Earlier this morning, we discussed some of the more hallucinogenic forecasts of the NAR (Home Prices Seen Rising in ’07).
As if on cue, a few more HomeBuilders show us what a bottom looks like (or not):
• M/I Homes Inc. (MHO) Thursday said new contracts for the quarter ended Dec. 31 fell 61% from a year earlier to 353 homes. The Columbus, Ohio-based home builder said its cancellation rate rose to 63% in the fourth quarter from 27% in the year-ago period, and from 42% in the third quarter. More buyers have been backing out as prices fall and as they experience more difficulty selling their existing homes.
• Meritage Homes Corp. (MTH) said net orders fell 42%, cancellations hit a record high, and the company will take land-related writedowns in the fourth quarter as Meritage, like others in the sector, struggles with a crumbling housing market. The Scottsdale, Ariz., home builder reported net sales of 1,201 homes valued at $356 million, down from 2,072 orders valued at $723 million a year earlier. The weak sales were largely attributed to a surge in cancellations by jittery homebuyers worried about the volatile housing market. The company’s cancellation rate soared to an all-time high of 48% of the company’s gross orders in the quarter, up from 32% a year earlier.
• Palm Harbor Homes Inc. (PHHM) warned it expects to post a loss in its fiscal third quarter ended Dec. 29. Chief Executive Larry Keener in a prepared statement said the manufactured-home industry "has continued to decline through the second half of calendar 2006, resulting in the weakest year for total factory-built housing shipments in history." The Dallas company said it projects unit shipments for factory-built housing for 2006 were 156,000 to 158,000 homes, about a 17% decline from the prior year.
I got your bottom right here.
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Sources:
More Struggling Builders Warn Market Hasn’t Turned Yet
John Spence
DOW JONES NEWSWIRES,January 11, 2007 12:50 p.m.
http://online.wsj.com/article/BT-CO-20070111-710984.html
Two more home builders say times are tough
John Spence
MarketWatch, 3:07 PM ET Jan 11, 2007
http://tinyurl.com/uhyaq
I don’t want to be a smart-ass,but isn’t this info widely accepted at this point. For now,this news is in the housing stocks. They’re mostly packing 5-15 days of short interest for the past 6 months. It’s last years trade. No position here.
I don’t think it is. The big public builders are down 10-15% at most (and in the case of PHM are almost flat) over the last two years. That suggests their prospects are very slightly weaker than they were in Jan 2005. The data, on the other hand, are very much worse than in Jan 2005.
Sure, it was last year’s trade, but moves like this develop very, very slowly. Look at builders on the way up: long homebuilders was the trade of 2000. And 2001. And 2002. And 2003. And 2004. And the best trade of all was to buy in 2005, ride up the short squeezes, and get out in the fall.
The two major data points I do not see reflected in the prices are 1) the likelihood that sales rates for new homes have to drop another 15% to come in line with population growth, drop lower if you want to work off inventory, which brings me to 2) since sales rates have been so high they disguise what is a very ugly inventory picture, especially for-sale-only vacancy rates which are at forty-year highs.
Now, I am not short in size; I covered my shorts from last fall on the way down, missed the bottom, and started fading the recent rally only in the last month or so. I might cover again if the market tells me to get out — I don’t like fighting the tape — but unless something dramatic happens to put bodies in those empty homes, this short will be the trade of 2007 just as surely as it was of 2006.
I have posted this before but it still confuses me. Now that we are well into the housing slowdown shouldnt cancellations start slowing down? I understand a year ago people were surprised by the slowdown and cancelled. Now that the slowdown is well known why do they keep buying and then cancelling at such an amazing rate?
You may be right,but what seems out of sync from a trading perspective is the 1-way analysis that is focused on here. I’m sure,you have thoughts on why your trade may be wrong or what would force you to cover.That’s the way good traders think! It’s more important to know the other side of the trade than your own side. I never see any mention of what could go right in housing. So if it is a one way trade,why isn’t the writer (Big Picture) short?
