Thursday, May 31, 2007

GDP Report: Q1 2007 Preliminary

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q1 2007 GDP Report showing truly anemic growth of 0.6% weighed down by, amongst other things, continued weakening to fixed residential investment.

Major praise has to go to Professor Nouriel Roubini for his accurate forecasting having called this deceleration to GDP well in advance as well as virtually nailing the actual figure earlier this month in his post on the “growth recession” while the advance GDP report suggested that growth was closer to 1.3%.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a decline of 15.4% since last quarter while shaving .87% from overall GDP.

Housing continues to be, by far, the most substantial drag on GDP subtracting an amount roughly surpassing to the contributions made by ALL non-durable goods including food, clothing, gasoline, fuel oil.

Keep in mind that the initial GDP reports are highly revised so it seems likely that the coming report (Q1 final) will further capture the historic housing market weakness seen in the first three months of 2007.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The Fed For The Record: May FOMC Minutes

The Federal Reserve Board yesterday released the minutes of the May Federal Open Market Committee (FOMC) meeting erasing any doubt that they had initially underestimated the significance of the current housing decline.

From yesterday’s released minutes:

“The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply.

Nevertheless, most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.

Participants remained concerned that the housing market correction could have a more pronounced impact on consumer spending than currently expected, especially if house prices were to decline significantly.

The Committee thought that the statement should reiterate the view that the adjustment in the housing market was ongoing, but that nevertheless the economy seemed likely to expand at a moderate pace over coming quarters.”

It’s important to keep in mind that as recently as the January meeting, the Fed was talking stabilization ala Bob Toll and The National Association of Realtors.

From the January FOMC minutes:

“The decline in residential construction continued to weigh on overall activity, but some indications of stabilization in the demand for homes had emerged.

Residential construction activity remained quite weak late last year, but home sales showed some tentative signs of stabilization.

Inventories of unsold homes remained considerable although they ticked down in December for the second straight month. The most timely indicators of home prices, which are not adjusted for changes in quality or the mix of homes sold, pointed to small declines.

In their discussion of the major sectors of the economy, participants noted that the housing market showed tentative signs of stabilization in most regions.”

Additionally, looking back just one year, it seems obvious now that the Fed initially choose to hold a very optimistic outlook for an obviously speculative and historically overheated housing market.

From the May 2006 FOMC minutes:

“Anecdotal information pointed to some cooling of housing markets.

That cooling was especially noticeable for high-end homes and for houses in markets that previously had experienced the steepest appreciation.

Data on home sales, permits, and starts on the whole likewise suggested that activity was gradually diminishing.

Some reports indicated that speculative building of homes had dropped off considerably, but inventories of unsold homes still seemed to be expanding.

Although fresh comprehensive data were not available, home prices on average appeared still to be rising, but at a slower pace than over the past few years.

Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for some households and erode mortgage loan performance for some lenders.

Nonetheless, the household sector seemed likely to remain in sound financial condition overall.

On balance, consumption spending was viewed as most likely to expand at a moderate pace in coming quarters.”

Paradoxically, the latest sentiment caused Wall Street to rally apparently on the notion that the Fed is “out of the way” in terms of interest rate hikes and soon may even lower rates in an effort to soften the blow of the housing decline.

It’s important to keep in mind that the leadership at the Fed has, on several occasions, outlined very clearly that they do not intend on stepping in to preserve specific asset prices particularly homeowner equity.

The following excerpt was taken from a speech given by Federal Reserve Governor Donald L. Kohn in March of 2006 titled “Monetary Policy and Asset Prices“.

“Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk. Whatever might have once been thought about the existence of a "Greenspan put," stock market investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy.”

“The same considerations [as was given to dot-com stock holders] apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions. Our actions will continue to be keyed to macroeconomic stability, not the stability of asset prices themselves.”

Tuesday, May 29, 2007

S&P/Case-Shiller: March 2007

Today’s release of the S&P/Case-Shiller home price indices for March continued to show weakness for the nation’s housing markets with thirteen of the twenty metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -8.38%, San Diego at -5.97%, Boston at -4.86%, and Washington DC at -4.78%.

Additionally, both of the broad composite indices showed accelerated declines slumping -1.88% for the 10 city national index and -1.36% for the 20 city national index resulting in the first negative appreciation on an annual basis since the 1990-1991.

To better visualize the results use the PaperMoney S&P/Case-Shiller/Futures Charting Tool and be sure to read the Tutorial in order to best understand how best to utilize the tool.

Monday, May 28, 2007

Gettin’ Down with Toll

Toll Brothers (NYSE:TOL) reported Q2 earnings results last week confirming a $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% as compared to Q2 2006.

Additionally, Toll yet again reduced its expectation for the maximum number of homes delivered for 2007 from 7300 homes last December to 7000 in Q1 now to 6900.

During the conference call, CEO Bob Toll uncharacteristically offered very little optimistic sentiment even offering some skepticism regarding recent Treasury Secretary Paulson’s “market bottom” outlook and the recent up-tick in the Census Department’s New Home Sales.

“I think what that indicates is that most new homebuilders that are large, the public homebuilders, their average product goes anywhere from about $250K up to us which is about $700,000 so obviously the increase [in sales] is taking place below our space. Which means that we’re not out of the woods yet. I took with surprise yesterday and it’s now confirmed today by this analysis when the secretary of the treasury said that we’ve got the hard times pretty much behind us I wondered how many communities he had and where he got that information but I now understand that the information he got hadn’t been pealed away, I guess, to show that it was $150,000 housing. So I would say that we have not got the bad times behind us yet though it could be… you never know.”

