Posts Tagged ‘Housing Finance’
Japan — take 2
A correspondent on one of the news shows seemed almost apologetic this week in discussing investment opportunities following the crisis in Japan. I concur with the sentiment — the focus today must be on humanitarian and environmental concerns.
Nonetheless, Japan will fix the immediate problems, and then must move rapidly toward the economic issues. People need to be fed, housed, clothed, provided jobs, and treated medically. To accomplish this, they need energy (over 10% of their nuclear generating capacity has been wiped out) and capital.
It’s too early to get good facts on the housing disruption, but it is safe to say that the housing shortage will be north of a million units. The final tally will depend on whether or not large swaths of “buffer” zone will be created around the melted-down nuclear plants (probably so, but we don’t know for sure or how big yet). In a typical year, Japan builds less than 1 million housing units (788,000 in 2009), down from about 1.3-ish million a decade ago. Thus, the housing shortage will likely exceed a year’s typical output for their housing industry.
Further, even though Japan is a heavily forested country, they are the least-self-sufficient in terms of lumber of any developed nation in the world. By the last statistics I’ve seen (and these are estimates — Japan itself isn’t very forthcoming with this stuff) they import about 44% of their lumber needs. Canada has historically been their biggest supplier, followed by Russia, Indonesia, Malaysia, and the U.S.
From a global-trade perspective, this is problematic in the extreme. Ironically, the U.S.-Japan lumber trade has declined dramatically in recent years, due to foresting limitations here. China has become a big importer of lumber in recent years, principally from the same markets as Japan. Both China and Japan have faced the same commodity-price increases of late, mainly driven up by increasing demand in emerging markets.
Lumber is not the sort of thing that can be spun-up quickly. Here at Greenfield, world lumber supplies are not our expertise, and we would note that demand in the U.S. is down (due to the housing crisis) by an annual amount roughly equal to the potential housing disruption in Japan. Thus, there may be some offsetting world-supply equilibrium, albeit with prices (and transport costs) going through the roof.
None of this portends good things for prices of new homes in the U.S. One of the saving graces of the construction industry has been that costs of construction have fallen sufficiently so that builders can construct homes at prices which match the overall price decline. If lumber prices soar, as is quite possible, then it may very well be that homebuilders won’t be able to deliver homes at market prices. Since home builders are very much economic “price takers” right now, this could really be a short-term death knell for that industry and many of its smaller — and even larger — players.
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Housing equilibrium — part 3
The Economist is simply the most informative magazine in the world today. If I came out of a coma, I’d want it as the first thing I read. One issue, and I’d feel fairly well caught up. The on-line version is an extraordinary supplement to the print edition, and may very well be a one-stop shop for economic research.
With all the obvious sucking-up out of the way (and no, I don’t get a free subscription — I pay for mine just like everyone else), the current issue has a stellar article titled “Suspended Animation” about America’s Housing Market. In prior missives on this blog, I’ve drawn linkages between the home ownership rate (currently at about 66%) and the housing bubble (best visualized with the Case-Shiller Index). The article makes that same comparison, without drawing the conclusions I do (see below).
When visualized this way, the linkage becomes fairly clear and obvious. Nonetheless, the real question is “where is the bottom”. There is significant anecdotal evidence to suggest we may be closing in on it right now, but then again, there’s some evidence to the contrary. On the plus side, a LOT of speculative cash is entering the marketplace right now, and about a quarter of all home sales in America are cash-only (see the front page of the February 8, 2011, Wall Street Journal). More interestingly, in the hardest-hit places, such as Miami, this percentage is approaching 50%. From a pure chartist perspective, we note that the C-S index has been “hovering” around 2003 prices for several quarters now. Back in my Wall Street days (LONG before the movie of the same name), the technical analysts would talk about “bottoms” and “breakouts” and such. Of course, residential real estate is not a security, per se (although mortgages are), and the comparisons fall apart at the granular level.
On the down side, the Fannie Mae/Freddie Mac controversies continue to simmer. The Obama Administration and the Republicans in Congress are finding common ground hard to find. The “Tea Party” Republicans want the government out of the home lending business entirely, which means privatizing the F’s. This idea is getting no traction at all among the Realtors and the Homebuilders, two typically “Republican” groups who generally sound like Democrats on this issue. One might blame this on grid-lock, but these are fundamental issues regarding the government’s role in the housing market which date back to the Roosevelt administration. Congress — both Republicans and Democrats — emphatically wanted to goose the home-ownership rate over the last twenty years, and empowered the F’s to do that. After that, the Law of Unintended Consequences got us where we are today. Now, in the words of Keenan Thompson on Saturday Night Live, everyone wants congress to “just fix it!” but with no solution in sight. Until this gets “fixed”, house prices will, at best, probably bounce along where they are today.
From a small northwestern observatory... 