Economy poised to shake off housing slump (except Lennar)

The WSJ reports that the U.S. Economy is poised to shake off the housing slump and regain momentum by year’s end. That’s the  positive economic consensus that has formed as we begin the New Year. (see WSJ: Economy Poised For ’07 Rebound, Forecasters Say; and NYT: Economists Cautiously Optimistic About 2007)

Hardly any of the dismal scientists expect Housing to be an appreciable drag on economic growth. Indeed, quite a few observers believe that the Housing sector has bottomed: Last week, the WSJ had two separate very optimistic columns on the subject:  End of Housing Slump Seems to Be Drawing Near (free) and Home Sales Bode Well for Big Picture (no pun intended).

The fascinating thing about these articles is that included charts that seem to belie the content of the column: I read these charts and simply do not reach the same conclusion as the author. As we discussed Saturday, sales remain in a downtrend, with inventory still near record levels:


Charts courtesy of WSJ


Speaking of stabilizing Housing, since the Bottom is already in, I wonder what to make of this pre-announcement by Lennar, the  $8.3B homebuilder. This morning, they released preliminary numbers for the quarter ending Nov. 30 — and they are a doozy:

"Lennar Corp., the fourth-largest U.S. homebuilder by revenue, will post a fiscal fourth-quarter loss after taking a pretax charge of up to $500 million to write down land it no longer intends to buy.

The loss in the three months ended Nov. 30 will be 88 cents to $1.28 a share, the Miami-based company said today in a statement.

When the
company released its third-quarter results in September, Lennar warned
it expected below-forecast earnings of $1 to $1.30 a share. Wall Street consensus was for lowered to $1.07, Not counting the $1/2B writedown, the projected fiscal
Q4 earnings are 70 cents to 75 cents a share.

"Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery,” Lennar Chief Executive Officer Stuart Miller said in the statement.

I am once again forced to ask the question: You call this a bottom?


On a related note, here’s a multiple choice question: Who is sleazier, Lennar releasing the news this morning, or the SEC, waiting until the day before the Christmas vacation to back away from their previously announced executive compensation disclosure plan?


Home Sales Bode Well for Big Picture
Second Consecutive Rise Points to Limited Fallout From Market Slump in 2007
December 29, 2006; Page A2

Lennar to Post Loss on Charge of Up to $500 Million
Peter Woodifield
Bloomberg, Jan. 2  2007

End of Housing Slump Seems to Be Drawing Near (free)
Signs of Stability Emerge In Mortgages, Home Sales, Buoying Economic Prospects
December 28, 2006; Page A3

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What's been said:

Discussions found on the web:
  1. Mike S commented on Jan 2


    Do you know ECRI has flipped bullish and is calling for a soft landing? That’s nothing to sneeze at. ECRI has a great record of predicting the US economy.

    And Paul Desmond is also bullish for 2007.

    Oy VAY! Get long & stay strong ;-)

    The market climbs your wall of worry.


    BR: ECRI never called for a recession — they have been consistently in the soft landing camp . . .

  2. anon commented on Jan 2

    ECRI has a great record of predicting the US economy.

    Didn’t it take them until March 2001 to turn bearish last time around?

  3. Bob_in_ma commented on Jan 2

    If this is a false bottom and housing falls off in the spring, outside of one comment from Robert Toll, no one will be able to point a finger at the builders for providing false hope.

    So far, the predictions for a bottoming out are based totally on an optimistic outlook, and in ignorance of the data.

    They may turn out to be correct, but if they are it will be blind luck.

  4. Leisa commented on Jan 2

    HOV was the first to have these writedowns; now Lennar. Has Toll Brothers announced any yet?

  5. wcw commented on Jan 2

    Ah, LEN. I am satisfied to see. Wonder if the market rallies the stock on the news. HOV wrote down timely, imo, since management still owns much of the stock. Might as well be honest. TOL may not have as much to write down, as its financing style seems to be less aggressive. They haven’t been on my list, I could be wrong.

    “Long and strong” is a phrase that immediately makes me want to fade whatever the commenter bought. Despite the temptation, I’ll stay net long, but I am happy I went into the holidays short a few things in refining and homebuilding.

