Wednesday, June 06, 2007

Constructing Capitulation: April 2007

Not only did April’s results show further weakening of the nations housing markets, it also provided definitive proof that the housing decline is having a significant and undeniable negative impact on the overall economy.

The latest preliminary GDP report confirms that the historic decline to residential fixed investment continues weigh heavily the US economy with GDP registering a mere 0.6% for Q1 2007 a fact now not so underestimated by the Federal Reserve Chairman Bernanke.

“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.”

“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.”

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

The housing weakness also appears to clearly show up in retail sales as consumers pullback on spending for some of the most discretionary of goods.

The recent National Association of Realtors Pending Home Sales Report, a forward-looking indicator, confirms that demand for existing homes continues to trend down as seen in the following chart (click for larger version).

Note, that the Pending Home Sales data shows that demand for existing homes has been steadily trending down, a fact that is more obvious if you compare the latest results to the peak results seen in 2005 shown below.

The Census Department’s New Residential Construction Report showing continued weakness to both permits and starts that, when smoothed and averaged, clearly indicates and predicts an accelerating slowdown.

The Census Department’s New Residential Home Sales Report that, while vexing traditional media sources, clearly showed a decline in sales activity for new homes priced at or above $300,000 while also showing a significant jump in sales for new homes priced below that, especially below $200,000.

There now is ample evidence to suggest that the pricing trends for new homes that was established during the historic run-up are now in the process of reverting as homebuilders slash prices to counter slumping demand.

NAR’s Existing Home Sales Report showing continued uniform weakness in sales activity resulting in year-over-year declines for every region and across every home type as well as many significant declines to median selling prices.

The March 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, Bob Toll, CEO of Toll Brothers (NYSE:TOL), offered a conflicting point of view to Treasury Secretary Paulson’s optimistic outlook on housing.

“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.”

Furthermore, Toll Brothers reported $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% in the second quarter of 2007.

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

With the weakening trend continuing, total residential construction spending fell 14.41% as compared to April 2006 while private single family construction spending declined by a grotesque 25.60%.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 15.41% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 14.41% as compared to April 2006.
  • Single Family residential construction spending dropped 25.60% as compared to April 2006.
The following charts show changes to construction spending (click for larger version):