Property Worsens: Beginning, Middle or End?

A few quick words on yesterday’s Housing data: Of course, it was god-awful. Despite the incessant bottom-calling by the clueless, spin-miesters, and industry insiders, we are nowhere near the end of the cycle.

If we are lucky, this is now the middle — as opposed to 2nd year of a decade long slump.

As to yesterday’s data — it was a mixed blessing. The manifest problems in Housing are twofold: Prices are too high, and inventory is too great. These are of course, related. Once prices come down further, the supply problems will begin to clear up. So the enormous drop in permits/starts is, perversely, a good thing.

Let’s go to the data: 

• New construction of homes in the United States fell 10.2% in September (seasonally adjusted 1.19 million units)

• The drop in housing starts was the 4th consecutive monthly decline.

• We are now ar the lowest level for new home construction since March 1993.

• Starts of single-family homes fell 1.7% to 963,000 (annualized); 

• Construction of large apartment units plummeted 34.4% to 228,000.

• Building permits fell 7.3% to a seasonally adjusted rate of 1.23 million — the lowest level since July 1993.

So there is no bottom anywhere in sight. The scary question is whether we are in the 5th/6th inning, or the 1st/2nd inning.

For a real good read, Dan Gross goes postal on Treasury Secretary Paulson: Dan claims that the subprime collapse didn’t bother the Bush administration until Wall Street bankers started whimpering: Protecting Paulson’s Pals.

Lastly, considering how much denial there was for the longest time, I found some of the Wall Street economists comments at Real Time Economic terribly amusing. This crowd has not yet begun to panic . . .

Housing Starts amd CompletionsStartscompletions


chart courtesy of Calculated Risk


New Residential Construction
(Building Permits, Housing Starts, and Housing Completions

New construction falls 10.2% to fewest housing starts since ’93
Detroit Free Press, October 17, 2007

Protecting Paulson’s Pals
Daniel Gross
Slate, Tuesday, Oct. 16, 2007, at 5:52 PM ET

Economists React: ‘Horrific’ Housing
October 17, 2007, 10:25 am

Standard & Poor’s Ratings Services Reviews Ratings on Certain U.S. Residential Mortgage-Backed Securities Issued in 2007

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  1. SINGER commented on Oct 18

    I hear alot of “Foreclosure Ads” urging people to get in on the great deals available now…My guess is plenty of people will “get in too early” before the bottom is in…

    BTW, in order to combat the massive price increases in food cigarettes and hospital care, I have taken to the following:

    eating “apparel” as source of nutrition…
    smoking “electronics”…
    hitting the “used car lot” for Medical Care

  2. W.Edwards commented on Oct 18

    The listing of Countrywide’s REO (foreclosure) inventory on their website continues to increase and appears to have accelerated over the last few weeks. They continue to add new listings at around 100 per day. Using this as a real-time indicator, a bottom has yet to be found.

    The way, asset-backed securities as measured by have dropped dramatically again over the last few days, credit spreads are starting to widen again. Credit crunch redux, anyone?

  3. W.Edwards commented on Oct 18

    “The way” ==> “By the way”

    I really wish there was a way to edit stuff that’s posted by numbskulls like me who don’t check what they’ve written closely enough!

  4. dblwyo commented on Oct 18

    Your readers might also benefit from CR’s earlier post on housing, recessions and (especially) the long-run price adjustments process:Housing Bottoms: Residential Investment vs. Existing Home Prices
    ( )

    If you read thru and think thru this post you’ll see that the timelags are enormous because housing is a very sticky market and the outlook would be for continued downtrends before flattening until ’10 ! At least in my interpretation.

    With Paulson just this week finally coming out and admitting the problem is much worse than public policy statements have implied maybe reality is setting in. Wessel’s Capital column in today’s WSJ is worth reviwing as well for those with subscriptions. It’s literally in only the last couple of weeks that reality (big R) is setting in.
    We have a long…long way to do.

  5. Justin commented on Oct 18

    It’s the bottom of the 2nd, with no outs!

  6. mh497 commented on Oct 18

    We haven’t had much of a price adjustment, really. So maybe we’re in the third inning.

    What’s gonna be real interesting to watch is how the Fed tries to kick start this thing if it goes on too long/deep. Bernacke doesn’t strike me as a 1% guy. But maybe Greenspan wasn’t in the early days either.

  7. dan commented on Oct 18

    BR, should the drop in starts and construction be viewed favorably as it is a signal the industry is no longer adding capacity to a saturated market?