    Even a soft landing, still IMO the more probable outcome, is going to make for an upwind to companies levered to consumption. Too bad the ISM is delayed for Ol’ Do-You-Like-Nachos, or we’d have another data point.

    FD: short LEN, underweight US, net long equities

  6. Steve commented on Jan 2

    So, since the home building industry is now dominated by big players, much more than say 1995. Are these players (Toll, Lennar, etc.) better at managing inventory. That is have they also learned from Cisco and Walmart and can slow their inventory build up much quicker than say a hundred small builders?

    If so then the quick flattening of inventory would be the expected outcome. I don’t know if its true, but I wonder what the ramifications are if it is.

  7. ECONOMISTA NON GRATA commented on Jan 2

    I do not see how it is possible for the housing market to be bottoming out so quickly. However, I’ve seen stranger things happen.

    I just don’t think so. Oh well they’re the “experts”…


  8. theroxylandr commented on Jan 2

    This market is running 6 months without any corrections. Maybe it will not turn bearish, but it has to shake weak hands.

    Ah, there is no weak hands anymore? I suppose when you can borrow money for 1% abroad how you can be weak?

    The age of terminators…

  9. advsys commented on Jan 2

    As someone I was reading this weekend said. “If you think this is going to be a soft landing, I do not want you ever to be flying my plane!”

    The data that comes out is very contradictory which must drive many folks crazy. It is very easy to fall into a trap of believing the ones you want to hear and ignoring what you don’t.

    Welcome to the real world. Business leaders find themselves in this kind of situation all the time. They solve this in two ways.
    Remove personal biases as much as possible and look for ways to validate from external sources or conditions.

    For example. Do not trust yourself to look at the data rationally if much of your net worth is tied up in real estate. You are biased. Put the data in front of some person you know who has no ties to real estate. See how they read the numbers.

    The govt or industry numbers come with very little in the way of consequences if they are wrong. However, in this instance SarBox is a very very strong influence on the publically traded companies to provide the more reliable data. So, when they report cancellations are running over 30% I believe them. When they report that incentives and freebies are running at over 10% per home, it can only mean that prices are not really rising.

  10. wcw commented on Jan 2

    The homebuilding is not dominated by public builders. It is still 3/4 private. As for inventory, at the UBS homebuilder CEO panel back in November, BZH’s CEO said, “[t]he 75% of the business that’s still in the private hands, it’s in their interests to keep drawing down their bank lines, and to keep doing that they have to keep building… Currently, I think they’re still pushing inventory into the market..”

    Months inventory, true, is lower than it had been at its worst points in the past — but that may, as everyone’s favorite anonymous housing bear Calculated Risk notes, be due to “the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years..”

    If instead of comparing inventories to sales, you compare them to owner-occupied units, the current high level really jumps out at you.

  11. GerryL commented on Jan 2

    LEN has been one of the most aggressive builders with rebates. I have read where other builders have complained about LEN’s
    rebates. What does it say if LEN isnt seeing a bottom even with their aggressive pricing?

    I also wonder if the large rebates the builders have been offering is the reason for the so called stabilization. Is this stabilization or have they just stolen from future sales?

  12. glenn_in_MA commented on Jan 2

    “ECRI has a great record of predicting the US economy.”

    Anon asks – Didn’t it take them until March 2001 to turn bearish last time around?

    No. ECRI was warning of a recession as early as September 2000. I track their WLI very closely. As for current conditions, they have warned of nothing more than a slowdown.

  13. anon commented on Jan 2

    No. ECRI was warning of a recession as early as September 2000. I track their WLI very closely. As for current conditions, they have warned of nothing more than a slowdown.

    That’s still just a 6-7 month lead time, and wouldn’t necessarily preclude a Q3 or Q4 recession… no?

  14. Ffredd B commented on Jan 2

    Anecdotal data points re “improving” RE:

    1. Owner occupied and for-sale housing being taken off-market due to ongoing lousy conditions — a factor in the otherwise rosy-appearing “reduction” (aka slowing growth of) stale inventory.

    2. Ongoing larding-on of “freebies” by builders desperate to move inventory — this stimulus has to lose its effectiveness

    3. Property tax shock amongst new home buyers who almost immediately try to sell out but are on the hook big-time

  15. DD commented on Jan 2

    A new low for Greenspan, sleeping at a state funeral.

