From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘NAHB

WSJ Property Report

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Three things caught my eye in the Wall Street Journal’s Property Report this morning. The first two were a positive note about Home Depot — which is doing a land-office business — and a related note about the aging of American homes.  Let’s start with the second point first.

The National Association of Homebuilders reports that the median age of a home in America is now 37 years, up from 31 years just a decade ago.  Mathematically, that’s an extraordinary increase.  It basically means that very few new homes have entered the housing stock in the past 10 years, and almost no homes have been torn down or in some way converted to some other use.  That’s the point NAHB is trying to make.  Our aging housing stock is a drag on the economy.  People who might have been employed in higher wage construction jobs are now serving coffee at Starbucks.  This ultimately means that our flat-line inflation in America has, to at least some degree, been achieved on the backs of stagnating wages.

Of course, this means good things for home re-hab shops like Home Depot.  If you’re house is getting older, you have two choices.  You can sell it and buy a new one (making the NAHB happy) or you can buy a can of paint or some new kitchen cabinets at Home Depot.  (Full disclosure — the folks at my local Home Depot know me by name.)

As for the third point, while wage stagnation is decidedly affecting the middle class, there is no such problem in the luxury class.  Belmond Hotels, owners of some of the world’s premier hotels, are considering buy-out offers.  Financially, this suggests they think we may be at the top of a cycle, and it’s hard to imagine that they could wring any more profits out of their properties than they do already.  Ergo, it may be time for them to cash in, and rumor has it some sovereign wealth funds are offering top dollar.  (Full disclosure — Belmond owns the Charleston Place in Charleston, SC, where I spend every New Years.  It is one of my favorite hotels in the world.)

By the way, Belmond is one of those fascinating stories that underscores the globalization of commerce.  Belmond was actually founded with the acquisition of the Hotel Cipriani in Venice, Italy.  It owns the Orient Express, which is run out of its Paris Office.  Corporate offices are in London, and today owns properties in 22 countries, including the historic 21 Club in New York and the Copacabana in Rio.  The legal headquarters, however, are in Hamilton, Bermuda, and the stock trades on the NYSE.  Go figure….

Written by johnkilpatrick

August 15, 2018 at 8:34 am

Need a job?

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I pulled up behind another car at a stop light yesterday and couldn’t help but notice a license plate surround for the local construction laborers union, plus a labor bumper sticker in the back window.  This attracted my attention because the vehicle in question was a late-model Cadillac Escalade.

Admittedly this may have been an outlier, but all across the U.S. there is a huge demand for entry level construction trainees.  Here in Seattle (a high-wage, high cost-of-living area) entry level “no experience, no education” wages are in the high-teens per hour, rising rapidly to $50k per year with a modicum of experience.  Take some winter months to go get trained in plumbing, electrical, or HVAC and the annual income gets into the high 5 to low 6 figures pretty quickly.  (The average plumber in Seattle makes $95,000 per year, according to   Some sources put this number somewhat lower, but you get the point.

Ironically, these jobs are going begging, and the reasons are varied.  Many young people are scared off from a job that evidently requires a lot of outdoor work and physical stamina.  Yet, as one young woman in a carpenter training program noted, “If you work hard and you put in your effort, they’ll take you over somebody else who is muscle…” Baby boomers seem to think that if their children don’t go to college, they’ve failed as parents, and so the percentage of construction workers under age 24 has declined in 48 states since the peak of the housing boom.

Wall Street Journal has a great article this morning called “Young people don’t want construction jobs. That’s a problem for the housing market.”  It is indeed.  It is one reason why home construction per household in America is at its lowest level in 60 years of keeping records, according to the article. The reasons include lack of vocational programs in high schools, although many of these are coming back. The Home Builders Institute, affiliated with the National Association of Homebuilders, has as many as 6,000 young people in their training pipeline at any given time.

I’m not suggesting — nor is the WSJ, that flooding young people into construction jobs will change the housing affordability metric overnight.  The homebuilding industry is still replete with problems such as a trade war with our principle material suppliers, a lack of housing infrastructure, and short-term financing issues.  Nonetheless, young people might want to be reminded that a surprisingly large number of CEOs in the construction field got started with a hammer in their hands.