The HB stocks are so overpurchased by institutions that the supposed market float is misleading. Any stength will be erased by the institutions reducing exposure.
Well my Cousin at a condo in Florida was layed off because of “lack of business”. People have stopped coming essentially.
I have been through bubbles before. I understand that to some extent they are a part of human nature.
This bubble seems to be deeper and wider than anything I have ever seen before. I find it quite frustrating. After all, one can’t really have a turn around until you hit bottom. So, it is actually to the NAR’s benefit to stop with their crap. Same is true for all the govt. data etc.
I do have to give BR kudo’s here. He posted many moons ago that this would be a long slow trip to the bottom. I did not believe that this was possible at the time. I have clearly learned something new. It is not only possible, it was I guess predictable.
And let’s not forget the lenders folks.
Remember, Americans don’t buy homes… they simply don’t have the cash for such monstrous transactions. Lenders buy homes and give the “homebuyer” conditional ownership of the property while the loan is gradually paid off.
Now with the sub-primes popping off one by one, and foreclosures continuing their relentless rise, the lenders might decide they’re through buying homes… at least without draconian, long-forgotten provisions like down payments and income qualification.
People might suddenly come to realize that their illusion of the housing market being a market between “homebuyers” and “homesellers” is just that.
Without financially solvent or emotionally unmolested lenders you really have no home buyers at all. Or very few in any case.
I am short a handful of homebuilders and building supply companies, and I have to say I am surprised by how much bad news is apparently “built in”. The values of these companies have steadily increased through all of the bad news. I expected that a month or two of bad news was built in, but it seems that more than six months worth may have been built in. At what point does the market start to be surprised by the magnitude of the downturn that most seemed to think wasn’t going to be this big or bad? Fortunately my positions were small in relation to my total portfolio since it was my first attempt at going short, but I am wondering how much more bad news the prices can absorb while saying “yeah, we expected that, no problem”.
“I got your bottom right here.”
Barry, this statement gave me goosebumps!
I simply can’t accept the theory that “the worst is over” for housing … not yet. I’m with BR on this one — we’ve got a ways to go in this downturn.
I’ve posted on my blog many times about the enormous magnitude of the inventory overhang built up during the boom. The supply of both new and existing homes for sale has more than doubled in the past 5+ years, leaving us buried under the biggest mountain of new and existing homes in U.S. history as of July. Granted, we’ve come down ever so slightly since the July peak, but I’m talking about a couple percent. After a 100%+ increase, that’s chump change.
On the existing home side, a good chunk of this supply decline is pure seasonality. EVERY year, supply declines or levels out once the spring/summer selling season passes. That’s because sellers know buyers aren’t that active during the holidays. Without fail … even during the midst of the boom years … supply starts climbing again in the Jan/Feb time frame. So I believe it’s completely disingenuous for groups like the NAR to cite the recent MINOR decline in supply as a sign that we’re past the supply peak.
And on the new home side, the inventories are dramatically understated because previously ordered homes aren’t added back to the inventory count upon cancellation. And reports out of D.R. Horton, M/I Homes and others make it abundantly clear that cancellation rates are much higher than normal. Things are downright awful in some places, including my neck of the woods. If you look at the regional breakdown of M/I’s orders, you see they had NEGATIVE 50 net orders down here in FL, versus 409 a year ago.
It will take until at least 2008, in my view, to bring supply and demand more closely into alignment. And I doubt we’ll see a true real estate bull market again for another couple years beyond that. The history of real estate cycles is that they are long, drawn-out affairs.
One other thing worth mentioning: Anyone notice how heavy the bonds have been trading lately? Between the BOE surprise rate hike and the dismal TIPS auction today, bonds couldn’t get out of their own way. They’ve been in a general downtrend price-wise/uptrend rate-wise for several weeks now. Should this continue, it’d be another obstacle for a housing market “bottom.” Last but not least, there’s the nascent credit tightening going on in the mortgage lending world. It will hurt credit availability at the margin and hence, reduce the pool of qualified buyers.
