New Construction Growth: What Are They Smoking?

This is not "good news":

WASHINGTON (MarketWatch) - New construction of U.S. houses expanded for the second straight month in June after hitting a record low in April, the Commerce Department estimated Friday. Starts rose 3.6% in June to a seasonally adjusted 582,000 annualized units stronger than the 531,000 pace expected by economists surveyed by MarketWatch. This is the highest level of starts since last November. Starts of new single-family homes rose by 14.4% to 470,000 in June, while starts of large apartment units fell 29.4% to 101,000. Building permits, a leading indicator of housing construction, rose 8.7% to a seasonally adjusted annual rate of 563,000. This is the highest level of permits since December.

How do you sell down the existing inventory, including the hidden inventory of foreclosures, when these fools are still building houses?

I get it - its summer, that's when you break ground on houses. This allows you to get the framing and exterior up before it gets cold and snows.

But we have millions of homes that have been foreclosed or will be foreclosed, and we have an insane amount of existing "listed" supply on the market. In the apartment/condo marketplace in some markets there is literally five or more years of supply! Go down to Miami and take a drive around at night - brand new buildings, open, occupied, with four or five lights on at night.

Really.

Building more into this sort of market environment is criminally insane. It is guaranteed to destroy the comparable values due to competition and will absolutely decimate lenders who are holding back foreclosures instead of putting them on the market.

The futures spiked a fair bit on this news release, but you have to wonder why anyone would consider this "bullish" news? Bullish for who? Foreclosure lawyers? Courthouse fees?

It is truly unbelievable that builders would be ramping construction into this market environment. I thought I had seen everything stupid under the sun, but this, among all else, takes the cake, even though these figures are coming off deeply depressed levels.

We need less construction, not more, until we clear the excess inventory - this sort of "build into a severe inventory overhang" is how you go bankrupt - with certainty.

What lending institutions are funding this sort of thing? Where are the bank regulators? The FDIC and OCC? The Fed?

SLEEPING (AGAIN), THAT'S WHERE!

I smell lots (hundreds) of bank failures about a year down the road out of this when that inventory is unable to be sold and the construction loans default.

I'm stunned - literally.

Comments

[OptimizedPrime:]

As much as I agree with the sentiment of many of the posters here, I have to agree with @PCScipio. Real estate is local and despite enormously negative numbers in large areas of the country, there are pockets (viz. Texas) where things are better economically and where they never took part in the Bubble. So in a LOCAL area there might be undersupply and thus reasons to build.

So I too would need to know WHERE this building is happening before passing judgment. If it's anywhere in California, then yeah, this is suicidal... But I'm willing to be open minded here and believe that our poor country might have pockets of non-fucked locations left.


OP

Jul 17 12:16 PM

[conceptwizard:]

Foreclosure filings jumped to a record 1.9 million on more than 1.5 million properties in the first six months of the year, RealtyTrac said on Thursday.

The number of properties drawing filings, which include notices of default and auctions, jumped 9.0 percent from the second half of 2008 and almost 15 percent from the first half of last year.

"Despite everybody's best efforts to date we're not really making any headway against the problem," Rick Sharga, senior vice president at RealtyTrac in Irvine, California, said in an interview.

Loans that were temporarily frozen by various state and federal programs, which mostly ended in March, started pushing through the process in the past three months.

One in every 84 households with loans got at least one foreclosure filing in the first half of this year.

June's foreclosure activity was the third highest on record, and the fourth straight month of filings on more than 300,000 properties.

RealtyTrac forecasts about 4 million total filings this year on 3.2 million households with loans, which means little improvement from the first-half performance. The prior record was 3.1 million filings last year, up from a more typical year when about 800,000 foreclosure actions would be made.

I would rather sit home and sharpen my saws than loose money building a house in this housing market.

Jul 17 12:47 PM

[semperpax:]

"These are the times that try men's souls." -- Thomas Paine

Jul 17 01:55 PM

[Houston:]

Thadf and Scipio got it.

