Three Factors that Will Drive New Home Sales 19 comments
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New home sales came in at 31 thousand for September which disappointed investors who had been hoping for more like 34 thousand. The market worried that the real estate market had once again fallen off a cliff as the home tax credit was ending. When the numbers came out, the homebuilders sold off brutally. I think we have to keep these numbers in "historical" perspective. This year's dismal home sales are way below just about anything that has been seen in 45 years.
Between February 1990 until October 2008, no single month came in at less 32,000. Between January 1963 to January 2008, only 18 months came at less than 32,000 and many of these occurred in the 1960s and early 1970s. This September was the worst September since 1981. From 1998 to 2007, Septembers ranged from 53,000-94,000.
At the same time, we saw the value of September's seasonally adjusted residential construction increase 3.9% over last month. Moreover, September was also up over July, June and May, giving a sign that the future of housing is looking brighter.
The take away message: forget one month's disappointments. The low housing sales seen in the real estate market are the bottom. Expect a return to more robust new home sales as evidenced by increased construction.
Three factors will drive that:
- The larger U.S. population will push new home sales closer to historical averages.
- Congress will extend and expand home tax credits.
- Low interest rates will entice buyers.
The way to play it: buy the home builders. The eleven largest of the home builders (TOL, NVR, LEN, KBH, PHM, RYL, BZH, HOV, SPF, MDC, MTH) have a collective market cap of about $16 billion and control about 17% of all residential building. It is hard to imagine their market caps will stay so depressed.
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This article has 19 comments:
The third factor identified in this article, larger U.S. population, is negligible. With unemployment at 9.8% and expected to go higher, home buying will remain sluggish.
the reality is that this administration, the federal reserve and just about every think tank with any sway anywhere believes in the inflationary solution to the economic crisis we find ourselves in.
in the tax credit they have found themselves a relatively popular way of putting cash into the hands of consumers. at a time when the pressure to regulate banking transactions is at fever pitch (which will ultimately remove some cash from consumers), there is no way in hell they will allow this tax credit to die. not now and not in april 2010! in an environment with so much uncertainty, it's hard to predict anything these days. the tax credit however, WILL be extended to everyone soon and i expect it to grow in size. i'd wager the crown jewels on that!
On Nov 04 09:25 AM clreed1252 wrote:
> Two of the three factors this article identifies as driving new home
> sales are almost assuredly short term influences. If Congress does
> extend and expand the tax credits, it will only be until April of
> 2010. Low interest rates are being maintained by the Fed's purchase
> of mortgage backed securities; a practice scheduled to end in March
> of 2010.
> The third factor identified in this article, larger U.S. population,
> is negligible. With unemployment at 9.8% and expected to go higher,
> home buying will remain sluggish.
The point of the piece is that new home sales are depressed far below anything that has been seen in most of our lifetimes. If you go back through new home sales records that have been kept (about 46 years), it is hard to find anything similar. If you take into account the growth of the U.S. population, the numbers are even more startling. Were new home sales to rise to levels seen at any time in the 1960s or 70s, the builders' revenues would be tremendous. Whether a return to more normal sales will occur because of tax credit extensions, low rates, or simply population pressures, who cares? Quite simply, they will. Short term influences may do the job quickly; if not, certainly longer term pressures will move these sales back at least to those which held firmly for the last 45 years. Currently the eleven largest publicly traded builders account for about 17% of residential building. Their share prices have been smashed. I don't think that will continue.
Without a solid job no one qualifies for a loan. I know many that are in a home now that because of their employment status (underemployed) they do not qualify for a mortgage on what they already have.
#1 is the only one open to debate, but everything I've read is that our unprecedented demographic bump with the Baby Boomers is going now, and they are all moving from their big family houses near work to small 1 or 2 bedrooms in the middle of nowhere to retire without the kids.
Combine this with a giant building boom that left millions of houses unoccupied (investor-owned homes are still "inventory" if they are sitting empty remember) and you have oversupply and under-demand.
Combine THAT with the anti-immigrant sentiment building in our country (think Japan here) and the fact that we're not breeding like we used to and the US is population-neutral without immigration and we're on course for a very long period of flat population growth.
Our population needs to grow by something like 15% before we'll fill the houses currently sitting empty (not counting the negative factors above). Also, for some bizarre reason, we are STILL building houses in this country and that of course needs to stop. Insofar as it doesn't the inventory glut will take longer to disappear.
Demographics have never, in the history of our country, been so stacked against housing. Never.
OP
On Nov 04 01:31 PM Stephen Rosenman wrote:
> clreed1252 and 58robbo:
>
> The point of the piece is that new home sales are depressed far below
> anything that has been seen in most of our lifetimes. If you go back
> through new home sales records that have been kept (about 46 years),
> it is hard to find anything similar. If you take into account the
> growth of the U.S. population, the numbers are even more startling.
> Were new home sales to rise to levels seen at any time in the 1960s
> or 70s, the builders' revenues would be tremendous. Whether a return
> to more normal sales will occur because of tax credit extensions,
> low rates, or simply population pressures, who cares? Quite simply,
> they will. Short term influences may do the job quickly; if not,
> certainly longer term pressures will move these sales back at least
> to those which held firmly for the last 45 years. Currently the eleven
> largest publicly traded builders account for about 17% of residential
> building. Their share prices have been smashed. I don't think that
> will continue.