This is not “doom and gloom” … it’s not perma-bearishness … it’s just reality, as I see it. Reasonable folks can disagree, of course, but that’s why it’s called a market.
-Mike
http://interestrateroundup.blogspot.com/
Adding to Mike_in_Fl comments about sellers taking homes off the market at the end of the year. I am in Northern California and I am seeing homes that were for sale becoming for rent. That makes the inventory statistics look better but the homes havent been sold.
I also have a suspicion that more homes than usual were taken off the market at the end of the year because sellers are believing the NAR and others that the market is stabilizing and figuring they will get better prices in the spring. Many of these sellers will bring the homes back on the market in the spring. If I am right that will mean even more homes than usual will hit the market this spring adding to the existing glut of inventory.
I simply can’t accept the theory that “the worst is over” for housing … not yet. I’m with BR on this one — we’ve got a ways to go in this downturn.
Sorry to keep harping on the same point, but I’m seeing more people who are trying to look critically at the situation expressing uncertainty on where housing is going.
So once again I’ll submit that we have data that indicates that the housing market is virtually certain to continue downward.
Namely, we have data that shows:
a) Inventories are at or near historically record levels (with respect to existing households).
b) Foreclosures are rapidly increasing.
My insistence, in part, comes from living through a previous housing bust where such a situation preceeded disaster. But in addition, the data I’ve looked at so far suggests that no recovery is possible in such a situation.
Could somebody find a counterexample where a bottom or recovery occured in such a situation?
My suggestion is that there’s really no doubt. And that the following statement could be made with a great deal of certaintity:
There is no bottom or recovery in sight for housing while foreclosures are increasing with the current level of inventory.
I wish I had more time to investigate myself to put this question to bed… at least for thinking folks.
Many January 07 LEAP puts were purchased by those who thought the HBs would collapse by now. They bottomed in July, then the put writers had six months to vaporize all those contracts. My next catalyst for change in how the HBs react to news starts Monday Jan 22.
Courtesy of a post my wife made on a bubble-blog. Summary, look at cost to rent versus cost to own. Until affordability comes back to the market, it won’t be a bottom:
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Back in 2004, I began to believe that home prices in my area, Northern Virginia, had grown beyond anybody’s ability to rationalize it. Why 2004? Prices had grown so high so quickly that no homeowner I knew could buy their house all over again at those prices…not me, not my family, not my neighbors, not my friends. Our homes had jumped 120% in value over a five year period and incomes had not kept pace. If anything, we were paying more for self-funded retirements, health care benefits etc. than when we had purchased originally. Yet, most of us still felt like we had won the lottery. Can you blame us? Prices may not go up much more but they won’t go down right? Tell that to those of us who bought and sold between 1988-1996 and watched values dip. Some acted on that feeling of new found wealth and took out revolving HELOCS, others took out alternative (and risky) loans to buy bigger and better, some signed contracts to build houses certain their current house would sell, others bought additional properties as short-term investments. Too many breathed a sigh of relief and stopped worrying about their 401k balances. Lots of people just scratched their heads and did nothing. NoVa’s story is not unlike any of the hot market areas.
An online trip through our Fairfax County tax database shows houses jumping 50K-150K per year in 2003-2005. It didn’t take a rocket scientist to figure out that affordability would soon bite everybody. Want to clear a crowded bar fast? Just start talking about housing deflation in Northern Virginia circa 2005…you can just call me pariah. So, I started reading the media (still in positive spin mode) and following up by doing my own research on the sources they quote. Easy sources to access online include:
-First American/Loan Performance reports that 40-45% of all loans in NoVa were funded by alternative (read riskier) mortgage products in 2005 and first half 2006.
-National City/Global Insight tagged the DC area as 40% overpriced…they called us balanced in 2001.