Builders build and entrepreneurs have optimistic natures. Additionally, it's a lot about land costs. What u will probably see in the upcoming months is builder's putting up small brand new houses on land bought at post bust prices that is less than the same similar, three year old house a quarter mile away...thereby burying the people with those mortgages for years to come...unless inflation pulls them all out at the expense of the overall economy. There will be that pain. There has to be. A trillion dollar annual deficit will not be ignored.

There is a huge difference between Austin and Las Vegas or Phoenix or Miami.

I understand the basic sentiment but this article seemed sophomoric to me.

Jul 17 02:13 PM

[AndrewBaker:]

Well, if the starts are up as they say, and not just the numbers massaged up, then the view that there will be more banks and financials failing in a few months must be right on the button. How can you sell these new buildings when we haven't even got the full stock of the old ones yet? More foreclosures will mean more property to sell, and less jobs will mean less people with any money to buy them.

The demolition idea is good, though: knock the old buildings down to give demolition workers a job, then recycle the materials to show your green credentials, and use these materials to build the new homes so conctruction workers get paid too! And for no extra cost, the government can hire pen-pushers to keep records of the whole scheme and give their favorite media presenters work telling us how the green shoots have blossomed into a full-blown recovery courtesy of our MENSA-brained leaders.

Instead of picking holes , why didn't we think of that!!

Jul 17 02:16 PM

[Dave Wrixon:]

Most industries manage economic cycles. They have to, they think long-term. Even Detroit has some concept of balancing production against demand.

Building is generally different. When Real Estate goes through severe pain the shake-out is usually such that many players simply disappear off the map, only to be replaced by a brand new wave of risk takers, who next time around will make the same mistake all over again.

Jul 17 02:46 PM

[SkiDad:]

I get it. Oversupply from the perpetuation of livelihoods that can't afford to acknowledge the recession and lenders casting a blind eye in sympathy similar to what got us into this mess.

Unless there is some catalyst building support for reducing the savings rate, you're prediction may well come to pass. Thanks for posing it. I look at the investment environment as emotionally motivated from oversold to overbought in a whipsaw chart until equity is built within the greater economy. This takes years. There may very well be a second wave of defaults on the horizon catalyzing a real bottom. Hope it doesn't happen, but it is good to at least acknowledge it could happen. To do otherwise is blind. I like the gold trade into august and september near term. I like gold period.

Jul 17 09:47 PM

[Moon Kil Woong:]

Asia had this problem for decades now. If construction companies don't get new jobs they will be bankrupt. In order to finance their existing bills they need new developments to get access to loans to pay off their old ones. The banks give it to them because if they don't they will have to realize the bad loans immediately. It's oh so much easier to jelly roll them and let someone else in the future take the fall after a few years of million dollar bonuses for a job well done.

It's not the bankrupt construction companies that are out of their blooming heads, it's the bankers once again playing cover your ass today by selling all your clothes. Taxpayers eventually bail them out simply because it's too gross to see them running around naked and homeless in the streets.

Jul 18 06:26 AM

[Sober Realist:]

LOL.


On Jul 18 06:26 AM Moon Kil Woong wrote:

> Asia had this problem for decades now. If construction companies
> don't get new jobs they will be bankrupt. In order to finance their
> existing bills they need new developments to get access to loans
> to pay off their old ones. The banks give it to them because if they
> don't they will have to realize the bad loans immediately. It's oh
> so much easier to jelly roll them and let someone else in the future
> take the fall after a few years of million dollar bonuses for a job
> well done.
>
> It's not the bankrupt construction companies that are out of their
> blooming heads, it's the bankers once again playing cover your ass
> today by selling all your clothes. Taxpayers eventually bail them
> out simply because it's too gross to see them running around naked
> and homeless in the streets.

Jul 18 07:45 AM

[Pilgarlic:]

Denninger, you used the terms "fools" and "criminally insane", so I have one for you. Simplistic moron. Of course we will see new production long before inventories are fully depleted. A very large proportion of the existing inventories are blue and orange paisley ties that won't sell for many years. If I can manufacture a tie that's attractive in the marketplace and will generate a profit, why should I accommodate the unfortunate who owns all those blue and orange ties and wait for him to sell all of his before I make and sell mine? As a single family home builder in Tampa, why do I care about the towers of vacant condo inventory in Miami? Oh, yes, there's "substitutability at the margin", and the "all boats" metaphor, these old saws don't matter if I can start, build and sell a home at a profit. I'm going to do it, other peoples' inferior inventories be damned.
The failure of your "analysis" (generously speaking) is that you fail to recognize that markets aren't singular, massive homogenous phenomena. They are made up of particular buyers, sellers, inventories and submarkets that cause MUCH to be lost in their general charactarization. The foregoing is only one example of this... there are many others. Simplistic moron.

