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The latest report from the Census Department reinforces my judgment that the housing market has bottomed and will be a significant contributor to economic growth over the next few years, beginning in the third quarter of 2009.
From a low of 329,000 new homes sales at an annual rate in January, sales have increased to 384,000 in June. That 's a rise of 16.7% in less than half a year, a sizeable rebound.
Even more striking is the behavior of housing inventories, which are often misread by observors. June was the 28th consecutive month in which new home inventories declined. Unsold new home inventories peaked at almost 600,000 units. Now, they are just 281,000 units, which is about as low as they have been in the last 40 years. Since the U.S. population has grown by about 50% over that period, the level of unsold inventories is now very low relative to the size of the population. Much is made over the stubbornly high level of inventories as measured by the month's supply. Sales were falling during much of the last two years, so the month's supply, which is inventories divided by the selling rate, remained quite elevated. But it only takes a small rise in sales at a time inventories are falling to make a huge impact in the month's supply. That occurred very visibly this month. With sales higher and inventory down, the month's supply fell from 10.2 to 8.8 in a single month! That's a major reduction in the gap towards the 6 month level that is considered normal.
Keep in mind that the unsold inventory is not evenly distributed across the United States. We know that there are significant unsold supplies of housing in four areas: the Inland Empire region of California, southern Florida, Las Vegas and Phoenix. With overall inventories now so low, it is a safe bet that inventories are very lean in much of the rest of the country. So, expect prices to rebound in much of the country in the coming months. And population growth will continue to absorb what supplies of housing remain in the market. Therefore, new home construction should continue to rise and even accelerate once growth resumes in the coming months.
Disclosures: We own various housing and building oriented equities in client portfolios and our personal accounts, including HD, LOW, USG, MLI, and NVR.
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There is a secondary consequence that will not work in our favor: if we get great volumes at low prices, we hurt the asset quality of the existing homeowner's and lenders not involved in the new sales. At some point, we will hurt consumption further through a destruction of perceived equity.
This miniscule reduction in inventory of new houses is hardly an indication of any bottom in the market if all relevant market data is taken into account.
The bottom will be when inventory reaches 6 months and an equilibrium price is found at that level. We will see then how far prices have fallen. We will also see how much inventory is added at that equilibrium price and if inventory constraints and demand bid the price toward a rising trend (in real dollars). Nobody knows at what value the median will become stable or how fast or how far it may rise off the bottom. We may know that by Q2 of 2010. We may revisit the bottom concept in Q1 2010 when and if inventory hits 6 months.
Based upon your long positions (?) in housing, when a balanced analysis--one which explores arguments for and against bottoming--is absent from article, it degrades the article's value. Clearly you have advanced knowledge of housing, but restating content available in Reuters or AP is not entirely beneficial. Are banks manipulating inventory? I'd like to know. How do the price declines impact those not wanting to sell: those who see their value plunge ever downward?
A worry is the significant decline in New House prices though. To the extent these indicate declining values in same house sales one would think they point to dangers in equity values for more households and, combined with increasing unemployment, a potentially increasing foreclosure rate - indicating a likelyhood of the downward spiral continuing.
The housing industry is a major driver of the economy, and the type of "recovery" that is required to start economic activity is a clearing of the housing inventory overhang and an increase in the number of transactions. These will allow lenders to lend, builders to build, etc. It isn't important that we see beachfront condos selling for $1M+ before we have an economic recovery.
Higher housing prices are probably in the cards over the mid term anyway due to inflation.
Second, the "housing market" right now is not a market at all. A market implies a free exchange where supply equals demand. Today, the “market” is a place where misinformed people confuse shelter with investment, and the government and banks (same thing these days) artificially limit supply on the low end… and then take the resulting statistical phenomena out of context by applying it to the whole universe of data… while ignoring the tsunami of even greater problems that have not yet started.
And as a friendly reminder… there is also effectively no market for high-end real estate mortgages… which means the high-end real estate market has effectively been reduced to an all cash economic exchange.
The problems we have collectively (mis)labeled as “subprime” are not even close to being contained. There are hundreds of thousands of homes that should be on the market that are not due to moratoriums, bank agendas, negative equity, etc. The problem people will start to (mis)label as the “prime” problem… will make the “subprime” problem pale in comparison.
Claiming a housing bottom at this point is optimistic at best, irresponsible at worst.
1. In some local markets they never went up much from there, so there's not much correcting to do.
2. In some markets foreclosures have driven the necessary liquidity to correct the market, so these markets may be near "bottom" in the sense that they only have a little more bleeding to do, which will happen slowly over a number of years.
3. Some markets still have a DEADLY combination: a huge run-up combined with only slightly dropped prices.
The midwest is often an example of #1.
Places like (low-end) Florida and the Inland Empire are an example of #2.
