Saturday, December 02, 2006

Constructing Capitulation: November 2006

November seems to have brought back a smidgen of reality to real estate Bulls, having spent four magnificent weeks in October basking in the glow of Greenspan only to find that another month of truly heinous housing numbers were just around the corner.

Nevertheless, home building stocks began to present the initial stages of a rally after gaining votes of confidence from a round of analyst upgrades as well as the Bill and Melinda Gate Foundation.

Having only just entered the initial stages of this historic housing decline, it will certainly be interesting to see how investors function as accelerating weakness takes a further toll on the home builders.

November gave us the following:

  • NAR's Pending Home Sales report showed increasing declines to existing home sales both nationally and regionally, but most notably in the Northeast and Midwest regions where home sale activity has registered below 2001 levels for several months running.
  • A New Construction report showing housing starts plummeting to a six year low while regionally, housing permits showed some truly astronomical declines.
  • NAR's third quarter wrap-up showing that now 39 states are experiencing home sale declines with many of the formally hot areas showing high double-digit drop-offs.
  • The White House significantly downgrading its expectations for GDP for the remainder of 2006, 2007 and beyond.
  • An Existing Home Sales report showing the greatest single monthly drop to national median home price on record as well as a host of significant sales declines.
  • A Revision to Q3 GDP showing further declines in “Residential Investment” shaving a whopping 1.16% from GDP.
  • A New Home Sales report showing a host of truly astounding sales declines with the regional leader, the Northeast, presenting a 52.6% drop-off.
Now, December is opening with another, significant indicator that the housing decline is having a wider impact on the overall economy with the latest release of the Commerce Departments “Construction Spending” report.

The October report presented significant downward revisions to the August and September “residential construction” values resulting in an even more dramatic fall-off over the last 11 months.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 10.29% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 9.4% as compared to October 2005.
  • Single Family residential construction spending dropped 17.2% as compared to October 2005.
  • The latest 9.4% year-over-year decline is the LARGEST percentage drop in 12 years and the greatest drop to date for this year and for this cycle.

November clearly struck a dissonant chord to Octobers, maestro lead upbeat “worst is behind us” tune, now it will be interesting to see if December brings some sharp refocused expectations for the American Consumer and possibly even some reflection on housing related negative wealth effect should this holiday season be slow.