Mar242015
When will homebuilding really recover?
Assuming we don’t have another recession, homebuilding will take another two or three years to regain full strength.
I reported in 2012 that the same policies that served to eliminate distressed inventory from the MLS also served to revive homebuilding. Homebuilders provide must-sell inventory, so they need a vibrant resale market with a chronic lack of supply to sell into. A glut of foreclosures and weak demand is not a favorable set of circumstances for homebuilding.
At first low MLS inventory was a boon to homebuilders, but housing market manipulations give homebuilders false signals, so Orange County homebuilders oversupplied the market, and as it turned out, reflating the housing bubble hurts homebuilders, rather than helps them.
It wasn’t until early 2013 that homebuilding bounced off its five-year long malaise at 60-year lows. Homebuilding is still 40% below the average of the last 60 years, and with high prices and weak job growth, some are wondering when the industry will ever recover.
The housing recovery that never was
by Chris Matthews, March 17, 2015
The home-building industry remains in a deep slump. Will it ever regain its past glory?
Much has been made of the housing recovery in recent years, but when pundits talk about the phenomenon, they often fail to define their terms.
Real estate has recovered in the sense that home prices have regained their pre-bubble levels. The real estate market on average is fairly priced once again,
Fairly priced? (See: Is the only meaningful sign of recovery higher home prices?)
but the home-building industry — the sector of the economy that fueled past recoveries and provides good-paying, middle-skilled jobs to blue-collar America — is still stuck in the doldrums.
This is one of the main reasons the recession persisted for so long. Homebuilding generally leads the US out of a recession, and increasing employment in homebuilding accelerates the recovery — except this time. (See: It’s a tough job market for SoCal real estate development professionals)
That fact was reinforced by data released Tuesday by the Commerce Department, showing that new home construction fell by 17% in February to a seasonally adjusted annual pace of 897,000 units.
(See: OC new home sales fall a frightening 41%)
The decline in housing starts dovetails with the index of homebuilder confidence released on Monday from the National Association of Homebuilders, which fell two points in March to 53, after declining in February as well. Analysts are quick to blame these troubling data on poor winter weather, but that explanation doesn’t really hold water.
(See: The housing recovery falters in 2014 because… the dog ate it)
First off, the housing starts data are seasonally adjusted. Second, while February was cold, there wasn’t as much precipitation as in January, as pointed out Tuesday morning by Trulia’s Chief Economist Jed Kolko.
The fact of the matter is, the home-building industry remains in a deep slump. One obvious reason for this is that ever since the Great Recession, Americans have been very reluctant to move into homes of their own. They’d rather double up with roommates, parents, or other relatives, and that is apparent in the fact that over the past two years, Americans have, on average, formed just 467,000 new households per year.
(See: Household formation less than 50% of normal)
Over the past couple months, however, that trend looks to be reversing. The most recent data show that household formation in 2014 increased to 2 million, well above the long-term average of about 1.3 million new households per year:
If this trend can hold, it could signal the next wave of the housing recovery that includes more higher-paying jobs for middle-class Americans in the construction industry. But we’ve had reason for false hope before, such as in 2012 when for a few months it appeared that we would see breakout growth in household formation, only for Americans to revert to their post-recession habits.
(See: Home sales down, household formation down, purchase applications down: Housing recovery?)
The question then for homebuilders and economists trying to predict future behavior is this: have Americans fundamentally changed their attitudes toward household formation? Are we now a nation of roommates and renters, cowed by the bursting of the housing bubble?
(See: Why aren’t Millennials buying homes?)
This cultural change wouldn’t be without precedent. The 1929 stock market crash and the ensuing Great Depression fundamentally altered the risk appetite of a whole generation of Americans. It wasn’t until the 1950s and 1960s that the taboo against risky investing began to fade.
In the 60 years between World War II and the housing bust, each generation obtained an education, secured a job, got married, and bought a home in the suburbs, enshrining our nostalgic notions of the American Dream. Unfortunately, lenders destroyed all that.