    BR: I thought I wrote that above (para 3):

    “As to yesterday’s data — it was a mixed blessing . . . inventory is too great . . . So the enormous drop in permits/starts is, perversely, a good thing.”

  8. L’Emmerdeur commented on Oct 18

    Silver lining: the quality of most homes built in the last ten years is so piss-poor, they will either rot away or need to be demolished soon enough. Inventory problem solved!

  9. Mike G. commented on Oct 18


    I know that particular segment is in the toilet, but isn’t this all just dramatized a little bit because of the all time record breaking pace of the UP side in the previous few years?

    I mean, look at the graph you supplied. We appear to be a little more than half way to the historic low of the range (~ 900?) after an abnormally long uptrend that when all is said and done, didn’t even set a record on that upper part of that range. So we had a longer period of rising starts and completions which is being followed by a more rapid decrease than usual of those same metrics. I’m not saying that it’s great, but it appears to (so far) be well within the “normal” range for the metric. No?

  10. Justin commented on Oct 18

    Barry, not to change the subject, but what’s your opinion on this SUPER SIV?


    BR: I haven’t done all that much homework on it — yet.

  11. hocus pocus commented on Oct 18

    For detailed historical perspective, Chip Case’s papers:
    Peak to trough cycles have generally lasted four years. Three to go…

  12. Justin commented on Oct 18

    I remember hockey games at the U of Wisconsin, where the crowd would yell, siv, siv, siv, when the opposing team’s goalie would allow the puck in the net…how appropriate. This market should be close to 2003 levels at best!

  13. Stuart commented on Oct 18

    All one has to do is look at what the underlying cause is that is applying all the pressure, mortgage resets. Take a look at any chart showing the coming resets and we KNOW we are still only near the beginning. Q1 and Q2’08 are going to be where the pain threshold gets tested as one or more of the mortgage insurers to fails. Not to diminish the pain felt by hundreds of thousands of homeowners to date, but so far, this is nothing. People need to get the fact that we are still in the early part of working our way through the mortgage resets with the most severe months still in front of us.

  14. Leisa commented on Oct 18

    I love Sandra Ward’s interviews. Here’s something I wrote earlier:

    “I was cleaning off my desk, and I found an article from Barron’s (11.13.06) that I had printed out. It was Sandra Ward’s interview with Richard Arvedlund (Cyprus Capital Management). The title of the interview was called, “Recession: The Stage is Set”. In the interview, he felt that the preconditions for a recession were set because of the state of the housing market. Specifically, he stated that “Whenever housing starts and permits drop by the rates o decline that have been exhibited–10-20%–it has always preceded a recession.” He also notes that when housing leads the downturn (which happened in the late 70’s and late 80’s), it typically tends to last longer than people dream. He states that the average cycle is 3-4 years.”

  15. X commented on Oct 18

    A-Rod just cleared the bases in the bottom of the first.

  16. Owner Earnings commented on Oct 18

    WM, CFC, BAC, C, ETFC…I’d like to see what Q407 looks like.

  17. Michael Donnelly commented on Oct 18

    Just based on the relationship between NAHB Housing Survey and Housing Starts alone there is no way we don’t get Starts below 1.0 million by the end of the year 0.9 million is more likely.

    This PDF walks you thru the relationship between the two

    so yesterday’s starts number of 1.2 million which was bad, is by no mean the bottom.

  18. michael schumacher commented on Oct 18

    Welcome to yet another round of:

    “Oversubscribe the Repo”

    I guess the Fed is making plans for alot of shopping to occur this weekend- as the people who have no grasp of repo.s have “informed” me that thursdays are big because the shopping that goes on during a weekend so the brokers need alot of cash…..

    I bet they do….seems they need about 15X the amount the fed is “offering”……

    The fix is on…..


  19. million dollar watch commented on Oct 18

    Mr. Ritholtz,

    “…we are nowhere near the end of the cycle.”

    And what cycle would that be? The “Manias, Panics, and Crashes” cycle? Will you finally acknowledge this was a huge bubble NAZ style?

    Give me a ……. break.

    The only good part of this blog is when you steal material from others. Get a clue!


    BR: I may need to hire you. Occasionally, our firm needs to employ a professional asshole, and you fit the bill perfectly.

    I mean that in a sincere way: Let’s say I have corporate rectum needs — are you capable of fulfilling all of the technical requirements of an asshole for hire? (I don’t mean a lawyer — I have enough of those).

    Can you fill the needs of those who require an occasional extraordinary anus for business reasons? Cause if you haven’t had this chat with your guidance counselor yet, let me save you the 45 minutes.