When asked about the April year-over-year comparisons getting less negative Toll suggested that favorably comparing against a year that “stinks” is not what he’s looking for.

“As you get further in to a down market, in terms of length of time, the comparisons are going to get better. So that, ultimately, if we stay here for a long period of time, you will see that April sales equaled April sales last year. That’s not what we’re looking for of course. So, I think the statements are a little misleading. The comparisons are good but what you’re comparing to stinks so that’s why your getting unhappiness expressed by the public home builders.”

Ivy Zelman, analyst with Credit Suisse First Boston tweaked Bob Toll in a minor skirmish over Toll’s interest in buying additional land.

Toll: “I would hope that we would increase the land portfolio somewhat from where we are now, we are actively looking and trying to buy… We have raised thresholds because we can and I think we should operate more prudently, more carefully than we did when the market was going up.”

Ivy: “You don’t feel that having almost a 10 year supply of land is enough?”

Toll: “Well, we hope that it’s not 10 years Ivy.”

The complete conference call can be listened to here.

Here are some of the interesting data points from the Q2 release:

Second Quarter Results

  • Net income was $36.7 million down 79.0% compared to Q2 2006.
  • Pre-tax land write-downs totaled $119.7 million up 897.5% compared to Q2 2006.
  • Earnings per share declined 66.7% as compared to Q2 2006.
  • Total revenues were $1.17 billion down 18.75% compared to Q2 2006.
  • Net signed contracts were $1.17 billion down 25% compared to Q2 2006.
  • Quarter end backlog was $4.15 billion down 31.6% compared to Q2 2006.
  • Signed contracts was 2031 down 14% compared to Q2 2006.
Current 2007 Projections

  • Deliver 6100 – 6900 homes (prior estimate 6000 – 7000).

Saturday, May 26, 2007

Crashachusetts Existing Home Sales: April 2007

This week, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for April 2007 showing further weakness to the regions residential housing market.

Along with the release, MAR President Doug Azarian continued to maintain an optimistic outlook on the trend.

“The housing market continued to trend in a positive direction for the month of April … While the number of detached single-family homes sold was down, the 1.7 percent decrease year-to-year was the lowest we’ve seen in the month of April for the past three years. … With inventory levels decreasing and interest rates still low, demand should continue to keep prices stable through the end of the spring home buying season,”

Probably the most notable data-point of the report is the continued increase of the average “days on the market” resulting in an increasing monthly supply.

Although the total residential inventory is lower now than in April of 2006, the sales pace is continuing to slow.

It’s important to remember that we are again seeing year-over-year sales declines “on the back” of last years historic sales drop-off indicating truly fundamental weakness.

This is inevitably resulting in climbing inventories that for some towns, such as Concord, are exceeding last years levels while many other towns continue to simply trend upward.

Use the PaperMoney Inventory Tracker to follow your town’s daily inventory as well as visualize the inventory changes that have occurred over the last year.

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

April’s Key Statistics:

  • Single family sales declined 3.5% from March and declined 1.7% as compared to April 2006
  • Single family median price increased 0.3% from March and declined 2.3% as compared to April 2006
  • Condo sales declined 0.7% from March and increased 0.7% as compared to April 2006
  • Condo Median Price declined 1.6% from February and increased 2.6% as compared to April 2006
  • The number of months supply of residential properties stands at 10.0 months.
  • The average “days on market” for single family homes stands at 150 days.
  • The average “days on market” for condos stands at 143 days.

Friday, May 25, 2007

Existing Home Sales Report: April 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing continued and uniform weakness of the nations housing markets.

Without missing a beat, the new “fill-in” Senior Economist Lawrence Yun continues to suggest that the weakness is indicating stabilization.

“We’ve been anticipating slower home sales because many subprime loan products are no longer available … In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community. Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to scare buyers into action with the threat of increased interest rates.

“Long-term financing remains favorable, but interest rates are rising … Although some buyers have a wait-and-see attitude regarding home prices, they should consider that rising interest rates later this year could offset a lower sales price when you get down to the monthly payments.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Sales are, in fact, down in EVERY region with the majority of declines in the double digits.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their April 2007 report.

Particularly notable are the following:

  • Majority of median prices are down.
  • ALL sales are down.
  • ALL Inventory and Months Supply show HIGH double digit increases on a year-over-year basis.

A Closer Look at New Home Sales

Let’s take another crack at making some sense of the numbers released in yesterday’s New Home Sales Report.

The most notable figures released in the report were the 10.9% decline in median selling price and simultaneous 16.2% jump in the number of sales.

Revisions notwithstanding, these figures seemed to indicate that declining prices are now driving greater number of sales.

Although it’s likely true that lower prices are, in fact, spurring on sales, it’s important to look at the distribution of sales activity in order to gain a truly accurate sense of how the housing markets are changing.

It’s also important to understand that the “headline” new home sales number is essentially an estimated count of the number of homes sold during a given month regardless of price.

As we all know very well, home prices have increased dramatically in recent years, and new homes, especially in the bubbliest markets, are very expensive.

In order to really understand what’s happening in the market, as well as make the sentiment and results provided by luxury homebuilders like Toll Brothers (NYSE:TOL) and Hovnanian (NYSE:HOV) “jive”, we need to examine the home sales results by particular price ranges.

Luckily, the Census Department also publishes the price range breakdown and sales counts of the home sales that are used to formulate the overall “headline” total home sales number.

First, let’s examine the following chart that shows home sales counts for four separate price ranges since January 2000 (click ALL charts for larger versions).