Irresponsible lending inflated a massive housing bubble, saddled a generation with onerous student loan debts, and poisoned the economy so many can’t find a job, which caused many Millennials to postpone marriage, family, and buying a house.
Perhaps the past few months of data are just a blip that will be corrected once home builders begin to sense that pent-up demand is about to let loose. But in the meantime, we’re still waiting for the real housing recovery to begin.
The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.
Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit.
True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.
When will homebuilding recover?
The short answer is when the growth of high paying jobs and rising wages creates demand for more houses. People who get high paying jobs either form new households or make move-up trades, but the jobs created need to be of high quality. Creating low-paying or part-time jobs may pad the government stats, but they do little to stimulate the housing market. Although the job market has been steadily improving since early 2010, the rate of job growth has been relatively weak when compared to previous recessions, and the quality of these jobs has been suspect at best.
I’m still hopeful 2015 will see economic growth that strengthens job and wage growth. Realistically, it will still be a long, hard slog, and we won’t see a full recovery in homebuilding for another two or three years, barring another recession.
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No it will not. If you look at the housing starts chart and the household formation chart and apply linear regression the trend is not your friend. Congratulations Federal Reserve.
Federal reserve = big banks and corruption !
It’s High Time to ‘Audit’ the Federal Reserve
The calls in Washington to “audit” the Federal Reserve are not for a narrow, bean-counting review of the institution’s financial statements. The audit’s goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”
History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed’s actions over the last century represent the greatest systemic risk of any financial organization in the world. These actions include the runaway inflation after World War I and the overreaction leading to the depression of 1921; the failure to liquefy the banking crisis of the 1930s; setting off the internationally disastrous great inflation of the 1970s; and more recently stoking a housing bubble while failing to recognize that it was a bubble.
The Federal Reserve, established in 1913, was a prime example of the dream-world that President Woodrow Wilson imported from the theorists of the German Empire—the notion of government based on the superior knowledge of independent experts that bypasses the messy and undisciplined world of democratic politics. The fatal flaw? The Fed has no superior economic knowledge. It has only forecasts as unreliable as everybody else’s, and theories as debatable. Hence its many mistakes.
Since the Great Recession ended the Fed has been in overdrive. It is running an unprecedented, giant monetary experiment. This experiment includes years of negative real interest rates, the creation of a huge asset-price inflation, and the monetization of real-estate mortgages and long-term bonds. Should the Fed, or anybody, be allowed to carry out such vast and very risky experiments without effective supervision? The correct answer is: no.
Opponents say an audit would threaten the Fed’s “independence.” That’s precisely why it’s necessary. The promoters of Fed independence, which of course include the Fed itself, must believe that the Fed is competent to have the unchecked power of manipulating money and credit, or in a grandiose variation, of “managing the economy.” They must believe that the Fed knows what the results of its manipulations will be, when manifestly it does not. The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power.
The historical argument against letting Congress play a role in monetary issues is that elected politicians are always inflationist, and it takes an independent body to stand up for sound money. Yet now we have the reverse of the historical argument: a sound-money Congress confronted by an inflationist central bank—a Fed that endlessly repeats its commitment to perpetual inflation at its “target” rate of 2% a year. This means prices will quintuple in a normal lifetime. What then?
Here is the reality: The Fed is a creature of Congress, which created it and has since amended the legislation that authorizes its existence on numerous occasions. In the 1970s, Congress, with Democratic majorities, made two efforts to bring the Fed under more control. In the Humphrey-Hawkins Act of 1978, it required regular reports to Congress by the Fed. These hearings achieve nothing but the Kabuki theater of scripted presentations and sparring over questions and answers.
In the Federal Reserve Reform Act of 1977, Congress defined a triple mandate for the Fed to follow: stable prices, maximum employment and moderate long-term interest rates. The Fed has dropped any mention of one-third of its assignment—“moderate long-term interest rates”—and redefined “stable prices” to suit itself. It tells us in remarkable newspeak that “stable prices” really means prices that always go up.