    Your new profession awaits . . .

  20. michael schumacher commented on Oct 18

    Ok million dollar watch…..

    WHy don’t you tell us all what it is…..


  21. Stuart commented on Oct 18

    Million dollar baby, what is your problem.

    You haven’t contributed a bloody thing to this blog since practically day 1. All you do is sit back and bitch and ask questions of such stupidity that one almost has to believe they’re rhetorical. You ask what cycle is being referenced.. Hmmm…Lets see now,…

    1. “A few quick words on yesterday’s Housing data”
    2. “The manifest problems in Housing are …..”
    3. “supply problems will begin to clear up”
    4. “New construction of homes in the United States fell 10.2%”
    5. “The drop in housing starts was the 4th consecutive monthly decline.”
    6. “We are now ar the lowest level for new home construction since March 1993.”
    7. “Starts of single-family homes fell 1.7% to 963,000 (annualized)”

    Oh, ya, right. The trading cycle in postage stamps. Ya, that’s it. LOL

  22. L’Emmerdeur commented on Oct 18

    Story hitting the headlines about a Paypal money market fund blowup. Dotcom meets credit crunch – it’s a clash of the bubble monsters!

    Also, million dollar watch… what?

  23. John commented on Oct 18

    On the way home from work the other night I thought I heard Kudlow (on XM radio) mention he did not want the Fed to cut interest rates any further so as not to put any more pressure on the falling dollar…, thought the economy was in good enough shape… Somewhat interesting coming from him, in light of his rant’s for the “Shock and Awe” last month, and now given what the fed futures and the yield on the 3 month T-bill would seem to indicate… and that the problems in the Housing/Construction market have been known for some time.
    I’ll have to (make an attempt) to catch Cramer. It would be interesting to here what PeeWee’s take on the next FED move should be…

  24. commented on Oct 18


    We have many problems here in the U.S.A. and million dollar foreclosures in San Diego is minor in comparison to the erosion of the middle class standard of living.

    The middle class has finally reached the point where they are better educated and their next step is to be more active in voicing their concerns.

    They know that banks and insurance companies are in the business of making lots of money on “their” deposits and other service fees.

    They know that when a bank starts to fail the government will bail them out. And when a hurricane rips through the assets of the insurance company the government will bail them out.

    They also know that “the government” is just another word for “the taxpayer.” And in turn for the taxpayer bailout, the taxpayer faces increased fees across the board (to further help the very companies we bailed out to survive). So they can do it to us again and again and again.

    The middle class knows the upper class depends on it’s generosity, so their way of living at the top isn’t threatened.

    Without the rich, the middle class wouldn’t have jobs and they wouldn’t pay the taxes required to provide the investor class a safety net.

    And now, something worse is happening. Taxpayer money is being spent on contracts awarded to “American” companies that outsource middle class jobs offshore.

    To the educated middle class person, it’s easy to see that less American jobs equals less tax revenue equals less government contract awards. American taxpayers are virtually funding their own demise.

    The good news is that if America goes down the drain because of the demise of the middle class, the upper class can still rely on their millions to survive. Anywhere in the world.

    In most cases the American middle class has followed the rules: work hard, educate yourself and your family, invest in the future.

    They didn’t count on competing with globalization and third world wages less than ten times the American poverty rate.

    How foolish it is to pay for a college education only to find that upon graduation, your field of expertise is now outsourced to a third world country for one third your previously expected starting salary. Sorry, the position has already been placed.

    The middle class of America is too smart to let this erosion go the distance. Or at least I hope so. I for one still hear that “sucking” sound old man Perot spoke about.

    Listen carefully to presidential candidate Huckabee’s comments. He’s the torch bearer on this subject. Without a strong, healthy, educated and prosperous middle class, America is nothing.

  25. Michael Donnelly commented on Oct 18

    ” I may need to hire you ” LOL

    That was very funny ! but laughing out loud, makes my co-workers wonder what I am up to.

    Excellent way to make a point, kudos.


  26. michael schumacher commented on Oct 18

    How the market is not down over 100 pts on the backs of what WAMU and BOFA just reported is just another sign that the powers that be will not allow reality to happen in the marketplace.

    The disconnect from reality started last Oct. when the North Koreans exploded what we thought (at the time) was a low level nuclear device. The market never flinched………In the past it would of, at the very least, gapped down and recovered.

    That is the power of the consistent and always present bid on the SPX brought to you by the Bush administration’s constant trickery via a capital infusion from China…the new “heads of state”.