Jul 18 09:53 AM

[Old Trader:]

Bloomberg TV had an interesting interview with a MD of a private equity distresssed real estate fund, yesterday, and he said that there are actually areas in SoCal (LA area) and west coast Fla. that are turning around. Miami, the NE states, Pacific Northwest, and the Midwest still have a way to go before bottoming, according to what he's seeing.

Jul 18 10:39 AM

[Tomcat101:]

Could this be partially due to the program for first time home buyers? Builders trying to get homes ready before the program expires maybe? I think the program ends in November.

I'm betting new home sales fall like a rock after that program ends, unless Obama pulls another rabbit out of his hat.

Regarding all those empty forclosed homes, I think the govt. should buy a bunch of them and use them for HUD houses the next time a hurricane hits New Orleans.

Jul 18 11:56 AM

[Fighting Yoda:]

The sentiment rise of 2% to 17 from a historical low of 15% is nothing to speak about, but probably green shooters will take anything and create all the hype.

I think there is too much unsold inventory and lots of foreclosures coming; they should not be building new homes but destroying existing ones. That is the only way demand/supply situation can be corrected and price stability achieved.

Jul 18 12:40 PM

[John Lounsbury:]

I know a number of custom home builders. I should say a few custom home builders and a larger number that used to be custom home builders. The ones still in the business had an equal or smaller number of spec homes compared to homes built under contract starting in 2007, and have not built a spec home since. The ones that went under were caught with a big spec house inventory from 2006.

One builder I talked to this past week says he has no new starts planned, has talked to a couple of prospective contract build people this year (nothing has come of these talks yet), is sitting on his vacant lots (all purchased with his equity - no loans) and is surviving on his wife's income and what he has made from three small remodel jobs last year and two so far this year. He was caught with two unsold spec houses at the end of 2007 and finished two contract houses in 2007. He lost more money unloading the two spec houses (fourth quarter 2008 and first quarter 2009) than he made on the two contract houses. If he had followed many other builders into more spec houses in 2007, he could not have survived.

I asked him how he had managed to avoid ruin and he said he was wary of booming markets because he has been building since the 1980's and has weathered two smaller downturns in the early 1990s and the early 2000s. In other words, he fits Dave Wrixon's prescription: "Most industries manage economic cycles. They have to, they think long-term. Even Detroit has some concept of balancing production against demand." As Dave points out, most home builders don't have this perspective.

Jul 18 12:55 PM

[mkreisel:]

In Silicon Valley, there are hordes of high income earners who have been squeezed in tiny apartments for many years and who want to finally buy a place of their own.

On the other hand, people will buy new ones over foreclosures especially when the price difference is only 10-15%.

Jul 18 02:33 PM

[perceptions...:]

As much as I feel emphathy with some of the posters here, I am obliged to look at the reality, of where we have been and what the future has in store.

The "housing market" has been driven by the needs of a huge population growth, over the last 65 years, in particular.

However, over the next 20 years, some 80 million Americans will move from their Peak earning & Spending years, to being thrifty retirees, before finally leaving us forever.

So, THE NEED FOR NEW HOUSING GROWTH WILL SLOW, it will THEN STOP, BEFORE GOING INTO REVERSE, as Baby Boomers pass on, in increasing numbers, reversing long held patterns of growth.

So, whilst we may wish it were not so, I can not see any likely saviours?

Jul 18 10:44 PM

[Nick36:]

Perhaps the cost of land, labor, and building materials has fallen more than the prices of houses have fallen.

Because the US government is trying to delay and prevent many foreclosures. And this is keeping house prices higher than they've would've been in a free market without government interference.