Note, the data has been smoothed using a six month moving average so as to make the trends a bit more obvious.

Notice that in 2000, the majority of new homes sold were priced at or less than $150,000 and the minority of new homes sold were priced at or above $300,000.

Notice also, that some time in 2005, this relationship reversed.

That is, in 2005, the distribution of home sales exactly flipped, the lowest priced homes showed the lowest number of sales while the highest priced homes showed the highest number of sales.

Although, this change can obviously be explained by a number of factors including increasing prices, changes in buying patterns and builder products, it represents an important shift in the market that may, or may not be fundamental and long lived.

Now, look at the following chart which shows the same four price ranges, unadjusted and un-smoothed, since January of 2006.

Notice that during the course of the housing slowdown, the numbers of homes sold in each price range appears to be beginning to converge.

That is, the number of homes sold in the top two price ranges are trending down while the number of homes sold in the bottom two prices ranges are flat to recently trending up.

This may indicate that the distribution flip that occurred in 2005 and still exists today, is likely in the process of reverting.

Notice also, that April 2007’s data showed the largest simultaneous decline in the top two ranges and “incline” to the bottom two.

This explains why there was such a dramatic increase in sales and simultaneous decline in median price.

There was a surge in the number of new homes sold below $199,999 and a slump in homes sold at or above $200,000.

Another way to look at this data is to visualize the “market share” of homes sold per each of the four price ranges.

The following chart shows the share of each price range out of a total of 100% of all unadjusted new home sales.

Notice again how the market share has changed since 1999 when the lowest priced homes showed the largest percentage of home sales and the highest priced showed the smallest.

Also note that in April 2007 (all the way to the right), the bottom three ranges are increasing in market share while the share of homes sold at or above $300,000 is decreasing.

Aside from all this, let’s remember that, in general, new homes, particularly the “McMansions” commonly seen in the luxury developments of the nations bubbliest areas, are very expensive.

In order to really make the new home sales numbers “jive” with the outlook and results reported by home builders like Toll Brothers (NYSE:TOL), Hovnanian (NYSE:HOV), and KB Home (NYSE:KBH) we are going to need look ONLY at the top price range of homes priced at or above $300,000.

As you can see, there was a considerable expansion of homes sold in the top price range which peaked in August of 2005 and has been heading down precipitously ever since.

Thursday, May 24, 2007

New Home Sales: April 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for April showing an unexpected “surge” in new home sales.

Probably the most notable figure in today’s report was the 10.9% decline to the median home price, the largest decline since December 1970, further reflecting the weakness brought on by the inventory oversupply and continued reduced demand.

It’s important to note, however, that with this report the Census Department revised every month back to January 2005 as formally imputed permit data, a factor in the new home sales estimate, was replaced with actual data.

This, as well as other factors, effected both sales and price data, including a 22% downward revision to the March 2007 reported median home price providing further evidence that some caution should be used when interpreting this report.

The following charts illustrate the revisions to sales and median price published in today's report (click for larger versions).

As with prior months, on a year-over-year basis sales are still declining in the double digits at 10.6% below the sales activity seen in April 2006.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.

Look at the following summary of today’s report:


  • The median price for a new home was down 10.9% as compared to April 2006.
  • New home sales were down 10.6% as compared to April 2006.
  • The inventory of new homes for sale declined 4.8% as compared to April 2006.
  • The number of months’ supply of the new homes has increased 4.8% as compared to April 2006.

  • In the Northeast, new home sales were up 43.1% as compared to April 2006.
  • In the West, new home sales were down 25.4% as compared to April 2006.
  • In the South, new home sales were down 3.4% as compared to April 2006.
  • In the Midwest, new home sales were down 28.1% as compared to April 2006.

Wednesday, May 23, 2007

Mad As Hell

In an impassioned yet somewhat contrived and disingenuous “finger pointing” appeal to the National Press Club, the Mortgage Bankers Association’s Chairman John Robbins yesterday placed the blame of the subprime meltdown squarely at the feet of “unethical” predatory lenders while simultaneously insisting that the extent of the damage has been overblown.

“I know the good my company, my employees and thousands of my fellow mortgage bankers have done for families, for communities, and for this country. Frankly, Id imagine my brief tenure as Chairman of the Mortgage Bankers Association would be celebratory. One part victory lap, one part implementation of initiatives with a lasting impact on the industry I so cherish. Yet I stand before you mad as hell. I have to be angry. It would be too depressing to accept that a very few, unethical people, can give my profession, and me, a black eye.”

Robbins goes on to use passionate words for everything from the role of Mortgage Bankers in promoting home ownership to immigrants utilizing subprime loans to get their share of the American Dream.

“Many of the people in this category are not mere victims of unscrupulous lenders. They’re smart people who took a calculated risk to get into a home, all along planning to refinance before the big jump in their ARM. We can’t leave these people twisting in the wind. They were practicing financial planning and attempting to take advantage of the opportunities they saw in the future. They were betting on themselves. To keep their financing options open, we must avoid a credit crunch.”

Yet when addressing real estate speculators, his tone quickly changed.

“It’s clear that our first steps are to help those that are in trouble. We mean homeowners living in their own homes. We’re not for rescuing real estate speculators. Blanket forbearances that bails out investors could actually drive up delinquency. Some might view it as a way to get out of their obligations… Even the talk of blanket forbearances could spur a surge in delinquencies.”

When addressing the question of who was responsible for the current state of the subprime market, Robbins risks an association “battle royal” with the National Association of Mortgage Brokers by pointing the points the finger squarely at “the short term folks” who care only about “their commission”.

