Homes Under Water: Looks Like a Long Slog for Homebuilders

The WSJ Real Time Economics site is always a good place to visit when major economic date is released. Today, they have a good roundup of thoughts on the housing data. Here is one entry:

The bright spot in this report is that there is now so little new homebuilding in the pipeline that the inventory of new homes available for sale is declining rapidly. If sales stabilize over the near term — which we believe is likely given the recent plunge in mortgage rates — then we should reach a normal level of new home inventory by mid-2009. Of course, the overall stockpile of homes available for sale will continue to be bloated by foreclosure activity, which should continue to exert some downward pressure on home prices over the near term. –David Greenlaw, Morgan Stanley

The reality is that there is an incredible of inventory of homes throughout the country and particularly in the areas hit hardest by the downturn in housing. Despite some fairly brisk, at least by recent standards, purchase activity, the inventory of foreclosed homes has shown little decline. Obviously, new foreclosures are filling up the pipeline as quickly as homes are sold out. Efforts at slowing the pace of foreclosures are likely to be forthcoming from the new administration. While those efforts will probably slow things a bit, if history is any guide they may just push the problem down the road. It’s going to be hard to get around the historical failure rate of loan modifications particularly in a deep recession.

Investors have purchased a goodly number of the foreclosed homes in the past nine months or so. While they may be true investors as opposed to purchasers who are looking to make a quick flip, there is going to be a not insubstantial portion who will bring their homes back to the market when prices start to firm up. Add to that shadow inventory the inventory of owners who would like to sell but have put off the process until the market stabilizes, and you have the ingredients for a rather long period of market stagnation.

One other factor that perhaps hasn’t received the attention it deserves is the degree of market disruption that this entire episode is imposing. We may well be creating a rather large percentage of owners that are trapped in their homes. Saved by loan modification efforts from losing their home, they may still remain substantially under water from an equity standpoint. If that does become a reality then the normal dynamics of the market are going to be seriously dislocated.

It, therefore, gets a little difficult to see just how the homebuilders are going to experience a turnaround of any great significance any time soon. Right now they cannot compete with foreclosed homes on a price basis. Help from Washington in the form of tax credits might help narrow the price gap if it only applied to new construction but it’s hard to see that flying politically. Moves like that could also create as many problems as they solve.

Things can and do change, but barring some rather remarkable turnaround in the economy it is really hard to see anything but a multi-year struggle for the new home market.

Comments

[Eric Rasbold:]

Clear out the standing inventory!

Most of us here in California have watched our values drop so low....My home has lost better than fifty percent, and no it isn't one of those 3500 square foot spec houses in some damned subdivision neither. It is a nice two story mountain house on 2 acres. At the height of the market, it was valued at 450K, now 220K which is exactly what I paid for it in 2004.

Thank God I didn't ride the equity too much, but it still hurts and is very limiting. I think it will get worse before it gets better, AIA is dead and so are the Builder's Exchanges (I am a contractor) and that is actually a good thing right now. Laffer was wrong, supply side never works in perpetuity.

Like they say, "Hard times done flushed the chump!"

The markets will correct to remove those who could afford their debts in the first place. It hurts, but is for the greater good.

May your Dow never Jones!

www.whatwouldwarrendo....

Jan 23 12:42 PM

[Ivan the Cr...:]

"Most of us here in California have watched our values drop so low....My home has lost better than fifty percent, and no it isn't one of those 3500 square foot spec houses in some damned subdivision neither. It is a nice two story mountain house on 2 acres. At the height of the market, it was valued at 450K, now 220K which is exactly what I paid for it in 2004."

So what exactly have you "lost"?

Jan 23 12:49 PM

[Guero:]

Hate to say it, but maybe your property was probably never worth 450K, maybe we are now closer to its true value.

And that is not a commentary on your individual property either...it is probably very beautiful, but 450K was the "value" at the top of an artificial, unsustainable bubble built on too-cheap credit.

Unfortunately the hammers & saws will have to stop for a while to work out the excess inventory.

May your Bloom never berg!