But for land, labor, and construction materials there isn't that much government support. And for this reason it might be cheaper to build a new house than to buy one.

Jul 18 11:39 PM

[Developer.....:]

As a residential housing developer, I can attest to the intense devastation in the Pacific Northwest region. Simply put, every developer is bankrupt, having lost all equity and all cash reserves, and with all lines of credit cancelled and interest reserves on existing land and construction loans recalled. The NAR, along with other local news media, attempts to rekindle the market with overstated numbers. As a developer, and not a banker or an economist, whose career requires huge amounts of fuel (operating and reserve cash) and cajones of brass, I laugh at the miscalculations marketed by those not in the know. For example, there is something called latent inventory (entitled land waiting to become developed into finished lots), latent finished lots (lots with infrastructure, but not approved by the city officials or recorded), and latent housing inventory (homes not completed). This overall latent inventory is in the millions, not hundreds of thousands. DR Horton, Centex, Ryland, KB Homes, all have latent inventory on their books. Then you have the developers, like me, who have over 1500 lots in the small town of Bend, Oregon, waiting to come onto the market of a population of 78,000. And, I am only one of about 15 developers with inventory. Forget the Case-Shiller Index, forget the Timber futures, and the yield curve, just drive around your local areas and describe the existing vacant inventory on a note pad, then back into the numbers, i.e., how many working families can actually afford the existing product, and what might be their exit strategy (if they lose their job, or worse, become disabled), and can they really afford the unit. Every community government is raising the permit fees, meaning it cost more to buy a permit to build. For example, in Bend, Oregon, an 1800 ft2 home used cost 13000 USD in 2004, now it costs 20000 USD in 2009, plus all the ancillary fees due to deferred and deteriorating existing infrastructure in areas surrounding the new housing development. Housing costs are rising.

The real financial carnage will begin within the next 18 months in areas not considered 24 hour cities, with little or no manufacturing or farming jobs. The real financial carnage will occur when the banks who now own the many subdivisions figure out that they are now the developers, and in the future, the actual makers of the market because they own the dirt, the house and the market. And, when a barrel of oil hits 100 USD, we will see another crash, implosion and complete standstill.

Like the quartermaster calls out on a ship in rough seas, "Standby for heavy rolls."

Jul 19 12:44 AM

[BullnBear:]

I don’t like to let everyone in on this little bit of information but I heard from a friend of a friend that some empty land is still available for prime single family new home building in Nevada, California, and Arizona. If you get in on the action soon enough you may be able to get financing on a new strip mall for all of the occupants of these new houses as well or maybe just build your own master planned community.

Jul 19 01:32 AM

[58robbo:]

no, as a single family homebuilder in Tampa i wouldn't worry about 'the towers of vacant condo inventory in Miami'! i would be much more concerned about the mountains of vacant single home inventory in Tampa. i think that what Mr Denninger is opposed to is banks, flush with state bailout funds, reluctance to liquidate this vacant inventory. this de facto price fixing is providing false demand signals to builders like yourself.



On Jul 18 09:53 AM Pilgarlic wrote:

> Denninger, you used the terms "fools" and "criminally insane", so
> I have one for you. Simplistic moron. Of course we will see new production
> long before inventories are fully depleted. A very large proportion
> of the existing inventories are blue and orange paisley ties that
> won't sell for many years. If I can manufacture a tie that's attractive
> in the marketplace and will generate a profit, why should I accommodate
> the unfortunate who owns all those blue and orange ties and wait
> for him to sell all of his before I make and sell mine? As a single
> family home builder in Tampa, why do I care about the towers of vacant
> condo inventory in Miami? Oh, yes, there's "substitutability at the
> margin", and the "all boats" metaphor, these old saws don't matter
> if I can start, build and sell a home at a profit. I'm going to do
> it, other peoples' inferior inventories be damned.
> The failure of your "analysis" (generously speaking) is that you
> fail to recognize that markets aren't singular, massive homogenous
> phenomena. They are made up of particular buyers, sellers, inventories
> and submarkets that cause MUCH to be lost in their general charactarization.
> The foregoing is only one example of this... there are many others.
> Simplistic moron.

Jul 19 06:55 AM