“We need to identify the problem… unethical people. They’re responsible for this mess. The short term folks. People who get a commission when the deal happens. For them it’s the number of loans that count. Good loan, bad loan... who cares. For them, it’s all about their commission. … For the people who caused this problem, there’s no such thing as a lifetime customer. The closest they get is someone you refi every six months until they sink. They, not people with marginal credit, are the ones that need to be stopped. Frankly, it’s too easy to hang a shingle out and call yourself an expert in mortgages. We need licensing of brokers with a threshold that will weed out those unwilling to be responsible.”

In a particularly emotional and sappy portion of his address, Robbins recounts what it means to him to be a mortgage banker.

“Their stories take me back to one of my very first originations. The Realtor had left the keys to the house with me and asked if I could drop them off to the buyers once all the paperwork was done. Well, I went to their apartment, and we were sitting around a little Formica table… bright red. And I handed them both the keys at which point they both started crying. They said they never imagined they would own their own home. That was 37 years ago and you know it just never leaves you. There isn’t a day that goes by that I don’t stop and think about that scene going on thousands of times across this country. And that’s why, despite my temporary black eye, I’m proud to be a mortgage banker. Thank you.”

Later in the Q&A portion of the appearance, Robins is asked how immigrants in the past received financing to buy homes prior to the boom in subprime lending.

“Those that could afford to do so, and not all could, accumulated a traditional 20% down, waited years, and years, and years to obtain home ownership when they had the possibility to do that. But then home ownership was for the wealthy and the powerful not for the masses.”

Here Robins continently forgets that until recently the national home ownership rate had traditionally hovered at about 65%, hardly limited to the wealthy and powerful.

Furthermore, it has only been during last ten years, with lending running footloose and fancy free, that an extra 5% of Americans have been draw into home ownership many without down payments and with volatile and exotic affordability loan products.

Watch the entire National Press Club address on BNN!

Tuesday, May 22, 2007


Today brings six great additions to the BNN lineup, most notably, a Nightly Business Report interview with Federal Reserve’s Michael Moscow in which he admits, in so many words, that the housing decline has been more significant than the Fed had anticipated last year.

“As we move through this year, I would expect to see the housing market stabilizing, but no one can say exactly when that’s going to happen. I had thought it was stabilizing toward the end of last year as well and then we had some numbers that turned out to be worse than expected.”

Watch Moscow backpedal on BNN!

Next up there is News Hour interview with Treasury Secretary Henry Paulson in which he states that the US has experienced a “major” housing correction that was inevitable after years of historic gains. “That correction has now been significant, we think it is near the bottom, it will take a while to work its way through the system.” Unfortunately, Paulson only reiterates the same guidance he offered last year prior to the housing market taking another major leg down.

Watch Paulson call the bottom again on BNN!

Then there was Bernanke’s latest take on the subprime meltdown. Although Bernanke underestimated the extent to which the mortgage market would slide, he continues to present an optimistic outlook.

“How will developments in the subprime market affect the evolution of the housing market? We know from data gathered under the Home Mortgage Disclosure Act that a significant share of new loans used to purchase homes in 2005 (the most recent year for which these data are available) were nonprime (subprime or near-prime). In addition, the share of securitized mortgages that are subprime climbed in 2005 and in the first half of 2006. The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

Watch Bernanke talk containment on BNN!

Next, we have an excellent segment where Marc Faber, founder and managing director of Marc Faber Ltd outlines all the assets, sectors and regions in which he sees bubbles. In an era of historic liquidity, it’s not surprising that there are price bubbles in virtually every asset. Faber suggests that “everything will come down and massively so.” Additionally, Faber sees the whole global bubble scenario resulting from the inflation of the US housing bubble.

“The global liquidity was fueled largely from the American current account deficit, coming largely from the trade deficit, coming largely from US consumption, which was driven from the asset inflation in the US, most notably the housing market.”

Watch Faber talk Bubbly on BNN!

Next, Mortgage Bankers Association Chairman John Robbins discusses the subprime meltdown suggesting that the extent of the mess has been “oversold”. While pointing the finger squarely at predatory lenders for their obvious role in the current meltdown, Robbins adeptly downplays the possibility of any spillover and grater effects on the general economy.

“[the subprime meltdown] is certainly not expected to cause any great pain to the financial markets and shouldn’t bleed over to a great degree.”

Watch Robins spin on BNN!

Finally... Want to get cash out of your home without those pesky monthly payments and interest charges?

This CNBC segment features a new home equity product from Rex and Co. that allows homeowners to “borrow” against the future value of their home. That’s right! You get cash now, no payments and when you sell, you return the favor.

Watch and learn at BNN!

Friday, May 18, 2007

Starting to Apply Logic

Can there be anything funnier than watching CNBC correspondents struggle to make sense of economic data?

I’m sure there is but still, it’s pretty humorous.

Wednesday's New Residential Construction Report really threw them for a loop as it reported a “surprise” jump in national housing starts while also showing a somewhat expected decline in national housing permits.

Various CNBC “Realty Check” segments were dedicated to this supposed anomaly finally culminating with a Diana Olick blog post titled “Starting to Defy Logic” with some of the following text:

“The permits number makes more sense, down nearly 9%, which seems to say builders get that if they build a house right now, it’s going to be hard to sell. But I have to go back to the starts number. What’s up with that? What are these builders thinking??? Every expert I talk to, and trust me I talk to a lot, from Wall Street analysts, to DC industry wonks, tells me that until the builders get their inventory under control, any recovery in the housing industry is going to stall. There’s demand out there, but not that much!”

