New Residential Construction Report: November 2007

Today’s New Residential Construction Report continues to firmly indicate the intensity of the second leg down in the decline to the nation’s housing markets and for new residential construction showing substantial declines on a year-over-year and month-to-month basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 33.7% nationally as compared to November 2006.

Moreover, every region showed significant double digit declines to permits with the West declining 39.6%, the South declining 36.6%, the Midwest declining 20.6% and the Northeast declining 20.9%.

Keep in mind that these declines are coming on the back of last year’s record declines.

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 compared to the peak years of 2004 and 2005.

Notice that on each chart the line is essentially combining the year-over-year changes seen in 2005, 2006 and 2007 showing virtually every measure trending down precipitously.

Although year-over-year declines to permits have not accelerated measurably in terms of maximum monthly YOY declines, the fact we are continuing to see declines of roughly 20%-30% on the back of 2006 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.






Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 33.7% as compared to November 2006.

Regionally

• For the Northeast, single family housing down 20.9% as compared to November 2006.
• For the West, single family housing permits down 39.6% as compared to November 2006.
• For the Midwest, single family housing permits down 20.6% as compared to November 2006.
• For the South, single family housing permits down 36.6% compared to October 2006.

Housing Starts

Nationally

• Single family housing starts down 34.9% as compared to November 2006.

Regionally

• For the Northeast, single family housing starts down 29.9% as compared to November 2006.
• For the West, single family housing starts down 38.3% as compared to November 2006.
• For the Midwest, single family housing starts down 28.6% as compared to November 2006.
• For the South, single family housing starts down 36.1% as compared to November 2006.

Housing Completions

Nationally

• Single family housing completions down 28.5% as compared to November 2006.

Regionally

• For the Northeast, single family housing completions down 32.7% as compared to November 2006.
• For the West, single family housing completions down 19.2% as compared to November 2006.
• For the Midwest, single family housing completions down 26.0% as compared to November 2006.
• For the South, single family housing completions down 32.9% as compared to November 2006.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Crashachusetts Existing Home Sales: September 2007

Yesterday, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for September 2007 showing a slight bump in the road for president Doug Azarian’s purported two month long winning streak of increasing home sales.

In fact, MAR reports that in September, single family home sales plummeted 13.7% as compared to September 2006 with a median price decline of 0.3%.

Along with MARs release, Azarian blames the media coverage of the mortgage-credit crisis for keeping buyers on the sidelines while he simultaneously attempts to goad potential buyers by invoking the “for credit-worthy buyers now is a really good time to buy” jargon.

“it is definitely possible that all the reports about foreclosures, lack of financing, and the like have taken their toll and the result is that buyers are waiting on the sidelines. However, despite the disappointing news, interest rates are still low and for credit-worthy buyers now is a really good time to buy.”

Although I just love the addition of “for credit-worthy buyers” to that tired old line, I can’t say the same for the quality of MARs numbers.

As usual, The Warren Group’s latest figures were significantly different than that of MARs showing single family home sales down 18.7% and a median price decline of 4.4% as compared to September of 2006.

Whereas last month I speculated that we were at a crossroads of perception and information, I believe with September’s results we have firmly crossed over to the new reality of virtually non-existent (or ridiculously costly and inaccessible… take your pick) Jumbo and No-Doc loans.

We are now clearly seeing the results of the credit-mortgage crisis on home sales resulting in a new leg down that is not likely to recover anytime soon.

I now feel firmly that the next few monthly results of the S&P/Case-Shiller index for Boston will show renewed price declines indicating that as the mortgage-credit crisis unwinds, out area is not immune.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the year-over-year and peak percentage changes to the S&P/Case-Shiller home price index for Boston (BOXR) from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog for the concept).


The “year-over-year” chart compares the percentage change, on a year-over-year basis, to the BOXR from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines” and as we can see, if history is to be a guide, we could be about one third of the way through the annual price declines with the majority of falling prices yet to come.

