New Residential Construction Report: November 2009

Subtitle: Bounce Looking Wobbly

Today’s New Residential Construction Report continued to indicate a weak recovery for the new home market showing the first year-over-year increases to both permits and starts seen in at least 44 months (44 starts, 45 permits).

It’s clear now that the government’s housing stimulus tax credit and loose FHA lending policies have worked to prop both new and existing home sales.

The government’s efforts, which now include an extension of an even more broad housing tax credit, have sponsored demand and provided the new home market with a more fertile environment to clear.

Nonetheless, at 482K single family units (SAAR), the level of national housing starts still remains substantially below that seen in October 2008.

With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Any substantial departure from the current perception of a strong “V”-shaped recovery (i.e. stock selloff, protracted high unemployment, etc.) would likely send both new and existing home sales down for another go at the lows seen last March.

Single family housing permits, the most leading of indicators, increased 12.1% nationally as compared to November 2008 but still remains an astonishing 72.66% below the peak in January 2005.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.




Here are the seasonally adjusted statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits increased 12.1% as compared to November 2008.

Regionally

• For the Northeast, single family housing increased 6.4% as compared to November 2008.
• For the Midwest, single family housing permits increased 1.4% as compared to November 2008.
• For the South, single family housing permits increased 15.3% compared to November 2008.
• For the West, single family housing permits increased 16.3% as compared to November 2008.

Housing Starts

Nationally

• Single family housing starts increased 5.5% as compared to November 2008.

Regionally

• For the Northeast, single family housing starts increased 12.2% as compared to November 2008.
• For the Midwest, single family housing starts declined 13.6% as compared to November 2008.
• For the South, single family housing starts increased 12.9% as compared to November 2008.
• For the West, single family housing starts increased 2.1% as compared to November 2008.

Housing Completions

Nationally

• Single family housing completions down 31.1% as compared to November 2008.

Regionally

• For the Northeast, single family housing completions down 25.8% as compared to November 2008.
• For the Midwest, single family housing completions down 28.7% as compared to November 2008.
• For the South, single family housing completions down 35.3% as compared to November 2008.
• For the West, single family housing completions down 25.8% as compared to November 2008.

The FHA Meltdown!

Back in 2006 and 2007 I detailed the push by the Washington elites to “modernize” the FHA by lowering its standards effectively making it more “competitive” with the other major government and private institutions operating in the nation’s mortgage market.

Back then it appeared that FHA had become almost completely ineffective with loan insurance volume dropping over 95% in some areas in just the preceding five years.

But this drop-off was simply the result of the significant lowering of the lending standards of other public and private institutions and the sharp and artificial rise in home prices.

Stated plainly, FHA couldn’t compete because its statute simply prohibited its operation within such a distorted credit environment and inflated housing markets.

Rather than simply recognizing the obvious dangers in forcing FHA to compete in a market that was clearly undergoing a systemic meltdown the shameful Washington elites, prompted by the coming elections, self interested RPAC (Realtor Political Action Committee) initiatives, and just plain negligence, pushed forward with their efforts to “revitalize” FHA thereby “expanding American homeownership”.

As former senator Hillary Clinton explained in April of 2007, the proposed FHA modernization was a worthy cause “With the meltdown in the subprime housing market, it is clear that there needs to be a real alternative for more working families who want to achieve the dream of home ownership…”

So, the government continued to drive down standards while simultaneously pushing the populous theme of “homeownership for all” even directly in the face of epic levels of uncertainty and the obvious possibility that many new low standard loans would go almost directly into delinquency and foreclosure.

When, in January 2008, I protested legislative actions to increase of the “conforming loan limit” (affecting Fannie and Freddie as well as FHA) to as much as $730,000 Representative Barney Frank responded to my email with the following:

“With regard to the FHA, the Congressional Budget Office gives us a positive score with a comparable increase in the limit - that is they find that these loans will be repaid at an even higher rate than the other loans that fall below the old limit.”

Well, now comes news that FHA is in serious trouble as a result of significant levels of mortgage-related losses with 7.8% of their insured loans 90+ days delinquent or in default forcing its reserves to likely drop below 2% of the loans they insure, the minimum level mandated by Congress.

Some are suggesting a government bailout is on the way while HUD Secretary Shaun Donovan suggests that the chances are 50%-50%... either way this whole episode provides a nearly perfect example of how our government is simply disgraceful.

Faux Economics

Driving about these days it’s hard to miss (… at least in my area) the impact of the American Recovery and Reinvestment Act.