Well, looking at the data the way Diana views it (look at the following chart and click for a larger version), there’s no wonder she’s having difficulty.

What we can learn from this view is that permits, starts, and completions are very seasonal and volatile data series.

Also, looking at the materials released by the Census Department, not only are there large margins of error, but there are various other distortions that are introduced into the data when it’s compiled.

In order to shed a little better light on what’s going on with permits through completions, Ill go through the steps I took to clean up and chart the data resulting in a much more sensible view.

First, there is one distortion present in the headline permits versus starts and completions that needs to be factored out, namely the fact that not all starts (and subsequent completions) require a permit.

On average roughly 2.3% of projects are started without a permit resulting in there always being a slight disconnect between permits and overall starts and completions.

Fortunately, the Census Department releases two additional series of starts and completions that are compiled ONLY from permit issuing places that can be used to make an apples-to-apples comparison between permits, starts and completions.

Next, as you can see in the prior chart, these series are very erratic and seasonal and also subject to many revisions so instead of attempting to compare the actual series, I smoothed things out a bit by calculating the 12 month moving average for each series.

Keep in mind that we are working with the “raw” unadjusted data series so as not to incorporate any additional smoothing provided by the Census Departments seasonality adjustments.

Notice now that we have a much clearer, “noiseless” view of each data series that reveals their obvious trends.

Now, it’s important to remember that these three series are not simply independent time-data series but are, in fact, three logically related and dependent series.

In the process of a building project, first you get the “permit”, next you “start” building, and finally you “complete” the project.

For this reason, one must adjust expectations prior to reading a newly released Census Department report to account for the true nature of the data published simultaneously each month.

In general, permits “lead” starts by roughly a month so this month’s permits are for next months starts.

By the same token, starts lead completions by roughly six to eight months (it takes that amount of time to build a house) so this month’s starts will complete at least a half a year from now.

Because of this, it would be helpful, for comparative purposes, to shift the starts back one month, and the completions back roughly six months.

This way, you can see that permits are “indicating” next months starts result and starts are indicating the result for completions six months from now.

It’s important to keep in mind that this is not a perfect science as there are many factors that can limit the effectiveness of this kind of manipulation.

For example, its likely that the time between getting a permit and starting a project could be less than a month so in many cases, permits and their subsequent start might occur in the same month.

Additionally, the average amount of time between starts and completions may change over time so comparing a lengthy data series with one time adjustment (either 6 or 8 months but you can’t use both) may exhibit times where the completions correlate well with starts and other times when it does not.

That being said, for the series I’m working with, shifting seems to work fairly well.

As you can see in the prior chart, the series are not only smooth, but now very easy to relate.

Except for being an “order of magnitude” separate, the three series are following a very predictable trend, each one leading and indicating the future of the next.

Regarding the order of magnitude, Ill provide more analysis on this phenomena in a later post but I think for now it’s safe to say that cancellations are playing a role.

For now though, Ill factor out the order difference between each series by normalizing the data to a base of 100 as well as restricting the dates a bit.

Notice that now there is a very clear, consistent and obvious relationship between permits, starts and completions.

The trend is not at all enigmatic as CNBC made it out to be but, in fact, very logical and orderly.

Wednesday, May 16, 2007

New Residential Construction Report: April 2007

Today’s New Residential Construction Report continues to indicate significant weakness in the nations housing markets and for residential construction.

In particular, housing permits, the report most leading of indicators, again indicates substantial weakness in future construction activity both nationally and across every reported region.

In fact, nationally and for all product types, permits fell by 8.9% compared to March, the largest monthly decline since January 1990.

On a year-over-year basis, permits continue to decline substantially, even on the back of the significant declines seen last year.

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 and 2006 and shows virtually every measure trending down precipitously.

Although year-over-year declines to permits, for example, have not accelerated measurably from September 2006, the fact that they continue to decline roughly 30% should provide a solid indication that they are by no means stabilizing.

As predicted, housing completions are now declining significantly on a year-over-year basis indicating that the contraction in construction activity may soon be reflected by a substantial drop-off in construction related jobs as older projects reach completion and newer projects start at a far slower pace.

Here are the statistics outlined in today’s report:

Housing Permits


  • Single family housing permits down 6.0% from March, down 28.8% as compared to April 2006

  • For the Northeast, single family housing down 1.1% from March, down 18.4% as compared to April 2006.
  • For the West, single family housing permits down 7.7% from March, down 30.8% as compared to April 2006.
  • For the Midwest, single family housing permits down 6.8% from March, down 27.1% as compared to April 2006.
  • For the South, single family housing permits down 5.7% from March, down 29.7% compared to April 2006.
Housing Starts


  • Single family housing starts up 1.6% from March, down 18.9% as compared to April 2006.

  • For the Northeast, single family housing starts up 17.4% from March, down 19.4% as compared to April 2006.
  • For the West, single family housing starts up 8.0% from March, down 15.3% as compared to April 2006.
  • For the Midwest, single family housing starts down 13.8% from March, down 40.8% as compared to April 2006.
  • For the South, single family housing starts up 1.1% from March, down 12.0% as compared to April 2006.
Housing Completions


  • Single family housing completions down 3.4% from March, down 26.9% as compared to April 2006.

  • For the Northeast, single family housing completions down 3.5% from March, down 41.0% as compared to April 2006.
  • For the West, single family housing completions down 6.4% from March, down 29.3% as compared to April 2006.
  • For the Midwest, single family housing completions down 6.9% from March, down 36.5% as compared to April 2006.
  • For the South, single family housing completions down 1.0% from March, down 20.1% as compared to April 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.