How is Congress effectively to oversee its creation? Congress is too big and on average not sufficiently knowledgeable to do so directly—that’s why it has committees. But the House Financial Services Committee is also very large, with 60 members, and both congressional banking committees have numerous other difficult areas of jurisdiction, not least being the crisis-prone housing-finance sector.
So I propose that Congress should organize a new Joint Committee on the Federal Reserve. The Fed would be its sole but crucial jurisdiction. All Humphrey-Hawkins reports should be made to this joint committee, and it should have the power to audit whatever about the Fed it deems appropriate.
Such a committee should have a relatively small membership, made up of senators and congressmen who become very knowledgeable about the Fed, central banking, the international relations of central banks and related issues. Like the Senate Select Committee on Intelligence, it should include ex officio members from the leadership, but in this case, from both houses.
“The money question,” as fiery historical debates called it, profoundly affects everything else. It is far too important to be left to a fiefdom Fed.
This graphic sums up February’s tepid existing home sales
In National Association of Realtors’ existing home sales report released on Monday, there was only slight improvement in the February numbers, with sales increasing 1.2% after last month’s plummet.
This chart helps better depict the status of existing home sales and where the market currently stands.
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/March2015/February-EHS-Infographic.jpg
Lawrence Yun, NAR chief economist, said although February sales showed modest improvement, there’s been some stagnation in the market in recent months.
“Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”
Monthly changes are almost always tepid, that’s why it’s more informative to look at the yearly change. In this case, sales are up 4.7% over last February. Of course, last February was one of the most brutal Winters of all time, but since bears refuse to believe weather affects the actions of people, they can’t use that as an excuse now.
With as poor as last February was, I was expecting blow-out Y-o-Y increases in sales, double digits at least. Such modest gains over last year are somewhat surprising.
In 2014, we saw large increases in sales volumes in the 2nd quarter, so the Y-o-Y numbers set a higher bar. Unless sales pick up like that this year, we may see Y-o-Y declines in May or June.
Sales of New U.S. Homes Unexpectedly Rise to Seven-Year High
is this the start of the new home sales recovery or a meaningless blip?
(Bloomberg) — Purchases of new homes in the U.S. unexpectedly rose in February to a seven-year high as stronger job gains helped bolster industry activity amid severe weather.
Sales climbed 7.8 percent to a 539,000 annualized pace, the most since February 2008, Commerce Department data showed Tuesday in Washington. The reading exceeded even the most optimistic forecast of economists surveyed by Bloomberg.
Americans withstood weaker income gains and higher property prices, braving a chillier-than-usual February to go out and buy a house last month. Further healing in the labor market and a boost in inventory should provide stronger support to an industry entering its busiest sales season.
“It looks like the spring selling season is off to a good start,” said Stan Shipley, an economist at Evercore ISI in New York, whose projection for 485,000 sales was among the closest in the Bloomberg survey. “With low mortgage rates, if you look at it, it’s very affordable for most potential homeowners,” even as credit remains tight, he said.
Calculated Risk: Comments on New Home Sales
The new home sales report for February was above expectations at 539 thousand on a seasonally adjusted annual rate basis (SAAR).
Also, sales for January were revised up (sales for November and December was revised slightly).
Sales in 2015 are off to a solid start, although this is just two months of data.
The Census Bureau reported that new home sales this year, through February, were 81,000, Not seasonally adjusted (NSA). That is up 19% from 68,000 during the same period of 2014 (NSA). This is very early – and the next six months are usually the strongest of the year NSA – but this is a solid start.
Sales were up 24.8% year-over-year in February.
Don’t dig deeper when the data confirms your pre-existing biases
Frozen Northeast Saw 153% Surge
All of this would be great… if it was remotely credible. It isn’t, for three reasons.
First, as Census always admits in the fine print, the 90% confidence interval on the 7.8% increas is +/- 15.2%
Second, as we reported last year, after reported relentless beats in the middle and late part of 2014, Census would downward revise the data for 6 months in a row!