Written by johnkilpatrick

August 1, 2018 at 8:06 am

Lumber and other simple stuff

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Tariffs anyone?  Jann Swanson wrote a great piece for Mortgage News Daily last week, titled “NAHB: Lumber Shortages and Prices Hamper Affordability.”  In short, the shortages of framing lumber are “now more widespread than any time” since the National Association of Homebuilders began tracking in 1994.  About 31% of single-family builders reported shortages of framing lumber in the most recent survey, along with shortages in other building materials.  A full 95% of homebuilders reported that prices of these materials were having an adverse impact on housing affordability.

While there are numerous reasons for this, including a shrinkage in the building infrastructure during the several years following the housing melt-down, the NAHB notes that the top five building materials with shortages are on the Trump Administrations list of tariff targets.

Written by johnkilpatrick

June 25, 2018 at 7:31 am

Latest from S&P Case Shiller

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The always excellent S&P Case Shiller report came out this morning, followed by a teleconference with Professors Carl Case and Bob Shiller.  First, some highlights from the report, then some blurbs from the teleconference.

The average home prices in the U.S. are hovering around record lows as measured from their peaks in December, 2006, and have been bounding around 2003 prices for about 3 years.  Overall in 2011,  prices were down about 4% nationwide, and in the 20 leading cities in the U.S., the yearly price trends ranged from a low of -12.8% in Atlanta to a high (if you can call it that) of 0.5% in (amazingly enough) Detroit, which was the only major city to record positive numbers last year.  In December, only Phoenix and Miami were on up-tics.

One thing struck me as a bit foreboding in the report.  While housing doesn’t behave like securitized assets, housing markets are, in fact, influenced by many of the same forces.  Historically, one of the big differences was that house prices were always believed to trend positively in the long run, so “bear” markets didn’t really exist in housing.  (More on that in a minute).  With that in mind, though, w-a-a-y back in my Wall Street days (a LONG time ago!), technical traders — as they were known back then — would have recognized the pricing behavior over the past few quarters as a “head-and-shoulders” pattern.  It was the mark of a stock price that kept trying to burst through a resistance level, but couldn’t sustain the momentum.  After three such tries, it would collapse due to lack of buyers.  I look at the house price performance, and… well… one has to wonder…

As for the teleconference, the catch-phrase was “nervous but hopeful”.  There was much ado about recent positive news from the NAHB/Wells Fargo Housing Market Index (refer to my comments about this on February 15 by clicking here.)  The HMI tracks buyer interest, among other things, but the folks at S&P C-S were a bit cautious, noting that sales data doesn’t seem to be responding yet.

There are important macro-economic implications for all of this.  The housing market is the primary tool for the FED to exert economic pressure via interest rates.  Historically (and C-S goes back 60 or so years for this), housing starts in America hover around 1 million to 1.5 million per year.  If the economy gets overheated, then interest rates can be allowed to rise, and this number would drop BRIEFLY to around 800,000, then bounce back up.  However, housing starts have now hovered below 700,000/year every month for the past 40 months, with little let-up in sight.

Existing home sales are, in fact, trending up a bit, but part of this comes from the fact that in California and Florida, two of the hardest-hit states, we find fully 1/3 of the entire nation’s aggregate home values.  The demographics in these two states are very different from the rest of the nation — mainly older homeowners who can afford now to trade up.

An additional concern comes from the Census Bureau.  Note that for most of recent history, household formation in the U.S. rose from 1 million to 1.5 million per year (note the parallel to housing starts?).  However, from March, 2010, to March, 2011, households actually SHRANK.  Fortunately, this number seems to be correcting itself, and about 2 million new households were formed between March, 2011, and the end of the year.   C-S note that this is a VERY “noisy” number and subject to correction.  However, the arrows may be pointed in the right direction again.

Pricing still reflects the huge shadow inventory, but NAR reports that the actual “For Sale” inventory is around normal levels again (about a 6-month supply).  So, what’s holding the housing market back?  Getting a mortgage is very difficult today without perfect credit — the private mortgage insurance market has completely disappeared.  Unemployment is still a problem, and particularly the contagious fear that permeates the populus.  Finally, some economists fear that there may actually be a permanent shift in the U.S. market attitude toward housing.  Historically, Americans thought that home prices would continuously rise, and hence a home investment was a secure store of value.  That attitude may have permanently been damaged.