Tuesday, May 15, 2007

Boo Hoo?

Oh.. Boo Hoo.. That mean Lesley Stahl hurt the wittle twade organization’s wittle feewings…

Or so went the National Association of Realtors (NAR) sad, feeble smokescreen of a response to last Sunday’s 60 Minutes segment.

Well before you get all teary, let me remind you that the National Association of Realtors is not only Americas largest trade organization but also the most wealthy and influential Political Action Committee (PAC).

As such, they are routinely called to Capitol Hill to provide “important” testimony as well as certainly calling upon on our representatives (at least the ones they supported with campaign donations) to apply the best influence that money can buy.

Stated plainly, the NAR is far more powerful than any individual American using their campaign contributions and ongoing lobbying to virtually ensure that their interests are represented well in excess of the average consumers.

What happens if there is conflict between what would be in the best interest of the American consumer and what would be in the best interest of the NAR?

Ill let you decide.

The 60 Minutes segment merely stated the obvious, questioning the sense of the traditional 6% broker commission as well as pointing out that in the age of the Internet, the traditional real estate broker services are going the way of the buggy whip.

There were no new revelations in the segment as these are the very same issues many average consumers have asked themselves in recent years after seeing the obvious disconnect between the standard 6% commission Realtors have established and the actual work performed.

Yes, it’s true that, as NAR states, commissions are always negotiable and in fact average more like 5.1% nationally but one should use caution before jumping to the conclusion that Realtor commissions represent a free and efficient market.

The reality is that NAR has worked to prevent competition from limited service brokers who would otherwise charge minimal flat fees or commissions at or below 4% in exchange for services that generally assist sellers in listing their home with the MLS as well as providing a range of other Internet based marketing efforts.

Keep in mind that this attempt to stifle competition is really an attempt to prevent technology from doing what it does best, that is, bringing new and innovative services to the market that dramatically increase the efficiency of existing processes.

As we know very well, this efficiency is often translated to savings in the cost involved of a particular process which can be passed on to the consumer through free and unfettered competition.

Therein lies the real issue for the NAR.

The Mother of all “disruptive” technologies, namely the Internet, is bearing down on the NAR and instead of embracing the change and innovating, they are fighting it tooth and nail in an effort to maintain the status of the traditional full service broker model.

This is certainly NOT in the best interest of the consumer but is this really in the best interest of the association members?

You brokers out there ought to ask yourselves what services you have found to be most impressive recently.

The schlocky listing sites hosted by many full service agencies or the innovative services such as,, and

Remember, it’s your future that is in flux here.

You can either choose to join the trend that will inevitably yield a host of new services and models for transacting the business of real estate, or fight it and likely be left behind in an ever dwindling cohort of “old timers” attempting to provide defunct services.

The complete 60 Minutes segment as well as Lesley Stahl’s post-segment Q&A can be viewed now on BNN!

Sunday, May 13, 2007

Conspicuous Correlation

A lot has been made in recent years about the “wealth effect” associated to the unprecedented home value appreciation seen during the historic housing boom and its consequence on consumption and the general economy.

As the theory goes, as home values increase, homeowners “feel” wealthier, either directly through home equity withdrawal or indirectly by simply observing the increased value of their home asset.

The outcome is an increase in consumer confidence and, in turn, consumer spending, particularly on discretionary items.

Of course, this effect can work the other way as well, that is, as home values decline, homeowners, feeling a decline to their wealth, may pull back on spending.

It’s important to consider that, given the reckless lending and borrowing seen during the latest housing boom, it’s likely that consumers are not only going to feel their housing wealth decline, but also the burden brought by servicing their outsized debt obligations.

Either way, the “wealth effect” is a particularly important macroeconomic phenomenon as personal consumption accounts for over 70% of GDP.

So the key question is, has the recent decline in housing had a measurable effect consumer spending?

The answer appears to lie in data released in the Census Debarments Retail Sales Report which tracks total receipts at stores that sell durable and nondurable goods.

To reveal the trend, I have combined several of the key, discretionary retail sub-category results into a single “discretionary” retail sales series, and then charted the year-over-year percentage changes since 2000.

I then added the year-over-year percentage changes of the S&P/Case-Shiller Composite index which broadly and accurately tracks single family home prices using data from Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC.

The result is a significant correlation between the deceleration, and now outright decline, of home prices and a deceleration and subsequent decline in consumer spending.

The first chart (click for larger version) shows the complete series comparison from January 2000 to the latest reported months of 2007.

Note the precipitous deceleration and decline to home prices starting in January 2006 and the very well correlated decline in “discretionary” retail sales.

Also note that the latest decline to retail sales is easily the most significant and sustained seen since 2000, handily surpassing the decline that occurred during and preceding the 2001 recession.

The second chart (click for larger version) simply isolates the results from January 2006 in order to provide a clearer view.

Thursday, May 10, 2007

Toll’s Dirty Dance


Things have not gone well for Toll Brothers (NYSE:TOL), certainly not nearly as well as CEO Bob “Dancing on the Bottom” Toll had anticipated as 2006 drew to a close.

Back then, an optimistic Toll had suggested that the housing downturn may likely have bottomed.

“Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above.”

Furthermore, at that time Toll Brothers announced that they budgeted an additional $60 million to account for all pretax write-downs for the entire year of 2007, an allotment easily surpassed by the $96.9 million actually required for only the first quarter of 2007.

Now, Toll has announced an additional $90 million to $130 million in pretax write-downs for just Q2 2007!

That brings the total of pretax write downs to somewhere between $186.9 million to $226.9 million for just the first half of 2007, a truly astounding number compared to the $152 million in write-downs taken in all of 2006.

