Property Worsens: Beginning, Middle or End?

A few quick words on Wednesday's Housing data: Of course, it was god-awful. Despite the incessant bottom-calling by the clueless, spin-miesters, and industry insiders, we are nowhere near the end of the cycle.

If we are lucky, this is now the middle -- as opposed to the 2nd year of a decade long slump.

As to Wednesday's data -- it was a mixed blessing. The manifest problems in Housing are twofold: Prices are too high, and inventory is too great. These are, of course, related. Once prices come down further, the supply problems will begin to clear up. So the enormous drop in permits/starts is, perversely, a good thing.

Let's go to the data:

New construction of homes in the United States fell 10.2% in September (seasonally adjusted 1.19 million units)

The drop in housing starts was the 4th consecutive monthly decline.

We are now at the lowest level for new home construction since March 1993.

Starts of single-family homes fell 1.7% to 963,000 (annualized);

Construction of large apartment units plummeted 34.4% to 228,000.

Building permits fell 7.3% to a seasonally adjusted rate of 1.23 million -- the lowest level since July 1993.

So there is no bottom anywhere in sight. The scary question is whether we are in the 5th/6th inning, or the 1st/2nd inning.

For a real good read, Dan Gross goes postal on Treasury Secretary Paulson: Dan claims that the subprime collapse didn't bother the Bush administration until Wall Street bankers started whimpering: Protecting Paulson's Pals.

Lastly, considering how much denial there was for the longest time, I found some of the Wall Street economists comments at Real Time Economic terribly amusing. This crowd has not yet begun to panic . . .

Housing Starts amd Completions

chart courtesy of Calculated Risk

Sources:
New Residential Construction
(Building Permits, Housing Starts, and Housing Completions
http://www.census.gov/const/newresconst.pdf
New construction falls 10.2% to fewest housing starts since '93
ALEJANDRO BODIPO-MEMBA
Detroit Free Press, October 17, 2007
http://www.freep.com/apps/pbcs.dll/article?AID=/20071017/BUSINESS07/71017022

Protecting Paulson's Pals
Daniel Gross
Slate, Tuesday, Oct. 16, 2007, at 5:52 PM ET
http://www.slate.com/id/2175724/

Economists React: ???Horrific??? Housing
October 17, 2007, 10:25 am
http://blogs.wsj.com/economics/2007/10/17/economists-react-horrific-housing/

Standard & Poor's Ratings Services Reviews Ratings on Certain U.S. Residential Mortgage-Backed Securities Issued in 2007 http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-17-2007/0004684220&EDATE=

Comments

[Malkiel:]

Wall Street hates academia and ridicules its methodology, but a lot of questions would be objectively answered here by a basic study showing how many people fall into each wage percentile, the maximum home price they could expect to afford based on their wage, and how many homes are on the market in the various price ranges. We would then have objective information on how many homes have to fall how far in price to clear the market, what percent fall that would be, and get a handle on subjective factors like how much homeowners can become upside-down on a mortgage in relation to their income before default becomes a necessary safety valve. The Fed and Treasury should fund such studies if nobody's out there doing them...

2007 Oct 18 10:06 AM

[armadillo:]

All you have to do is look at other huge bull markets and see what happened to them after they discovered reality. In the end they correct to long term norms.

2007 Oct 18 12:28 PM

[Keithcho:]

The chart is very interesting. We will see whether it is telling: The housing market has never (since 1970), had a major sell off that did not bottom during a recession. There are two choices, here - either it is different this time, or it isn't. I'll bet on the last 37 years of history, you?

2007 Oct 19 03:21 AM

[Chris White:]

House pricing and refinancing maturing arms. Discussion about refinancing maturing arms has focussed on borrower ability to make higher payments. In a market characterized by declining prices the refinance issue might better be expressed by the question "how much cash will refinancing borrowers have to bring to the table?"

If what was considered equity evaporates what will the LTV ratio range be in lenders underwriting guidelines, when L is a fixed amount in dollars, and as a proportion of V probably 1.0 or greater, and V is declining, and always less than L?

The larger the overhang of unsold homes the greater the certainty of future price reductions. The larger the difference between the amount to be refinanced and the value of the asset against which the security is to be issued, the more cash the borrower needs to bring to the table.

Therefore the prospect of future price reductions will be to the 'credit crunch' as the prospect of housing price increases were to the willingness to finance evanescent equity expansion

2007 Oct 19 09:22 AM