  16. Mike commented on Jan 2

    Didn’t we all scoff at the builders’ bullishness back in ’05? The insider selling was worth a million words. But now that they’re all playing Chicken Little, we’re taking it as gospel? Personally, I thought the denial phase was way too short – almost nonexistent – and then they all seemed to change their tune in unison. Sorry if I’m led to believe all they’re doing is just completing the sandbag cycle. Be on the lookout for increased buys over the next few months. Money bets are the only thing we can believe out of these guys.

  17. winjr commented on Jan 2

    “No. ECRI was warning of a recession as early as September 2000.”

    Could you provide a link to this?

  18. Richard commented on Jan 2

    Lennar annoucment is backward looking. News is already baked into the cake. I do agree inventory is still too high to say for certain the worst is behind us.


    BR: I’m not so sure this was already “baked into the cake.” If it was, then you must expect LEN will open flat tomorrow.

    If it opens down, then that means this announcement was actually new info and the news wasn’t baked in.

  19. Brian Mihalic commented on Jan 2

    I’m really amazed that none of the economists looking at housing seem to be paying any attention to the lending environment. Subprime lending is changing, and it looks like the loose standards are finally tightening. What will happen to this “stabilization” of the housing market if the pool of buyers dries up because liar loans are no longer so easy to get?

  20. glenn_in_MA commented on Jan 2

    Anon, yes I agree, I’m certainly not ruling out a recession in 2H07…but I’m not counting on one either.

    Winjr, not sure I can provide a link but I’ll see what I can dig up.

  21. Dave C commented on Jan 2

    As more and more data comes out the worse I feel about the economy. My wife calls me an apocalyptic bear, but I see some many faults with the happy news. I never thought of myself as pessimistic, but this AP article makes me mental (it’s also about how housing will draw down the economy this year, but everything is great.

    Highlight: “The recession in the housing market does not seem to have had much of an impact on the consumer,” he said. “The bad news on housing has been offset by good news on wages, jobs, and the stock market.”

    My take: The consumer spends by treating their home as an ATM. People tend to stay in their homes for fewer than 7 years. When they cannot convert those to liquid assets, then they are stuck. The boom made for easy money that consumers used. Three things have happened since then: bankruptcy reform means it is near impossible to declare personal bankruptcy. 2) Exotic loan instruments that are resetting to the tune of billions (trillions?) this year, next, and 2009 with hikes in short term rates, wiping out discretionary spending. 3) Real wages not going up but going down (take the IRS data on wages, add inflation for the last few years and your get this: 2000 4.2T, 2001 4.2T, 2002 4.4T, 2003 4.5T, 2004 4.6T. Actual for 2004: 4.4T, 200B less than inflation adjusted 2000 data). Pah!

    So, my scenario is this: consumer tightens, no money with their spigot off and their loan resetting with the added problem they can’t refinance or sell their albatross. The Fed is painted in to a box and will try to keep the economy going with rate drops, but will cause inflation and a drop in the dollar as our friends in China, Japan, and Saudi Arabia buy Euros for the better return. Low job rate is a myth in the types of jobs being created. With real wages down, low unemployment should skyrocket wages, but since these jobs are service jobs then there is no wage increase. M&A will be big this year as the only real money will be made in combining assets and decreasing bottom line costs – which will shoot up unemployment. The US government burdened with trillion dollar deficits, a debacle with drug benefits, and problems with Social security/medicare on the shifting US demographic and a very expensive war will try and cut the spending free-for-all that has been the last five years. Taxes will go up.

    Then again, everything is fine according to everyone I read. I’m going to go stop worrying about things I can’t control :-)

  22. Lord commented on Jan 2

    I don’t see how anyone can say housing is bottoming unless prices firm. More sales by price reductions just says there are impatient early bird buyers, probably ones that have waited the last several years for their “opportunity”.

  23. glenn_in_MA commented on Jan 2


    The following series of articles written by Anirvan Banerji (director of research for the Economic Cycle Research Institute) and published on TSC over the period from Sep 2000 to April 2002 is the best I can offer for the “link” you requested. I believe all these articles are available on the free site and are available for public viewing.