Road projects are littered throughout Massachusetts and it doesn’t seem to matter what hour of the day or night you are out, crews (…including state police) are on site toiling away “reinvesting” our and future generations tax dollars in roads, bridges, sidewalks and all manner of decrepit infrastructure.

While this is certainly a means of pushing out dollars into the economy, is it fundamentally effective?

From the looks on the faces of road crews and state police they are simply going about their business, many likely vaguely aware of the government hand sponsoring the recent boom in demand for their labor but few stopping to ask questions.

To them, this is a boom and like all booms, active participants become complacent about their good fortune neither dwelling on the artificial forces driving it nor considering the possibility of its end.

Like a massive wave of prosperity, booms wash over what by contrast looks like a dry and desolate beach of economic malaise lifting a commodity, equity, asset class or even a whole industry along with its labor force high into what appears to be a limitless stratosphere of economic expansion.

Of course, we know very well that no boom lasts forever.

So, what good is this boom in infrastructure spending actually doing?

The projects themselves are investments but only in a limited sense… infrastructure starts to deteriorate immediately upon use with each hour marking a step closer to future rounds of “reinvestment”.

Infrastructure is more of a liability… it needs continuous costly upkeep otherwise its defective state would be counterproductive and even, in some cases, dangerous.

Also, it’s not as if the government mandated a re-design of existing infrastructure… that might actually lead to real fundamental improvement… instead government is simply looking for a quick and dirty means of pushing dollars (… future borrowed or current taxed and printed) into the economy under the guise of “investment”.

Participants aren’t any better off either.

Road crews and state police are working overtime likely making more money and bettering themselves for the moment but what did they really do to deserve this opportunity and good fortune?

Nothing … and how well they will manage the fruits of their labor will likely be a direct reflection of the ease at which it was produced.

But the government is counting on this as well… they ultimately want the “reinvestment boom” recipients to SPEND this phony prosperity NOT save it or use it to pay down prior debts.

But, are service providers, retailers, manufacturing and construction really any better off if the dollars funneled through “reinvestment” projects actually promote a temporary and artificial jump in consumption?

So you see, we keep pushing the questions on up the chain… What is the actual benefit of an artificial boom on false “investments” driving artificial earnings and artificial consumption?

Question of The Day - Government Controlled Economy?

Its one thing for them to tax it … but to run it?

Here is another great post by excellent analyst Ira Artman in which Ira estimates that the U.S. government now controls 49.1% of the U.S. economy.

But remember… all these federal bailouts were for our own good!

Question(s) of The Day - Will Government Meddlers Ever Learn?

Isn’t the OCCs findings on the re-default rates the most blatant illustration that all the government meddling is only exacerbating the housing decline?

Will the government ever learn from its mistakes?

The Almost Daily 2¢ - The Times They Ain’t a Changing

Not to take anything away from Barack Obama’s historic victory last night, clearly the election of the first African American president is a momentous event for United States and further represents to many hope and optimism for the future but this blog is about the economic events of our time and the fact remains that the U.S. and world’s outlook remains grim.

Let’s remember that, contrary to popular partisan banter, the credit bubble that is in the process of unwinding before our eyes was NOT the product of one administration or party or even a single philosophy.

What we are seeing is the disorderly collapse of the world’s economic model in the face of its obvious and even blatantly obvious problems.

The era that is now closing behind us was rife with speculation, profiteering, fraud, pandering and phony prosperity.

Our governments failed to lead, ignoring the growing liabilities that resulted from past eras all the while creating even larger liabilities for our future.

Individuals learned to ignore risk, embrace financialization and live a better life not through hard work, planning and sacrifice but through debt fueled chicanery.

We all knew the imbalances and distortions existed but we choose to ignore them.

But the cat is now “out of the bag” as caution, uncertainty, fear and even panic take up their proper positions amongst the animal spirits that make up the jumble of sentiment that guides our “essentially”-free market economies.

Firms and households alike have got the message… we are in a different operating environment … a new reality and further there is a certain realization that the old reality was but a mirage.

To date we have merely witnessed a partial unwind of the financial side of the picture.

The real human toll is only now starting to be paid as firms combat this new reality with cutbacks and layoffs.

But these late cycle attempts to prop up profits and justify fictitious value are doomed to failure with likely record corporate bankruptcies on the horizon.

Households and firms are on a downhill slide to a more meager yet fundamental station in life that no amount of government meddling can prevent.