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/03-overflow/20150324_newhomesales1.jpg
Third, and final, the reason why today’s data is just absolutely seasonally-(un)adjusted garbage is because somehow, even when all the other housing data woul dhave us believe the NOrtheast was a barren wasteland of snow and freezing soil, New Home Sales in February in the Northeast rose from 17K to 43K, an increase of 153%!
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/new%20home%20sales%20feb%20ne.jpg
Watching the slow meltdown at ZH is absolutely fascinating. It seems a new data point goes against them almost every day now, and they whine and pout more than my three year old.
Zero hedge has almost become like a political party for bears. They attack and spin any data point that is not bearish whether it warrants attack or not. Like the boy who cried wolf, it makes it difficult to discern when they are right and when they are merely spinning for the sake of spinning.
In this instance, the 153% rise in sales in the Northeast and the repeating pattern of downward revisions supports their contention that these government statistics are manipulated for public relations reasons, much like NAr data and forecasts. However, when taken in context of their other bearish posts that don’t add up, it weakens the case they make.
The problem with their downward revision argument is that prior to those six months there were many months of upward revisions.
They really need to stop with the posting of complicated graphs with multiple data sets placed on the same x/y axis. It makes it look like they are data searching (which I think they are).
They do that a lot, and they adjust the scaling to tell the story they want to tell.
these data points are false signals caused by monetarism. they are temporary.
Much like diamonds, monetarism is forever.
Solar panels: Home sale deal killer?
No one wants to cover your 15-year lease
Solar panels are prohibitively expensive to purchase and install outright on a home.
Luckily, there are many companies that offer lease-deals on solar panels, and the use of the alternative energy source is growing.
But, a few years into such a lease, what happens when the owners need to sell their home and the buyers either refuse or can’t qualify to take over the solar panel lease?
This article in the LA Times said either the sellers pony up the money, or the deal falls through:
“Some would-be buyers balk when they learn that they’ll need to qualify on credit to take over your solar lease payments for the next 15 to 17 years. Others say they like the house but won’t sign a contract unless you buy out the remaining lease payment stream — $15,000 or $20,000 or more — because they’re worried that the solar equipment will become obsolete or won’t save as much on electricity bills as advertised.”
“Issues like these are popping up increasingly in California and other states and are interfering in sales and closings, according to real estate industry experts.”
I was chatting with our Chief Credit Officer the other day and he was saying solar panels are creating more and more title issues that prevent loan approvals. In some cases, the solar lease/lien gets attached to the property taxes and the borrowers have to jump through all kinds of hoops to get it removed before we will fund their loan. You can’t have any liens other than property taxes ahead of a mortgage.
I didn’t realize this was becoming such a big problem. Most of these owners were likely told the solar panels would increase the resale value of the home because it would lower the future buyer’s electricity bills. Unfortunately, solar panels are more like swimming pools, desired by some, shunned by others, adding little or no resale value.
Swimming pools and solar panels are both items you can only sell to a specific buyer who wants them. I would never own a pool since the on going maintenance costs are insane and they take up the entire backyard in many cases.
My family would like a pool because my son would spend hours and hours enjoying it.
Pools in particular are an item a buyer either loves or hates. Since some prospective buyers hate them, a pool narrows the buyer pool. That’s the main reason that even though many buyers covet pools, they generally don’t pay a premium for them because there isn’t as much competition for a pool home.
The baby boomers sure built a ton of pools even in lower class neighborhoods.
I listened to this episode of Planet Money yesterday. There were two fun facts I found startling: the percentage of post crisis mortgages backed by the US government and the present location of the bulk of the QE money.
http://www.npr.org/blogs/money/2015/03/20/394274484/episode-612-the-indicator-strikes-back
Thanks for sharing:
http://www.npr.org/templates/transcript/transcript.php?storyId=394274484
Nice synopsis of the bigger issue of mortgage finance.
“So is anybody just saying, like, look, we’ve got to bite the bullet? We can’t build another housing bubble.”