    It’s a lot to read, but gives a clear idea of what ECRI was thinking starting in the Fall of 2000. Note the warning in the last paragraph of the Sep 2000 article (first link above). The recession did not exactly play out as they were originally thinking, but the early warning was there.

  24. Teddy commented on Jan 2

    Has anything changed since Hank and Ben visited China? Are the Chinese going to now hoard less copper, oil, and gold and hoard more US stocks? Forget about public and private home builders, home building is now dominated by Fannie and Freddie, and when you are talking trillions, that’s big business. How much longer can the US economy run on plastic whose debt limits have been expanded again and again in the past year? This economy requires LOWER interest rates for the housing market to bottom. Is that what the markets are telling us? Inflation is slowing, but it is far from dead, especially with worldwide central banks inflating their money supplies. No,it’s called stagflation. And if the Fed lowers interest rates, what happens to the dollar? Will a giant hedge fund in the sky suddenly start taking out loans in Euros, Swiss Francs, Yen, and Yuan and start cashing them in for US dollars in order to buy US stocks, bonds, and mortgaged backed securities? We shall see.

  25. vfsv commented on Jan 2

    “I also wonder if the large rebates the builders have been offering is the reason for the so called stabilization. ”

    We agree, except we would call it an “alleged stabilization.” Rebates & “free” upgrades are definitely prevalent:

    A new piece on resales is coming out tonight (Tuesday). In short, “investors” are still in denial…

  26. Mike_in_FL commented on Jan 2

    Brian — I’m definitely watching the subprime lending market. And I’m noticing that yet another relatively large subprime lender (Mortgage Lenders Network) is reportedly no longer making new loans … and that one of the first to get into trouble several weeks ago (Ownit) is now filing for bankruptcy protection. Some links and more comments are at my blog. I think we are absolutely due for more credit tightening, which will definitely impact housing demand at the margins.

  27. Eclectic commented on Jan 2

    You’re driving down a long lonely little-traveled road that you’ve never been on before. In fact, you haven’t seen another car in either direction in over an hour.

    There are 4 members in your party, including you the driver. It’s night and cold outside.

    Suddenly you notice you haven’t been paying attention and the gas tank is registering near the empty mark and the needle is almost on the mark.

    As you reveal this information, with some uncertainty and concern in your voice, it quickly gets the attention of your passengers who’d been near slumber as the miles were passing.

    There’s a quick minute or so of pondering this tenuous situation that takes place, and then the opinions of your passengers begin to make their way to you in rapid fire.

    One of your party suggests there was a gas station just passed about 20 miles back… and says, “You might be able to make it if you turn around now… should be enough gas to get there.”

    You seem to remember that station, but aren’t sure you remember how far it was behind, and, anyway, there’d been a sign that had said it would close about 30 minutes after the time you passed it, so you’re not so sure you could make it back before it is in fact closed for the night, whether you had the gas to get back to it or not.

    “No!” says another, “if you turn around, we’ll run out of gas because that station we passed was more than 20 miles back, and, even if it’s only 20 miles, we don’t have enough gas to even make the 20. Keep going… maybe there’s a station up ahead soon,” he says, but with a worried tone.

    Your own thoughts plus the conflicting information from these first two opinions is now really building a powerful source of internal conflict. What to do?

    But just as quickly you hear “Yeah, he’s right,” says the 4th member of the party, cheerily referring to the second opinion, “and I’ve been down this road many times before and there’s a station that’s only about 10-15 more miles… I’m pretty sure of it… and we’ve got plenty of gas to get there if you don’t turn around… tanks are never really on empty when they say empty… always at least another 5 gallons for reserve!… we’ve got enough gas, I’m sure, so just keep going… everything will be fine!”

    His veracity and tone appear to be so optimistic that, hearing this optimistic news, the other two join in and agree with his recommendation and urge you to follow it, and the mood among the 3 of your passengers is now much more optimistic about avoiding a possible gas-out and corresponding long cold walk in the dark.

    But, how do you, the driver, feel now?… Are you more or less optimistic because of what has been said to you?