  27. Stuart commented on Oct 18

    Angelo Mozilo may be in need of a job as well……

  28. Pool Shark commented on Oct 18

    Take a look at Bob Shiller’s 116-year inflation adjusted chart of home prices:

    This says we’re in the bottom of the 2nd inning of a no-hitter; 1 out, nobody on, and the count is 2 and 1.

    (We’re also looking at extra innings in this pitching duel.)

  29. Estragon commented on Oct 18

    This cycle may turn out to be somewhat shorter, but considerably sharper than past cycles because of the increase in market share for national builders. Small builders sometimes do marginal projects in down markets to keep trades busy. Large builders tend to be more ruthless.

    It’s also noteworthy that large apartment starts are down. If sustained, this may eventually feed into higher rents (and maybe OER) in the CPI.

  30. Mike commented on Oct 18

    Imo, this is the second year of at least a ten-year correction. Might be closer to fifteen. Prices are still ridiculous, and despite the fact that many homes for sale, many more will become so. Panic has yet to set in. With this type of bubble, it’s needed.

    Got a long way to go….

  31. wunsacon commented on Oct 18

    I’m looking in San Diego and still can’t see myself buying at these levels. I guess I’d buy if there’s a 25% price correction from here.

  32. stormrunner commented on Oct 18

    With the purchasing power of the dollar dropping like a rock,~1.10 in ’02 to 0.78 ~30% decrease and wages actually declining inflation adjusted, for people who live in the real economy, not the FIRE economy population, an OC CA median family income needs to increase to 100k while median homes need to decline to 400k to even approach affordability. This is a 30% move up for wages and down for housing. A mirror image of the debasement process. Entire occupations will not recover to the median home affordabilty ratio when this ends.

    How in the world are we going to convince our children that they need these elaborate educations which will saddle them with debt, for a apartment dweller standard of living.

  33. Dave commented on Oct 18


    Just a few 10,000 foot observations (mostly from your blog & maybe obvious) and one dumb question –

    Prices are not going down possibly because many people owe more than they can sell for or need cash for something (like retirement or eating). There seems to be just enough that can sell to lower prices but not enough to reduce inventory significantly.

    New houses are not being built possibly because material is still going up and with labor already low (mostly illegals) the price remains too high. I also think builders were already cutting corners on materials and feeling profit pressure.

    Banks are repossessing which will add housing to the market that will go down in price (at auction) but I would think they will soon figure out that cutting mortgage deals will probably be better damage control so maybe prices will not plummet.

    But the fundamental cost of new construction does not seem to have a way to come down as materials continue to rise (from $ devaluing, imports, …). Labor may even go up if the illegal immigration is fixed. Even if supply reduces, new construction inflation seems to be headed for locking out the over burdened (taxes, debt, energy costs, insurance, …) population so how does this mess resolve itself? What am I missing? Would it take a world wide depression or maybe just a reset downward on housing size (Momma won’t like that)?

    Seems like a mess, but thanks for the blog

  34. Mike G. commented on Oct 18

    Re Shiller’s chart:

    Not to start a flame war, but what “inflation” is adjusted in the chart? Barry et al are saying how inflationary the rising cost of oil and other commodities is. OK. Doesn’t that mean that the explosion in the price of existing homes must also be massively inflationary? And if one were to take that “inflation” out… :)

  35. TKL commented on Oct 18

    Dave: We will get out of this by any, or some combination, of three things: (1) lower prices; (2) higher incomes; or (3) lower interest rates. And then there’s the time factor: The faster (or slower) those things change, the faster (or slower) we’ll hit bottom.

  36. Thoughts From The Frontline commented on Oct 20

    Fingers of Instability part2?

    Introduction This week we revisit some ideas on how change occurs. We are in a transition in the world

  37. dano commented on Oct 20

    Why no more carnage? Simple.

    Three months to file for foleclosure, three months to take the foreclosure, 2 months to get it on the market.

    2005 2/128 loan resets hit in Jan (earliest) this year. Add 8 months to that, and all you truly see now are Jan/Feb 2005 resets, plus current 07 blowouts.

    Kiddies, we are in the early innings here — this mess will run for at least TWO years from now before we blow them all out. Then… why, option ARMS start hitting!

  38. Seeker commented on Oct 21

    A bit of perspective from Southeast Michigan.

    We got a head start on much of the rest of the country with a large downturn in the pump-priming industry for this region. Figure $3+ flows through the economy for every $1 from a pump primer. So the impact of layoffs and outsourcing is really leveraged. That shows up in supply and demand for housing. When you have been laid off and have real issues about servicing your debt, you aren’t thinking about the demand side of the equation for cars, trucks or houses. But you may be forced to add assets to the supply side of the equation to deal with the demands associated with servicing debt. That provides the first crunch.