Places like the Bay Area (high-end), Manhattan, and other higher-end markets are an example of #3.
The high-end in general is set for a huge crash. Just like the Bubble allowed you-want-fries-with-that incomes to get into doctor/lawyer homes, doctors and lawyers leveraged themselves into multi-millionaire homes. As has been documented here and many other places, the wave of foreclosures for THIS part of the market is coming soon. When it does finally correct there will be no buyers: FLIPPING was the primary way buyers afforded the high-end, and all of those buyers are deep under water and have no down payment.
When it somehow does move watch for the MEDIUM selling prices to skyrocket. The mansions will be selling for 50-60% below peak, which may finally move them, but it will make the market LOOK much better since the only houses getting any traction will be the high-end.
Yet another reason to not bet your life savings on a few soundbites.
OP
David Ristau
President, The Oxen Group
theoxengroup.com
overall confidence amongst the many with jobs and money (that no one here wants to acknowledge) and low prices have provided a bottom that could not be quantified or predicted...just like nothing else about this has been quantified or predicted.(except by Schiller)
It's like a cold front impacting a warm front early in the seasonal change, there are a lot of storms but there are many things offset...so often it's not so bad.
The economy is coming back. The impact of the Alt-a's and shadow inventory will bleed into it and have an affect but not the catastrophic one it would have had when it added burden to an un propped economy.
If you're in Phoenix and you bought at the top of the market mand are paying your mtg, you're effed for a good while. If you're in Dallas, not so bad.
During the 80's oil bust I bought a condo that bottomed at less than one third of it's value. I rented, held and took a loss on it for 20 years until I could sell it for 2/3 of what I bought it for which was breakeven on the mtg at that point.
Cal values will come back faster but it's gonna be a while. But overall the sun is beginning to shine.
Don't tinkle on everybody's tennis shoes.
Don't forget 11 is a lucky number which could fortell a true bottom.
I am closing my eyes and clicking my heels and implore you all to join me.............
"Just three more bottom calls, just three more bottom calls."
Just imagine if you will, fellow SAers, when the guy who's called the bottom 19 times actually gets it right.
All his/her subsequent articles would routinely begin, "Since I correctly predicted the floor in housing back in early 2011, real GDP......................
The foreclosure problem has not been addressed. Rather it is gaining momentum. And it is about to increase at an even faster rate as the neg-am, alt-A, and “prime” 5yr ARM’s begin to re-set.
The idea of the Midwest leading the pack is nice, but these conservative values didn’t buoy us during the liquidity crunch, etc, and it is not going to stem the tide of the pressures that are mounting now.
Midwestern values may well serve as an exemplary place for us to return. But I’m afraid we have a lot more falling down before we can pick ourselves up, brush ourselves off, and get back on the road that will take us there.
On Jul 27 05:00 PM Alan Young wrote:
> I'm surprised that only one comment has mentioned the seasonality. Okay, home sales are up from January, hurrah. But home sales ALWAYS peak in summer and dip in winter, so that indicates nothing..
++++++++++++++++++++++...
For my money, that would define all economists.
If some of yall want it to be so bad, please don't move to Texas.
Yes, housing is VERY local and yes, the bid-up process popularized following the ruling elite's reduction of interest rates to absurd levels in 2003-4 has and will prompt a relative tidal wave of disasters among the 600k-1.2mm house price crowd who don't have the cash to cover their situations and by virtue of economic requirements must change. My final rant is that I used to believe and use fundamentals to determine values. Now, I just watch the ruling elite.
Or hit a ledge.
On Jul 27 05:10 PM Houston wrote:
> For a few months all you chicken littles have decried the end is
> nigh and the barbarians are still closing towards the gates...the
> alt-a's, the shadow foreclosures...yet the news keeps improving.
> Maybe because
> overall confidence amongst the many with jobs and money (that no
> one here wants to acknowledge) and low prices have provided a bottom
> that could not be quantified or predicted...just like nothing else
> about this has been quantified or predicted.(except by Schiller)
>
>
> It's like a cold front impacting a warm front early in the seasonal
> change, there are a lot of storms but there are many things offset...so
> often it's not so bad.
>
> The economy is coming back. The impact of the Alt-a's and shadow
> inventory will bleed into it and have an affect but not the catastrophic
> one it would have had when it added burden to an un propped economy.
>
>
> If you're in Phoenix and you bought at the top of the market mand
> are paying your mtg, you're effed for a good while. If you're in
> Dallas, not so bad.
>
> During the 80's oil bust I bought a condo that bottomed at less than
> one third of it's value. I rented, held and took a loss on it for
> 20 years until I could sell it for 2/3 of what I bought it for which
> was breakeven on the mtg at that point.
>
> Cal values will come back faster but it's gonna be a while. But overall
> the sun is beginning to shine.
>
> Don't tinkle on everybody's tennis shoes.