    Has anthing changed about your situation?… You’re still almost on empty on a cold dark night and have rather little assurance, even now, that you could make it to either the station that’s behind you or the one in front of you.

    Do the two stations in question (assuming the yet unknown station exists where your passenger says it does) really care about how far they really are from you?

    Does the gas in the tank care?

    Will the optimistic attitude that has developed among your passengers change anything, either way?

    Can willfulness alone prevent you from running out of gas?

  28. brion commented on Jan 2

    there may be a bottom in RE but the market still looks like ass to me.

  29. winjr commented on Jan 2

    Glenn, thank for taking the time to supply the links.

    From Glenn_in_MA’s first link, published by ECRI on 9/11/00:

    “The fact is, throughout the last 50 years, there has never been a spike in oil-price inflation of this magnitude without a subsequent recession…

    “What it adds up to is the possibility of a sharp slowdown in consumer spending, possibly even the sort of spending decline that triggers a recession.”

    So ECRI called for the possibility for a recession (which was to come 6 months later), but I think it’s noteworthy that ECRI completely missed the boat on “why”.

    ECRI foresaw a consumer-led recession caused by an unprecedented spike in energy prices. What actually happened, though, was we got a business-led recession caused by an unprecedented inventory build-out in the internet sector.

    ECRI didn’t see this, though a small (but vocal) number of industry watchers (Bill Hickey, e.g.) saw it coming from a mile away.

  30. ac commented on Jan 2

    The ECRI completely blew the 1990 recession however and were bullish up to the summer. Beware of false leads.

    The housing bust is a different kind of beast and we have not had one in 15 years.

  31. Barry Ritholtz commented on Jan 2

    ECRI is very good, but I am not so sure that their methodology will recognize and account for how unusual the Housing input is this time around . . i

  32. glenn_in_MA commented on Jan 2

    ECRI is one of the bigger more frequently used tools in my tool kit…but I’ve been wondering lately about the point Barry just made.

  33. someguy commented on Jan 2

    “ECRI is very good, but I am not so sure that their methodology will recognize and account for how unusual the Housing input is this time around”

    Ditto !

  34. fred hooper commented on Jan 2

    Don ya tell no one, but I gots a backup can in ma trunk, so I don much care what them other fellas are sayin. Either way, when yous been part o’the walkin E conomy fer so long, well, let’s just say it don trouble me too much iffen I gotta get a bit more chickensh1t on ma boots. Them bankin fellas don bother me none too, printin them fancy paper notes and callin em money. Either way, ma coins ain’t goin nowhere iffen I don wan’em to, and ain’t no way I be runnin out of gas on a dark road in da middle of da night. I learnt my lesson and the gas cans can prove it. Yes sir.

  35. TAM Money and Finance commented on Jan 2

    Lennar Posts Loss

    Lennar (LEN), the big home builder announced a fourth quarter loss after it wrote down property investments and relinquished part of its stake in a company that controls 15,000 acres in southern California. Barry Ritholtz wonders aloud, …

  36. Rod_Serling commented on Jan 3

    Thanks, eclectic. That’s a nice little short story there. I’m scared out of my wits looking for gas and Robert Redford keeps trying to flag me down for a ride.

  37. Econbrowser commented on Jan 3

    December auto sales

    Auto sales data released today look just great, as long as your name is Toyota.

  38. Eclectic commented on Jan 3

    Well, Fred and Rod…

    I greatly appreciate the recognition of your kind selves in the matter of my tiny parables that are intended to sometimes amuse and entertain, often to cajole, persuade or illustrate, occasionally to plead and, when needed, to sting and parry.

    Float like a butterfly; sting like a bee.

    BTW, Fred, Yew need’duh larn yo-self jiss how’da punk-shy-ate better’n-nat iffin yore a-wontin’ to get’cho seff ahead innis ole world, don’tchee know.

  39. The Big Picture commented on Jan 10

    Phantom Rebound in the Housing Market

    Dan Gross had a good Sunday Times piece on a favorite subject of ours: The Phantom Rebound in the Housing Market. Not surprisingly, it was on cancelled new home contracts. Which brings us to this morning’s news:D.R. Horton orders tumbled 23%, and cance…

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