signs until one (or more) of the listings sell, then make sure it has a sold sign on it!” Priceless advice. (via

  23. GRL commented on Aug 17

    OMG: 50% of the people refinanced into HIGHER rate mortgages? They can’t all be strapped for cash due to catastrophic medical expenses or whatever. To finance a remodeled kitchen or Caribbean cruise? Scary.

    No, to put down a nice, healthy down payment on a rental property once the market has bottomed.

  24. teddy commented on Aug 17

    What if the stock market crashes again, this time because the housing market is in free fall, and interest rates go down big time? In most of the nation, the real estate market exploded up immediately with the last crash. And how long does it take to call the laid off real estate agents back. And the mortgage brokers are still fairly busy. So the real estate market comes back because it’s what drives our present economy. And what if oil prices collapse because of the housing market? Housing is starting to trade more and more like stocks.

  25. Blissex commented on Aug 18

    «What if the stock market crashes again, this time because the housing market is in free fall, and interest rates go down big time? In most of the nation, the real estate market exploded up immediately with the last crash.»

    What caused the housing explosion was not the crash in itself, but Easy Al reacting to the crash by cutting rates fast and hard as you say, and the expectation that he would do so again.

    The legendary Greenspan Put; but as the name says, that a big, hard, fast interest rate cut follows a crash is not a law of nature: it was Greenspan’s gift to investors.

    Now the big question, and I am being repetitive, is What Would Bernanke Do? A Greenspan Put to bail out investors or a Volcker Squeeze to crush inflation?

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