Posts Tagged ‘housing starts’
The right number of new homes?
Much has been said in recent days about the Census Bureau’s August 23rd announcement about new residential home sales in July. To summarize, 372,000 new homes were sold last month, which is 25.3% above the July, 2011. This is good news for a lot of reasons — construction workers get jobs, banks get new loans, etc., etc.
Naturally, it begs the question, “what’s the right number of homes?”. Here at Greenfield, we’ve posited that the U.S. housing price “bubble” was really a demand bubble, fueled by easy money, which led to an artificial inflation of the nation’s home ownership rate. (Housing bubbles in other countries were fueled by similar problems.) We’ve also suggested that the market won’t get healthy again until several things happen, including a stabilization of the homeownership rate at long-term equilibrium levels, a restoration of “normal” conventional lending (both for home mortgages as well as for development financing) and a restoration of the housing infrastructure (development lots in the pipeline, local regulatory department staffing, hiring & training skilled construction workers, etc.) . It is highly doubtful that we’ll see housing starts and new home sales “bounce back” to normal levels anytime soon, and our own projections suggest several years before we get back to “normal”.
But this begs the question: What’s normal? (A great t-shirt from the Broadway play, “Adams Family” simply said, “Define Normal”.) Anyway, as new home sales go, it’s helpful to glance at the experience over time. It may surprise you.
One might actually expect the graph to be less erratic, but there are good explanations for the “bobbing and weaving” you see from year to year. During recessions, new home sales decline, and then bounce-back afterwards. During periods of economic overheating, the FED tightens the money supply, thus causing home starts/sales to decline. (In practice, this is a major tool in the FED’s toolkit, simply because it has a great multiplier effect on the economy.) Of course, the bubble is quite apparent, and following it the inevitable decline.
With all that in mind, though, we can see that there is a decided upward trend in the chart — that makes sense, since a growing population, coupled with a fairly consistent homeownership rate, will generally demand more new homes each year than it did the year before.
The second graphic adds a simple linear trend line for simplicity sake, which is not far removed from the actual household formation trend line during that same period. Note that from the beginning of the chart until about 2001, we had a nice cycle going, and in fact around 2001, the blue line should have turned negative to account for the recessionary impacts. However, money got very loose during the early part of the last decade, and rather than housing starts serving its normal “pressure relief” role, it was driven into a counter-cyclical path. This created the oversupply we are now trying to work through (often referred to as the “shadow inventory”) and we won’t see a healthy market until this inventory is mopped up.
Good news, though — if you glance quickly at the second chart, it becomes clear — albeit from a very simple visual perspective — that we must be close to a spot where an up-turn in the chart would give us as much negative area red line as we had during the previous cycle above the red line. In short, we’re not at the end of the tunnel yet, but this simple way of looking at things suggests we may be able to SEE the end of the tunnel in the not-too-distant future.
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New Home Sales — “Much Ado About Not Enough”
Big news today — new home sales hit an annualized rate of 369,000 in May, compared to 343,000 in April. That’s 20% higher than a year ago. It also beat economists collective prognostications of 350,000.
Wow…. and only about 63% less than the 1,000,000 per year we would consider health.
And about 74% below the peak of 1.4 million during the boom years.
Obviously, there’s a problem here, and unless and until we get back to “normal”, the portion of the economy which is driven by home development, construction, financing, and sales will continue to suffer. Three things are currently terribly broken, and fixing them is no easy task.