Hey there can be densely populated areas and large apartment buildings. The House passes to extend the home buyers tax credit today! Obama is scheduled to sign this into law tomorrow morning. Hooray!
>Home sales overall have been on the move up for some months now and should continue. I don't recall the exact numbers for unsold home inventories but there starting to come in line with demand. In a few states they are lagging demand as I have read.
I trade BZH at peaks and troughs.
BZH had a very attractive inventory level compared to its peers.
BZH also should have a nice earnings day next Tuesday from the uptick in home sales last quarter AND; this is important; they should show a nice gain of about 80Mln from cheap debt buybacks.
They only lost 28Mln last quarter. I bought back in at $4.40 a couple days ago and looking to sell on there earnings on Tuesday. Check it out.
With all the time available they could also look for planned new constructions and customize the project as they like, then stipulate a mortgage at 110% the value of the house (the 10% is a contribution for the vacations of the next 10 years, you know, one must be creative to attract consumers). How does it happen that you cannot buy anymore something that does not exist with money that you do not have? Analysts are understandably amazed.
The only homes being built today are pre-solds (being built for a ready buyer). There is no speculative building going on as the banks won't lend for it. The pre-sold traffic is what's keeping our industry on life support.
I agree with the author here, the inventory of unsold new homes is at an all-time record low relative to the nations population, and at some point, simple demographics will revive the residential construction industry.
1). Jobs
2). Jobs
3). Jobs
The larger U.S. population will push new home sales closer to historical averages.
In all likelihood what you will see is seniors needing to live smaller lives. That will mean selling their homes and moving to apartments or condos which are more managable. The youth are not forming households nearly as fast today because they are emerging from college with debt. So even if the population grows, you are going to see demand for housing remain stable at best.
Congress will extend and expand home tax credits.
Great. Genius. This pushes demand forward so that we sell homes in 2009 that would have been bought in 2010. So now we need a bigger tax credit so we can push demand from 2011 into 2010. At some point this end, and when they do it will end badly.
Low interest rates will entice buyers.
There are those who think that the US deficit is now unsustainable. Once inflation works its way into the system, rates will rise, and what will we do then to bring in home buyers.
Housing remains a risky deal that is dominated by government intervention. Until it clears, housing isn't an investment it is a bet that the government will crash the rest of the economy to save housing.
Unemployment will continue to increase. Competition for jobs will become more intense. I believe the number of households will shrink, even with a growing population. Multiple generations of families will move in together, and take in renters to cover housing expenses.
Jim R is correct. The only thing that will spur real home sales is jobs, jobs, jobs. And job creation is nowhere on the horizon - except for government jobs, which aren't really jobs at all. Salaries for these jobs come out of others people's pockets in the form of taxes or devalued currency.
The only demand for houses will be artificial demand created by government backed phony-baloney mortgage programs that will have sky high default rates. This will just reinflate the housing bubble. This is already being done by the FHA, which is allowing the phantom $8,000 tax credit to be used for down payment money, resulting in no-money-down home loans.
Squatters will live in abandoned homes. We will have suburban slums, reduced quality of local public services because of a declining tax base, and lingering malaise.
The Carter years were picnic in the park compared to what lies in store for much of our nation.
The only thing that will lift us - and the rest of the world - out of what lies ahead is a really big war. History reveals that this is next on the agenda of our national leaders.
If you haven't yet planned on moving to Canada to escape the coming economic armageddon, you may wish to do so to keep your sons - and daughters - from being drafted.
GreatWhite
On Nov 06 09:46 PM K Smith wrote:
> Increases in residential construction have no bearing at all on home
> sales. Supply does not create demand.
>
> Unemployment will continue to increase. Competition for jobs will
> become more intense. I believe the number of households will shrink,
> even with a growing population. Multiple generations of families
> will move in together, and take in renters to cover housing expenses.
>
>
> Jim R is correct. The only thing that will spur real home sales is
> jobs, jobs, jobs. And job creation is nowhere on the horizon - except
> for government jobs, which aren't really jobs at all. Salaries for
> these jobs come out of others people's pockets in the form of taxes
> or devalued currency.
>
> The only demand for houses will be artificial demand created by government
> backed phony-baloney mortgage programs that will have sky high default
> rates. This will just reinflate the housing bubble. This is already
> being done by the FHA, which is allowing the phantom $8,000 tax credit
> to be used for down payment money, resulting in no-money-down home
> loans.
>
> Squatters will live in abandoned homes. We will have suburban slums,
> reduced quality of local public services because of a declining tax
> base, and lingering malaise.
>
> The Carter years were picnic in the park compared to what lies in
> store for much of our nation.
>
> The only thing that will lift us - and the rest of the world - out
> of what lies ahead is a really big war. History reveals that this
> is next on the agenda of our national leaders.
>
> If you haven't yet planned on moving to Canada to escape the coming
> economic armageddon, you may wish to do so to keep your sons - and
> daughters - from being drafted.
In the meantime while we are continuing to contract, housing will continue to be hammered - next year will be particualarly bad as ARMs recast with 10.5% unemployment.
Hope people find some more dips to play!