Nope. Exactly the opposite. The plan is to CREATE another housing bubble. In fact ninja loans are back!
low interest rates + easy loans + everyone knowing the housing market is too big to fail = Housing bubble 2.0
As soon as I find a job Im buying a house!
No, better yet, I’m going to become a mortgage broker!!!
Welcome To The Predatory State Of California——Even If You Don’t Live There
Theft has been “legalized” for governments and banks in America.
Every once in a while an event crystallizes the stark reality behind the lacy curtain of propaganda and artifice. Here is one such event.
Correspondent R.T. is a retired accountant who has resided in Arizona since 2001. Prior to 2001, he resided in California.
On March 14, he received a letter from the California Franchise Tax Board (the agency that collects income taxes) claiming that he owed $1,343 for the tax year 2006. This was the first notification he’d ever received of this claim. This was an interesting claim given that R.T.:
— Did not reside in California in 2006
— Did not file a State income tax return in California in 2006
— Did not have any outstanding tax issues with California in 2006
— Did no business in California in 2006
— Owned no property in California in 2006
The number $1,343 is also interesting, as R.T.’s total Federal tax liability in 2006 was $650. Since the top income tax rate in California is about 9%, and that only kicks in at relatively high income levels above $100,000 annually, then it’s difficult to see how anyone could owe double their Federal tax in California state tax.
But the truly interesting part of the story is that the state took $1,343 out of R.T.’s Wells Fargo bank account on March 2, prior to notifying him of the claim. Wells Fargo charged R.T. $100 for handling the removal of his $1,343.
As R.T. observed: “If I had filed a 2006 California tax return the statute of limitations would have run out, but since I did not file a 2006 tax return there is no statute of limitations. This is the classic catch 22.”
I do not have copies of the correspondence so I cannot verify this sequence of events, but I have corresponded with R.T. for many years and have found him to be a credible witness to national events. While some might claim he invented this story of state theft out of whole cloth, there is no basis in our years of correspondence to support that claim.
What is entirely believable is that the state of California, desperate for revenue, is churning out dubious income tax claims stretching back years and collecting the money without due process. This is theft, pure and simple, and charging the account owner $100 for transacting the theft is also theft.
Welcome to the predatory State of California–even if you don’t live there.
I find this story extremely questionable. Even the argument in the last paragraph is false. California is not currently desperate for revenue, as tax receipts are soaring well above expectations right now.
If the story is true, this victim will have to spend some time proving he doesn’t owe the money and it will be refunded. That story won’t reach print though…
I can confirm this kind of stuff is happening. My story:
I started and ran a 1 person LLC from 2001 through 2010. At the end of 2010, I legally closed this company down via the CA Secretary of State.
In 2013 I started getting bills for a Fire Prevention Fee. I got 3 of them. It took many long hours to get CA to admit the fee was not due. Later in 2013 CA said I did not file a tax return for 2007. My CPA sent a copy. In 2014 CA demanded a tax return for my LLC for 2011. It took several more hours to convince them I closed the LLC in 2010, so no tax return was due for 2011.
About a month ago, CA said I did not file a tax return for my LLC for 2004. I had my CPA send a copy. To make a point, I had to come up with a tax return from 11 years ago for an LLC I closed 5 years ago.
This has cost me nearly $1000 in CPA fees. It is ridiculous and wrong. It is clearly harassment.
It is the final straw. I am leaving CA.
I’ve failed to find info on what happens to individuals (not companies or state-owned enterprises) in China when the real estate bubble fully deflates. Bankruptcy is not available to individuals. Considering that, I think it’s fair to speculate that China doesn’t have anti-deficiency statutes protecting individuals.
So what happens in China when you own three homes, they’re all underwater, and you can’t make the mortgage payments? Debtor’s prison? Does anyone have info on this subject?
If you’re forced to pay, or face prison, death, or even bequeathing your debt to your children, why wouldn’t you sell US real estate assets to cover your debts?
I hope we get a knowledgeable reply. I’ve made the case that forced repatriation of foreign assets is a real concern, and the scenario you outline above is one of the ways this could happen.