1. The lending market is utterly disfunctional. There was a great headline in one of the papers the other day — if you don’t NEED money, there’s plenty of it. Unquestionably, one of the contributing factors (not a major one — but one, none the less) to the market meltdown was the sale and financing of homes to folks who had utterly no idea how they were going to meet their mortgage payments. However, even in good times, we know that a certain percentage of loans will go sour — call it about 2%. The straw that broke the camel’s back was when the recession hit, that “sour loan” percentage went up to about 4% – 6%. Unfortunately, the secondary market had “priced” these loan pools with the notion that only 2% or so would go bad. The loan pools themselves were so badly over-leveraged (at Lehman, apparently, the pools were leveraged something like 35-to-1 or more) that an increase into the 4% range completely destroyed the secondary mortgage market. Today, the pendulum has swung too-far in the other direction, and first-time homebuyers, who often have good jobs but little in the way of demonstrable credit, are completely shut out. If they can’t buy “starter” homes, then the “move-up” market suffers, and the retirees (who want to buy in places like Reno and Ft. Lauderdale) can’t sell their homes to “move down”. Fixing this lending crisis is the first order of business.
2. The land development business is broken. Even if we magically “fixed” the lending problem tomorrow, there is a real shortage of land in the development pipeline. It takes years to turn a vacant field into a subdivision full of lots (or a condo site), with extensive engineering, planning, financing, and entrepreneurship efforts. Even in good years, there is a fair amount of risk-taking and capital expenditure. We can’t just pick up where we left off a few years ago, because many (most? nearly all?) of these development projects burst like soap bubbles during the recession. Thus, we have to completely hit the “re-start” button on subdivision development in America. Unfortunately, there is absolutely no appetite for financing these projects, and many of the players have gone out of business. After World War II, the country was able to kick-start the housing market with extraordinarly favorable financing (remember VA and FHA loans?). None of that exists today, and the secondary market to sustain all of that has gone away. In the absense of a Federal mandate to kick-start housing, comparable to the GI Bill of 1944, this aspect of the market will continue to be flat-lined.
3. Local community infrastructure development is broken. Housing development requires a substantial public-private partnership. In many communities, much of this is paid for as a “public good”, while in others there is the expectation of significant developer contribution. Nevertheless, local planning agencies, transportation and utility departments, and even school districts and fire departments have to stand ready to provide infrastructure for housing. Local government fiscal crises have frequently broken the back of these agencies. Nationally, we’ve laid off something like 50,000 teachers in the past few years, yet new housing development and household formation will require increasing numbers of schools. The same is true for fire fighters, EMTs, police, road maintenance, and utilities. Until our cities, counties, and states are back on their financial feet, this segment of the equation will continue broken
Sadly, these are interactive parts of the same equation. For example, local governments fund planning departments with fees paid by developers. Hence, the city or county reviews tomorrow’s building permits with fees paid by yesterday’s developers. Restarting the system will take talent, money, and some significant leadership, none of which is currently apparent.
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The housing market — Damning with faint praise
Sorry we’ve been absent for so long — it’s been a terrifically busy summer and early fall here at Greenfield. Hopefully, we’ll be back in the saddle more frequently for the rest of this year.
From an economist’s perspective, there’s plenty to talk about — Euro-zone debt crisis, job growth (or lack thereof), Federal and state debt, etc., etc., etc. My own focus is the mixed-message on the housing market, which continues in the doldrums. If you listen to the reports from the National Association of Realtors, you get some positive headlines followed by fairly depressing details. Existing home sales are better than forecasted, mainly due to great borrowing rates and the influx of “investor-buyers”. Lots of single family homes and condos are being turned into rental property or held “dark” for the economic lights to come back on. A surprisingly large number of homes are purchased for all-cash, since if you believe that housing prices are near their bottom, then residential real estate may be more stable — and potentially have better returns — than equities.
On the other hand, new home sales continue to languish at their lowest levels since we started keeping score in 1963.
Intriguingly, if you ignore the post-2003 “bubble” period, and trendline the data (which grows over time, to account for the increasing population), you end up with about 900,000 new home sales in 2011. As it happens, we’re actually around 300,000, reflective of a significant decline in home ownership rates — now down to about 66%.
The real question is whether or not this change in home ownership rates is temporary or permanent. We happen to think it’s permanent. That’s not all bad news, but it means that when new home sales come back on-line (eventually getting back to somewhere short of 900,000, but certainly higher than 300,000), we won’t see a return to bubble-statistics.
From a small northwestern observatory... 