As for the dancing, Toll now suggests that things have taken a turn for the worse.

“Virginia came back… remember when I had said, either last quarter or the quarter before that that we were dancing off the bottom.. or something opaque like that, in the northern Virginia, Maryland, Washington DC market. The market continued to improve, not much but a little bit, and [now] it’s back down a little bit.”

As for additional impairment write-downs soon to come from obviously poorly purchased property such as a very large parcel Toll purchased on the outskirts of Las Vegas in January 2006, Tool responded:

“The real answer is, you haven’t reached the point where can prove to your auditors that the value isn’t there and therefore has to be written down in order to show a profit. I mean, you could argue all day that Vegas is slow and this property is going to come on the market in 09 and if things are in 09 as they are today, when we open it, we’ll be hard pressed show a profit and they’ll want to get vary exact and say ‘hard pressed quite do it’. You’ve got to show that you’re below the line.”

When asked about his outlook for the housing market in Florida, Toll replied:

“Nice place to play golf in the winter, but not a great place to sell homes right now. There are probably great opportunistic land deals in Florida, the problem is, sometimes half-price ends up to be twice-price.”

When asked if he thought there would likely be additional future reductions of “head-count” (layoffs) Toll responded:

“I prefer to call it overhead, and the answer is yes. We haven’t stopped, but we will be looking even more seriously at reducing overheads where sales paces are reduced.”

When asked to “grade” the different markets across the nation, Toll responded:

“In our northern territories, Massachusetts and Rhode Island are ‘F’. Connecticut is a ‘B+’. New York exurbs are ‘B+’, New York urban which for us is Queens, Brooklyn and Manhattan are a ‘B+’ if not an ‘A’. Jersey City and Hoboken are a ‘B+’. New Jersey suburbs, oddly enough when you juxtapose them against the New York suburbs ... you got an ‘F’, it may be due to the tax situation in New Jersey, Michigan is an ‘F’. Chicago is surprisingly still and ‘F’ market. Minnesota is a ‘C-‘ market which is a whole lot better than it was. The Philadelphia suburbs is a ‘B’ market for us. The Poconos is an ‘F’ market. The state of Delaware is a ‘C+’ market. The mid-Maryland shore, as I said earlier, is an ‘F’ market. Washington DC, northern Virginia is probably a ‘D+’ market. Raleigh is a ‘B’ market. Charlotte is a ‘B’ market. South Carolina is a ‘D’ market as in dog. Florida, central market, Orlando, we sell a lot of homes, we get the same homes back, we sell the same homes, we get the same homes back, it’s a very hard market to figure. People, I guess are renting them without ever moving in. That’s and ‘F’ market. Florida east coast is an ‘F+’ market. Florida north, Jacksonville, pretty much an ‘F+’ market. Tampa is an ‘F’. Florida on the west coast is an ‘F’. Texas is good, Austin is a ‘B’ market, Dallas and San Antonio, we’ve got a ‘C’ market because we haven’t got our product up and running as we should yet so it’s only a ‘C’ market. I suspect it’s really a ‘B’. Northern California averages to be a ‘C’ market for us, there are some pockets that are ‘B’ and some that are ‘D’. California southern market is a ‘C’ market for us. California Palm Springs is a ‘C’ market for us. Arizona … I would rate as a ‘D-‘. Vegas is definitely an ‘F’. Reno is an ‘F’. Colorado is a ‘C’.”

During the conference call, there is extensive discussion on Toll Brothers outlook for impairments as well as their methodology and criteria used to determine and take them which can be listened to in its entirety here.

Here are some of the interesting data points from today’s preliminary release:

  • Total revenue totaled $1.17 billion, down 19% as compared to Q2 2006
  • Quarter end backlog totaled $4.15 billion, down 32% as compared to Q2 2006
  • Net signed contracts totaled $1.17 billion, down 25% as compared to Q2 2006
  • Pre-tax land write-downs totaled between $90 million and $130 million
  • Q2 cancellations totaled 384 compared to 436 in Q1 2007
Remember, these results are preliminary and Ill post a more complete summary of Tolls Q2 results when they become available on May 24.

Tuesday, May 08, 2007

Pants On Fire!

Now that the National Association of Realtors Chief Economist David Lereah is soon to be history, let’s draw a bead on some of the other less-than-accurate, bullish-cheerleading paid-quacks out there spinning fantastic stories of housing’s future strength and riches.

Barry “Advocate of NO Housing Bubble” Habib

The CEO of the mortgage information service, The Mortgage Market Guide, Habib is frequently featured on CNBC as a mortgage expert who is well suited to advise homebuyers.

Of all the “experts” featured on CNBC’s bullish airwaves, Habib would handily win any competition for the most outlandish and self-serving statements, forecasts and recommendations.

In past CNCB segments, Barry has:

Harvard’s Joint Center for Housing Studies

This center, directed by Nicholas Retsinas, last year published a widely reported paper entitled “The State of The Nations Housing: 2006” that very clearly concluded that that outlook for residential housing was positive.

“Over the longer term, the outlook for housing markets is favorable. With household growth accelerating and second-home demand climbing, the number of conventional homes completed and manufactured homes placed in the coming decade should easily exceed the 18.1 million units added from 1995 to 2004. In addition, improvements in the mortgage finance system over the past several years, together with stricter inventory management in the home building industry, will help to dampen boom-bust cycles in the future. As a result, housing production should average more than two million units annually over the next ten years.”