    Lots of people think that the foreclosure process creates inventory. It doesn’t. The dwelling was already inventory — it just hadn’t been formally classified as such. Maybe it was recognized inventory — an owner trying to sell to stop the bleeding. Maybe it wasn’t — things were so visibly bad, the owner didn’t even try to sell.

    Lots of folks refer to the foreclosure process as though it provides a timely end to the problem. It doesn’t. It just ensures that control of inventory in the existing market is moved to financial institutions from individuals. It’s still inventory. It still has to be worked off before the market can return to “normal”.

    The housing market can’t return to “normal” until the local economy returns to normal — especially the pump priming companies that bring in money from outside the region. Until people are getting hired, and are getting raises, and are confident of the salary income floor for the next several years, they won’t show up on the demand side for cars, trucks and houses. I can’t see that far into the future, but it isn’t 2010.

    Part of this overview situation is the definition of asset value. The entities involved in financial flows associated with assets — especially real assets — relaxed the rules in the New Millenium. Economists note that the economy improves significantly as home ownership increases. Standards of living certainly have improved over the decades for home owners as contrasted with renters. So relaxing rules in the face of economic weakness and lower perceived risk of default made sense to enough people that it happened. The effect of that was that institutions caused the perceived value of assets to increase significantly. They then acted bureaucratically to document this perception of value (e.g., through appraisal standards), and to act on it through loan amounts and terms.

    As early as 2004, some institutional responses were shifting the definition of asset value from encouraging transactions to minimizing the perceived risk of lender loss. This was expressed through changes in valuation processes like assessment, in applicant screening, and in loan terms. People were encouraged to take out large first mortgages to get the lowest interest rates, and to use home equity lines of credit for everything above that. ARMs were pushed at borrowers that could qualify for fixed terms, and to borrowers that couldn’t clear the bar for prime borrower qualification. Everyone in this knew that loans had to be refinanced within a few years. Everyone assumed that the market environment would continue with minimal change, and that any obstructions to 30 year fixed conventional financing would be resolved before then.

    And then mass layoffs due to downsizing, rightsizing and outsourcing became a recurring theme in news. And everyone started worrying about how safe their personal revenue streams were. So they started retrenching — deferring big ticket purchases until confidence would return. So homes on the market did not sell for lack of buyers. And the improvements that borrowers expected to allow refinancing didn’t happen at all, or happened more slowly than expected, and financial retailers were forced by their lenders to speed up the tightening of lending standards. Suddenly, a home appraised for 20% less than it had two years earlier. By itself, that sleight-of-hand was greater than their gross income for the period.

    For a person to refinance a mortgage, they must pay off all existing home equity lines of credit, second mortgages and any leins other than the existing first mortgage. At the closing, they must have enough cash to cover any difference between the amount owed the first mortgage lender and 80% of the recently appraised value. That could mean as much as 45% of the amount originally financed. Few people with that much cash available take out that kind of mortgage. So, effectively, those borrowers are trapped in resetting mortgages by the terms imposed by a system of interlocking financial institutions that was designed to leverage and speed money flows. The predictable consequence is that inventory is created while the capacity for demand is destroyed.

    Existing homes in good communities, in good neighborhoods, received little attention and no bids when put up for sale by their owners. So they were foreclosed. Then the financial institution tried, and got no bids — even at significantly marked down prices. Surprised? The economy is still dominated by layoffs, not hiring and promotion. The things that create supply are in overdrive, while the things that create or sustain demand remain muted or shut down. So the inventory remains on financial institution books. Foreclosure didn’t end the problem.

    Two things drive housing — the state of the economy and demographics. Media spin is that the contraction in credit terms is simply shifting marginal people from buying homes to renting. That’s just spin. The latest construction data says that rental construction is down significantly more than single family. Children aren’t leaving the nest. Some that have are returning to live with Mom and Dad again — they can’t afford to live independently. The demographics of family formation has been a principal driver of new dwelling construction for centuries. It isn’t working now. We can speculate how long this can continue.

    So we have a contradiction. We have a growing inventory of dwellings and growing family formation in a time defined by concern over the sustained ability of borrowers to repay. The growing number of boomerang children — and their families — is evidence that the economy is not working in a sustainable manner. The resolution of those contradictory pressures will probably appear first in politics. The bureaucracies are doing what they were designed to do.

    … and I’m still not sure what the definition of “normal” is.

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