The “peak” chart compares the percentage change, comparing monthly BOXR values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

Notice that peak declines have been more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

September’s Key Statistics (according to MAR):

• Single family sales declined 13.7% as compared to September 2006
• Single family median price decreased 0.3% as compared to September 2006
• Condo sales declined 13.0% as compared to September 2006
• Condo median price increased 1.9% as compared to September 2006
• The number of months supply of single family homes stands at 12.1 months.
• The number of months supply of condos stands at 12.1 months.
• The average “days on market” for single family homes stands at 129 days.
• The average “days on market” for condos stands at 135 days.

The Daily 2¢ - Opps! Spoke Too Soon

Krikies!

Remember all the stuff I wrote yesterday about recent congressional actions being limited and not qualifying as a federal bailout? Well you can just scratch all that.

In a really disturbing and outright reckless move, New York Senator Charles Schumer (D-NY) yesterday publicized details of a soon to be introduced bill that, if enacted, would both raise the portfolio caps on Fannie Mae and Freddie Mac by 10% ($145 billion with $72 billion being allocated for refis of rate shocked mortgages) and increase the conforming loan limit to as much as $625,500 in “high cost” metro areas.

In his statement, Schumer stated that by enacting the “Protecting Access to Safe Mortgages” act, the federal government would be “deploying Fannie and Freddie to do the job they were designed to do.”

Obviously, the devil will be in the details but what I find most alarming is the possibility of the GSEs (and the federal government by a supposed but tenuous promise) stepping into the role as Jumbo lender of choice for the housing bubble’s metro markets.

Schumer’s suggestion that Fannie and Freddie were “designed” to lend up to $625,000 buyers of metro areas single family homes is both offensive and preposterous.

Originally created during the throws of the Great Depression, Fannie Mae and later Freddie Mac were designed to bring liquidity into the nation’s housing markets and help foster affordable housing NOT offer the most affluent of Americans a “government guaranteed” loan on their trade up to a luxury metro home.

What is it with this conforming limit anyway?

If it’s not the OFHEO director refusing to lower the limit, even after two consecutive years of declining home prices, it’s Congressmen like Senator Schumer and Representative Barney Frank (D-MA) proposing to raise it by as much as 50% simply to buy the housing bubble some more time.

And what about affordability in the metro areas?

How will it help the metro housing markets to support the artificially inflated home values that leave hordes of first time homebuyers permanently sidelined?

This is just completely idiotic and ill conceived.

The government is seriously risking getting in the way of a much needed correction in home prices that will materialize one way or another.

If the correction is left unfettered it will be destructive but likely come quickly and resolve as the market works through the damage and resumes some level of normal historical growth.

By tinkering in the market to extent proposed by Senator Schumer, the federal government will likely cause the housing correction to be draw out, with multiple failures and false bottoms, causing a slow bleed that could last for many years (i.e. the Japan model).

Be sure to let Senator Schumer know what you think of his proposal.

The Daily 2¢ - Federal Nonconformists

I can't think of a more preposterous and irrational example of exuberant upside bias on the part of the Federal government then that of the recent toiling over the OFHEO conforming loan limit.

For those of you that are not yet familiar, the Office of Federal Housing Oversight (OFHEO) is the government agency that is responsible for regulating the two primary Government Sponsored Enterprise (GSE) mortgage giants, Fannie Mae and Freddie Mac.

One of the main, if not THE main, role of OFHEO is to set the “conforming loan limit”, a maximum loan value that is used to act as the threshold between a “safe” loan that Freddie Mac and Fannie Mae are allowed to purchase and an “unsafe and unsound” loan “running contrary to statute”.

This is how the “conforming” vs. “Jumbo” loan is defined… below the limit is “conforming” above is non-agency “Jumbo”.

Currently, the limit for a single family home is $417,000, pretty frothy when you consider that, only as far back as 2000, the limit stood at $252,700.