-The Wall Street Journal/Loan Monitor (Smart Money – 12/2006) has us at 43% overvalued. These studies key off of median incomes/median homes prices.
-According to our county’s website, the median family income is $90K (2004) and 28% of residents make over $150K in family income. There are 0 (as in none) SFHs on our MLS available to the median income family. But heck, let them eat cake and live in condos.
-GMU’s Center for Regional Analysis has an eye-opening report dated July 2006 called “Definition of Moderate Income in Fairfax County” Under 15% of the current homeowners in one of the richest counties in the US has the income to buy our common garden-variety $750-800K SFH using the traditional 20/28/36 lending standard…we have an abundance of homes priced well over $750K. Our MLS has pages of homes in the $900 plus range. To quote the report “Home ownership has become out of reach for many Fairfax County households and as of 2005, households making 120% of income cannot afford to purchase single family housing in the county.”
-The National Association of Home Builders Housing Opportunity Index has us at a low 20% meaning that only 20% of the population can afford to buy the median priced home.
– Long&Foster’s and Weichert’s (our local powerhouse realtors) websites have pages of homes available for rent which are also for sale. Rents are way cheaper and those rents listed are quite negotiable. My favorite is one listing that says ‘rent for $3250, buy for $1.2 million”?!?!
I have a hard time believing that current prices in the DC area (particularly NoVa) are sustainable. How much will hold? Beats me. My personal opinion is that 2003 values will jumpstart the market. Maybe, the real reason our market has slowed is that the comps don’t yet reflect the market’s ability to buy. Maybe, you just have too many sideline buyers like me who no longer see a connection between price and value and won’t pull the trigger on a purchase until those elements come back in alignment. I can’t bring myself to spend close to a million bucks on houses that I played in as a child here.
But, you don’t ask a bunch of people who think and acted like they just won the lottery to hand back their tickets overnight. The Business Week article (see other thread) is right…the way down will be slow, sticky, and long. By a fluke, we sold in July 2005 at peak and cashed in our lottery ticket due to a job transfer. A year later, we’re back in the area renting one of those $800K homes for 40% less than it would cost to buy. I can’t see any other viable choice right now. But don’t pay attention to me. I’m just one person with an opinion. Use the media as a launching pad, do the research, draw your own conclusions.
Leisa,
Better your bottom than mine!
LOL.
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For example: “A significant portion of the OFHEO index,” he says, “is based on refinanced mortgages, not [solely] on actual market transactions.”
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link
Of course, the housing market has already fallen from the peak 2 years ago. It may not be the bottom, but it’s not at the top anymore, either.
Housing cycles generally take 7-8 years. I would guess that folks who bought a house in 2005 will get back to break even by 2013. And since this bubble was pretty large, maybe it takes a bit longer.
Something like that. Just a guess.
The huge housing bubble of the 1980’s in Canadian cities (Toronto and Vancouver, primarily), caused in part by a massive flight of capital from Hong Kong in advance of the repatriation of the colony, took well over a decade to work itself out. The situation was exacerbated by a crushing 1990’s recession in southern Ontario, by the way. Case in point was a gated subdivision built in suburban Toronto by then giant Bramalea Corporation. It was only half finished and half sold when the bottom dropped out in 1989. The actual residents had paid around $800,000 for their homes. The company that picked up the development from Bramalea’s bankrutpcy called a meeting of the current residents and gave them the good news – that the project would be finished so that they would no longer live in a construction site, and the bad – the finished houses, with no changes to the plans, would be sold for about $450,000.
It would be a couple of years into the new century before the originals would see any profit from their investment.
That’s how bad it can get.
But the dow is rippin higher… so can it be posited that the housing slowdown is just that, a slowdown with little effect on the economy in spite of all the schandenfrueuds that wish otherwise?
Barry, I believe much of the data you are relying on is a backward looking view of the housing market. I follow the San Diego and Sacramento housing markets as they were the first to slow and lead the national housing correction. Wallstreet analysts also frequently use Sacramento as a prognisticator for what portends other national “hot” markets. Here are five major reasons I believe Sacramento has or is close to a bottom.