Unfortunately for the average media consumer, it was not widely reported that the Joint Center for Housing Studies and the report itself was funded by such notable real estate insiders as The National Association of Realtors, The Nation Association of Home Builders, Fannie Mae, and Freddie Mac.

As for Retsinas, he has appeared frequently on sources such as PBS’s Newshour and CNBC and generally presents a somewhat balanced, possibly a tad too optimistic outlook while seemingly conscience of maintaining his credibility.

The “Bubble? What Housing Bubble?” Smiths

This married couple, Gary and Margaret Hwang Smith, two professors of economics at Pomona College in Claremont California last year published a widely reported paper (featured prominently by the New York Times in a article entitled “Some New Math on Homes”) that suggested that not only were many areas formally purported to be exhibiting signs of bubbles NOT bubbles, they were “screaming bargains”.

The Smiths, who have recently purchased a nearly million dollar home near their collage in Claremont also provide professional services for those who need financial coaching in order to “bring forth their best life”.

Their paper initially takes fairly sound position of using present and future rental income to calculate a “net present value” of a given home.

But then, unfortunately, the paper goes to great lengths in an attempt to justify recent prices by making overly optimistic assumptions as well as including some truly fuzzy logic.

For example, the Simth’s assist the cash flow derived from rental income with additional value derived from “non-financial factors”, such as a desire for privacy.

That’s about where the papers leaves reality and enters the realm of shameless spin and wishful thinking.

Remember, the problem with all of these “experts” is not that the average homebuyer turns to them to determine whether or not to make a home purchase.

In all likeliness, the average homebuyer has never even heard of any of these characters, even the NAR’s Lereah.

The issue here is that the lazy traditional media and overly optimistic and bullish business media take the reports, releases, and statements of these people and their respective groups and recast them into simple news blurbs that, being only loosely bound to reality, sow the seeds of widespread misinformation.

That being said, for a year now things have looked so bad that, try as they might, real estate industry shills have found it increasingly difficult to present overly optimistic information while simultaneously maintaining credibility.

Nevertheless, it’s important to remember, even celebrate, their contributions to inflating the single greatest housing bubble the country has ever seen, for at the very lest, we should remember next cycle to take every forecast with a grain of salt.

Copyright © 2007
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Monday, May 07, 2007

Inventory Tool Take 2

Today, I updated the Inventory Tracking Tool to better allow you to visualize the changes to an areas inventory.

I added the ability to visualize the average monthly inventory as well as the daily inventory over the full period that the tool has been operating.

The tool now includes the following charts:

  • Today’s Inventory - Today’s current inventory broken down to over 40 separate price ranges.
  • Monthly Inventory – The average inventory for each month beginning with the month that the tool started collecting to now.
  • Daily Inventory – The total daily inventory for each day beginning with the month that the tool started collection to now.
It’s important to note that data is collected as users request it so your town may or may not have a well populated data-set depending on how frequently you or others use the tool to check the data.

Most if not all of the most popular towns and metro areas are checked virtually every day so their data is mostly complete.

You can check out the tool here.

Thursday, May 03, 2007

Constructing Capitulation: March 2007

Well it’s safe to say that in March I almost capitulated as my server took a “hard landing” of its own putting a jeopardy all the Inventory, OFHEO, Case-Shiller and BNN data collected for an entire year.

Well luckily, I was able to recover everything and the server is now healthy and back up and running.

The same can’t be said for the nations housing markets though as they continued to flounder in March resulting in fairly uniform acceptance that the bottom was not seen last fall, as had been widely speculated, and that we are now on the verge of a new leg down.

The recent National Association of Realtors pending home sales data, a forward-looking indicator, seems to confirm continued weakness as shown by the following chart.

Note that, except for the West region, every 2007 year-over-year decline was larger than the declines seen in 2006.

Keep in mind that the 2007 declines are coming on “the back” of the declines seen in 2006 indicating accelerating weakness when compared to the peak year of 2005 as the following chart indicates.

The Census Department’s New Residential Home Sales Report showing more significant revisions to prior months results as well as continued weakness across virtually every region.

NAR’s Existing Home Sales Report showing the larges monthly drop in home sales since January 1989 as well as significant median price declines, particularly for single family homes.

The Census Department’s New Residential Construction Report showing accelerating weakness to both permits and starts pushing year-over-year declines to those measures above 20% for virtually every region.

The Q1 2007 GDP advance showed continued declines to fixed residential investment depressing the overall GDP by .97%, the slowest quarterly growth since Q1 2003.

The February 2007 results of the S&P/Case-Shiller Indices are continuing to show substantial declines to home prices in virtually every tracked market while housing futures continue to predict still further declines.

In a recent conference call, Angelo Mozilo, CEO of Counrtywide Financial (NYSE:CFC), suggested that his outlook on home prices are a bit of a mixed bag.

“I think, bottom line, it’s very difficult to determine where [home] prices are going. It would certainly, based upon our view of where the world is today, increased foreclosures, as that comes on to the market we’ve got to work through that. During that period of time, in certain areas of the country values will go down. Certain unique areas of the country, values will stabilize and others, although few, where values will continue to climb but not at the rate they did before so it’s sort of a mixed bag.”

Furthermore, Countrywide has now hiked rates significantly for their sub-prime products as well as indicating that their Q1 impairments related to their prime products totaled $135 million or over 30% of all impairments for the quarter.

The Census Department’s Construction Spending report for March again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell 14.37% as compared to March 2006 while private single family construction spending declined by a grotesque 27.2%.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 14.55% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 14.37% as compared to March 2006.
  • Single Family residential construction spending dropped 27.16% as compared to March 2006.
The following charts show changes to construction spending (click for larger version):