On Jan 23 12:42 PM Eric Rasbold wrote:

> Clear out the standing inventory!
>
> Most of us here in California have watched our values drop so low....My
> home has lost better than fifty percent, and no it isn't one of those
> 3500 square foot spec houses in some damned subdivision neither.
> It is a nice two story mountain house on 2 acres. At the height of
> the market, it was valued at 450K, now 220K which is exactly what
> I paid for it in 2004.
>
> Thank God I didn't ride the equity too much, but it still hurts and
> is very limiting. I think it will get worse before it gets better,
> AIA is dead and so are the Builder's Exchanges (I am a contractor)
> and that is actually a good thing right now. Laffer was wrong, supply
> side never works in perpetuity.
>
> Like they say, "Hard times done flushed the chump!"
>
> The markets will correct to remove those who could afford their debts
> in the first place. It hurts, but is for the greater good.
>
> May your Dow never Jones!
>
> www.whatwouldwarrendo....

Jan 23 05:29 PM

[rm:]

[Saved by loan modification efforts from losing their home, they may still remain substantially under water from an equity standpoint.]

It's not just those who were saved by loan mods. At some point, mortgage investors are going to have to address this, allowing homeowners to sell short without getting a deficiency judgment. Else, you cripple the economy by limiting workforce mobility.

They're as much in denial as homeowners facing foreclosure on this issue.

[Add to that shadow inventory the inventory of owners who would like to sell but have put off the process until the market stabilizes, and you have the ingredients for a rather long period of market stagnation.]

There's also the backlog of homes created due to the foreclosure moratoriums, as well as the properties that lenders have delayed foreclosure actions on.

But you're forgetting the massive stimulus bill, which is going to fix everything.

Jan 24 08:13 AM

[EEB:]

The inventory situation is much worse than people think. Not only is there a huge shadow inventory, but residential square footage per person in the United States is very, very high. People who lose jobs are going to be moving in with relatives or friends, and there is plenty of room to do so. Demand for housing by people who actually want to live in the unit is shrinking already or will be in the very near future.

Any one who thinks that the housing market will stabilize soon, thus preventing more job losses, is almost certainly wrong. And the job losses will continue to weaken the housing market. It looks like a vicious downward cycle has already begun.

Personally, I think that the nation needs to reduce the supply of houses. The federal government should invest some money in a home demolition program. Of couse, it would need to be called something like "The Home Improvement Act," or something like that. Sparsley populated and ill-conceived subdivisons in California, Arizona, Nevada, Florida, etc. should be evacuated, salvaged, and then bulldozed. This would reduce the inventory and put some construction workers back to work doing demolition.

Jan 24 09:27 AM

[know nothing:]

It appears that the laws of economics are stronger than ever! When banks lend money to people who estimate income,lend to people with bad credit, or borrow to people who should not be buying in the first place, you create a false demand, which in turn drives prices up.. For years I used to wonder, as I drove into the city, were is all this money comming from for people to build all these homes? not medium to low priced homes either,top end homes and lots of them.. After living through the 60's, 70's,and early 80's and compareing those years to the 90's through 2005 or 06.I could not imagine what was driving the new construction market? Now all truth comes out and for the young people of the U.S. that didn't ever see normal,sustainable economic development.This all seems unbelievable! But believe it, when lending insitutions and gov't practices are beyond the norm,this is the result. foreclosures,defaulati... of property prices...ect. Poeple cannot live on credit forever,sooner or later poeple need to live within their means,it is a shame this has happened, but a correction is long over due.. When the over supply is consumed,which could take longer than you ever imagine, then construction will pick up,but don't be supried if interest rates are double digit by then.Late 70's early 80's proved that even with high interest rates people who can afford it will build and buy. Eventually you will see inflation come back into the picture, as the costs of maerials rise,so to will your home values!

Jan 24 09:37 AM

[1234987:]

Housing solution!

I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.

2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.

3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.

4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.


Pro's:


Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.

Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.

Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.

Banks will now have a fresh source of funds to lend on homes that are not declining in value.

Banks will be able to clean balance sheets of hard to liquidate assets.

Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.

As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.

Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.

Other agenda items:

Mark to Market accounting will only apply to non performing assets.

Spend 50 billion each year for the next 3 years rebuilding infrastructure. Bridges, Roads, tunnels,
water plants, dams, levies anything to create jobs.
Stimulus checks for $300 only help pay a credit card bill once.

Any comments?

Jan 24 12:02 PM

[capital pains:]

Many interesting comments posted. However, I believe the only way to right the housing debacle is for lenders to bite the bullet and offer "Principal Reductions" Simply, new mortgages written at current appraisals, in place of the existing bubble-inflated insane mortgages out there by the ton.
Only, this action can ameliorate the cuurent disater.
$350 billion has disappeared with no assistance to the homeowner whatsoever. The next $350 billion won't nearly be enough to move the economy. If the government has to assist the lenders with the staggering losses they will incur, so be it. The government will continue to print paper in any event. Hence, print up a few extra $800 billion to offer a "principal Reduction" new mortgage. You can argue and play the blame game all you want. However, unless housing turns around faster than in 10 years time..Say hello to the depression ..