Keep in mind that this means that an average home buyer can go to a mortgage broker, bank or other lender and borrow as much as $417,000 of home loan principle and still remain eligible for GSE underwriting that carries a lower rate of interest since GSE loans are assumed to be backed by the full faith and credit of the federal government (this assumption is really a bit of a myth… but that’s a post for another day when things really start to quake!).

So how is it, you ask, that the limit nearly doubled in roughly 5 years (keep in mind, it was set to $417,000 in November 2005)?

Easy, when the home prices went up, they simply raised the value (for more detailed information on how they change the limit, see my prior post on the subject).

But now comes the sticky part… now that home prices are going down, what are they doing to the limit?

The answer is surprise… OFHEO is coming up with all sorts of oddball ways of keeping from having to lower the limit (see my past two posts on the subject)

In fact, in 2006 when home prices declined which, according to their prior inflating methodology, should have resulted in a reduction of the conforming loan limit, OFHEO revised their guidelines and left the limit unchanged.

Now in 2007, home prices are going to fall again, only this time by a likely far more significant percentage and what has OFHEO done in response?

They have revised the guidelines once again, effectively postponing any decrease until certain conditions are met (again, see my prior post on the subject).

After soliciting public comment in June and July about the proposed changes to the guidelines, OFHEO received a number of respondents, particularly the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Mortgage Bankers Association (MBA) as well as Fannie Mae, Freddie Mac and a whole raft of two-bit mortgage lenders who expressed clear opposition to the changes NOT because they would leave the limit unchanged BUT because they feel OFHEO should NEVER LOWER THE LIMIT!

ONLY UP... NEVER DOWN!

If that weren’t outrageous enough, there has been much talk for the last few days coming from Congressional figures such as Representative Barney Frank (D-MA), the Chairman of the House Financial Services Committee, who actually prefers that the limit be INCREASED, even in the face of two years falling home prices!

The point of this, obviously, would be simply to force Fannie and Freddie to effectively “re-liquefy” the now totally stalled Jumbo market.

Apparently though, both Treasury Secretary Paulson, and Senate Banking Chairman Dodd (D-CT) have expressed that it will take specific legislative action in order to allow OFHEO to raise the conforming limit above the current level.

Now, I’m not very sure why they have concluded this as OFHEO just modified its procedures for lowering the value without any legislative debate whatsoever, but it really makes no difference.

If you listen closely to Dodd, Frank and Paulson, they are all saying the same thing namely it will take legislative action and the legislation is on the way.

This is one of the most egregious examples of a dimwitted Congressional-Federal assault on the “free” markets I have ever seen.

They, in the supposed well meaning attempt to help “average” Americans, are essentially attempting to control the market price of residential real estate.

Don’t underestimate the severity of this fumbling.

To put it in better perspective, it has recently been estimated (in Dean Bakers latest excellent paper... hat-tip HousingPanic) that there is anywhere between $4 to $8 TRILLION of housing equity that will be lost in the process of deflating (re-pricing) the housing bubble, bringing prices back to hundred year historical averages.

That’s nearly 2 – 4 times larger than the entire 2008 Fiscal Year Federal Budget.

This means the by finagling with things like the conforming loan limit, mortgage bailout funds and foreclosure timeouts, the Federal government is attempting to use both taxpayer dollars and the full faith and credit of our government in order to maintain absurdly inflated housing values and the artificial wealth this boom created.

This would clearly create a moral hazard of unparalleled proportions.

Remember, Jumbo loans were most frequently used by upper middle class affluent home buyers, and for the ones that are now in trouble, the ride down will be painful.

But that is the price you pay for taking a risk in a “free” market.
And who better to take this hit than Americans with generally good incomes and employment opportunities.

If the government is smart it will allow this natural correction to take place unfettered, permitting scores of Americans to learn a valuable life lesson.