1. Starts – The lower the starts the quicker we’ll reach an equilibrium of supply and demand, and pricing stabilzation, so any news about low starts is good in my opinion. Starts are 50-60% of peak years.
2. Interest Rates – I do agree that many affects of the housing slowdown have not completely shown up in the overall GDP numbers yet, still, we should escape recession in the first half of the year. This will set up a similar situation as 2001 where housing led the economy by about six months into a recession, interest rates plummeted and then housing came back stronger than ever in spring 2002. This will happen in a more tame fashion Q4-07 or Q1-08.
3. Job growth. Though I expect it to stall out temporarily in the first 6-9 months of 2007, many previously “boom” housing markets such as Sacramento currently have job growth that exceeds starts by a historically high margin that will lead to recovery by the end of the year or beginning of 2008 from pent up demand. From 2000-2005 Sacramento had a SFD permits to job ratio of about 1:1 and the marketed moved along nicely because of three factors 1) Strong local job growth of 2:1 for the late 1990’s 2)High job growth of the dot com and bay area 3)Falling interest rates. Those same factors are alligning again. Sacraemento had 23,000 jobs and only around 11,000 SFD permits in 2006, the bay area job engine is again heating up, and interest rates will fall. Similar patterns can be drawn for other boom markets.
4. Pricing. New home pricing is a quicker prognisticator of market stability than lagging indicators of resale median pricing on closed homes. Using Sacramento again as a indicator (since this market and San Diego led the U.S. into the housing slowdown they are quite relevant) new home pricing stabilized in the 4th quarter. Builders reversed the negative quarter over quarter trend in new home sales for the first time in two years. See Article here:
http://www.sacbee.com/142/story/106756.html
5. Resale Inventory. Resale Inventory is down 20-30% in many of those markets. Sacramento resale inventory is down 30% since peaking in August. There will be some gain in inventory with the spring season, but and upward trend in sales should negate an increase in months of supply. Six months of inventory will indicate “balance”. See this site for proof.
http://bubbletracking.blogspot.com/2007/01/tracking-sacramento-metro.html
Again, I believe you should be looking forward not in the rear view mirror.
For more data I have it posted on http://www.drbrightside.blogspot.com/
~~~
BR: I dusagree — there is still a long way to go before real estate bottoms . . .
Except for permits and sentiment, just about all of the housing data is backwards looking.
I do not see Sacremento as a precursor of national housing trends, but if you know of any studies that have conclusively demonstrated this, please direct me towards them.
As to your specifics:
1) Starts are merely one part of inventory, which remains at historically high levels;
Also, prior cycles have bottomed when new starts have fallen by 50% from their most recent peak — we ar enowhere near there yet.
2) Housing tends to lead the economy when rates are dropping; However, mortgage rates are at present relatively low, and are not a major impediment to sales.
3) By just about every measure this is the worse Jobs recovery since WWII. Perhaps that may accellerate, but we have yet to see many indications of a new jobs surge.
4) Prices Stabilizing? That Sac Bee article you refernced noted that “steep price cuts and giveaways that often totaled as much as $150,000 per house.” Fire sales, huge discounts and selling homes for marginal profits or even losses is hardly a sign of stablization.
5) Inventory down 20-30%? I don’t know where you are getting your data from, but inventory remains at or near record levels. And, let me remind you that in much of the country, it is still a few months before the Spring selling season begins.
All this is occurring prior to the sub prime resets hitting the markets. Many of the 2/28 ARMs that were sold to people in 2004/05 who really weren’t qualified/credit worthy will be resetting this year — thats estiamted as between 1-2 million homes.
The past 5 months we have averaged above 100k in foreclosures per mo. If this number moves upwards, you will know we have more trouble coming . . .
Lets see what happens when MTH reports earnings tomorrow after the bell.