Jan 24 12:28 PM

[Conan the B...:]

Homebuilders continue to build new homes which continue to add to the inventory of unsold homes.

The Government pays Farmers not to grow crops, why not subsidize Homebuilders not to keep adding inventory?

Jan 24 12:30 PM

[Gawdfather:]

Something the focus on the decline of new homes in the pipeline misses is the absolute glut of residential lots with infrastructure sitting empty out there. A study of the Atlanta metro area that was released late last year found there were 158,000 empty lots with infrastructure sitting in the 22 county metro area. The study estimated that it is a 110 month supply, i.e. almost 10 years worth of lots, already on the market. Ouch.

Jan 24 01:37 PM

[John Lounsbury:]

I gave some thumbs up to those with what I considered to be facetious comments (rm and paultaut). If you were serious, I regret my votes.

"But you're forgetting the massive stimulus bill, which is going to fix everything."

and

"The Government pays Farmers not to grow crops, why not subsidize Homebuilders not to keep adding inventory?"

I agree with those commenters who recognize the "shadow inventory" in addition to current inventory plus foreclosure overhangs. The shadow inventory includes:

1. Discouraged home sellers who have withdrawn homes from the market;
2. Rental homes that would return to the resale market if there was demand;
3. Second and individual investment homes which have reached numbers way above historical norms;
4. The coming downsizing wave of baby boomers, followed by a mortality wave;
5. Slowing adult population growth because of a decreasing number of immigrants due to slower economic growth.

The bottom in the residential housing market is probably not near and interference by government policy can only be effective when the bottom is nearer (IMO).

Jan 24 01:38 PM

[kruser53:]

I see John Lounsbury has commented. He published a recent article http:seekingalpha.com/... which supports Tom Lindmark's conclusion: "...it is really hard to see anything but a multi-year struggle for the new home market."

Jan 24 02:06 PM

[kruser53:]

I'll try again with the link:
seekingalpha.com/artic...

Jan 24 02:07 PM

[john s. gordon:]

story in the washington post today about how a few builders are finally starting to build smaller less lavish structures to meet the actual market need, instead of continuing their greedy tendency to build the 700,000$ mcmansions that no-one can afford.

maybe there's some hope after all. the new structures will have all the latest energy saving features.
> jack

Jan 24 05:25 PM

[jdl51:]

The only problem in the banks devaluing mortgages is that the banks have packaged these loans into bonds, sold to banks all over the world, and then those bonds are "insured" by credit default swaps. They can't devalue the loans without defaulting on the bonds and then that kicks in the CDS which would pay the holder of that swap. Now, the CDS market was set up, without any regulation thanks to the past administration I might add, so that anyone and their brother could buy a CDS on any mortgage bond whether they actually hold the bond or not. So thousands, if not tens of thousands of people could hold these CDS's on any particular bond and the bank that issued that CDS has to pay out to all of those people when the bond defaults. That is why all these banks are going under now, not because they're out just the original mortgage. If it was just the underlying mortgage that failed, we could handle that, albeit with some pain, but not the total meltdown we're experiencing today. They were all fat and happy collecting the fees for the CDS's that they issued thinking housing would continue to rise, but when things turned on them and with the CDS liabilities not being backed up on their balance sheets, the whole house of cards came tumbling down. At this point, with some estimates of the U.S. financial system's liability being pegged at over $3 trillion and growing, it just might have to be torn down and started over again from scratch. CDS liabilites are close to bankrupting some governments, UK, Ireland, and have already bankrupted Iceland. The no regulation/less regulation/market is always right mantra has come home to roost and we're seeing the results.

Jan 24 07:44 PM

[rm:]

[2, Government Resolution Trust will purchase these homes from these institutions for 20% less than original first Mortgage amount]

Not NEARLY enough of a discount.

For many of these loans, that's at or above current market value.

It's time to stop the proposals that require the government to overpay for "assets."

There's plenty of private capital that would buy this toxic crud, if only it were offered at the right price.

When the banks/investors rise out of denial, then this can be resolved.

Jan 24 07:59 PM