“Nervous, but hopeful”


Housing News

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I was just at a luncheon (sponsored by the local chapter of the Appraisal Institute) on apartments.  One of the speakers noted that a real problem in doing adequate analysis was getting a handle on the single-family housing market — the data simply stinks due to the foreclosure mess, the number of homes being turned into rentals, etc.  Thus, as we try to ALSO project the future of the homebuilding industry (really down for the count the last few years), that same dirty-data problem is a real issue.

That aside, the National Association of Homebuilders released a report today noting that the NAHB/Wells Fargo Housing Market Index rose in February for the fifth consecutive month.  As I discussed back in November (click here for a link) this index attempt to project home sales based on model home traffic, customer inquiries, and such.  Even though the over all stock market was down today, this news sent homebuilder prices higher — indeed, Beazer Homes (BZH) rose by 3.1%, albeit to just over $3/share.

NAHB’s Chief Economist David Crowe said, “this is the longest period of sustained improvement we have seen in the HMI since 2007.”  Great news for homebuilders — we hope it stays this way.  For a full copy of the article, on Fox Business News, click here.

Written by johnkilpatrick

February 15, 2012 at 4:54 pm

Musings about the real estate market — part 1

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When we say the “real estate market” we’re really talking about four distinct but somewhat inter-related components:  housing sales (and values), housing finance, commercial real estate (starts, occupancy, etc.), and commercial finance.  Each of these components has plenty of sub-groupings.  For example, commercial apartment development is going well, although commercial apartment finance still has some problems.  Housing development finance is on life support.  Many aspects of commercial development (e.g. – hotels) are moribund.

I’ll start today with the most significant problem in the housing sector — the one which may take the longest to fix — and that’s housing starts.  The market is worse than it’s been since we’ve been tracking data (40+ years) and certainly the worst in my experience.  The attached graphic comes from the National Association of Homebuilders, and shows their tracking of both housing starts as well as the NAHB/Wells Fargo Housing Market Index (HMI).

The HMI is based on a survey of current new home sales, prospective sales in the next six months, and “traffic” of prospective buyers (seasonally adjusted).  While the two graphs seem to track one another, as you can see, the HMI is a bit of a leading indicator of the direction of housing starts.  On a historic basis, this makes sense, since homebuilders will “start” houses they think will be sold six months from now, and they will heuristically base that on traffic from prospective buyers.  (Back when I was in the game, we talked about a “qualified buying unit” being a prospective buyer or housing unit — such as a family — who actually had the capacity to buy a home and were actively in the market for a new home.)

As you can see, back during a period of relative housing stability (1985 – 2005), housing starts generally cycled between 1 million and 1.4 millin per year.  With the bubble in home ownership rates, starts got up to 1.8 million for a short period then collapsed.  More interestingly is the period between 1989 and 1993, when home starts dipped to about 600,000 per year, then rapidly bounced back to a healthy level.  That was a period marked by real problems with acquisition, development and construction (ADC) loans, but the underlying demand and value equations still held firm.  Thus, when the market cleared (when demand sapped up any supply overhang), the homebuilding community was ready to go back to work.

Today, it’s VERY different.  ADC lending is still nearly non-existent (compared to a half-decade ago).  The decline in values means that in many markets, it’s difficult to build a home for less than the selling prices.  Further, the permanent lending market is also problematic.  A big chunk of homebuilding is the “move-up” market, with a secondary chunk in the vacation or second-home market.  Down payments for “move-ups” and second-homes traditionally come from equity in existing homes.  However, a substantial proportion of homes in America have no net-equity.  Reports talk about the high percentage of homes which are “under water” (that is, the value is less than the mortgage.  However, for a home to have positive “net equity”, the value needs to exceed both the mortgage as well as anticipated selling costs.  A handy rule-of-thumb in many markets is that a home needs to be valued around 110% of the mortgage for a seller just to break even on a sale.  Worse, for there to be sufficient equity to “move up”, the home needs to be valued more like 120% to 130% of the mortgage.  That simply doesn’t exist in most of America right now — trillions of dollars in paper equity disappeared over the past few years.

Additionally, there is a huge overhang in shadow inventory.  As I noted in a recent blog post, Americans are currently buying under 5 million homes per year (new plus re-sale) and in a healthy market, the inventory for sale is about a six-month supply.  However, the shadow inventory alone is close to 6 million right now (and that doesn’t include “regular” homes on the market).  Thus, we’re looking at a couple of years of absorption just to get the market back to some level of stability.  Even THAT presumes that the home ownership rate will stabilize right where it is (it’s been falling precipitously for several years).  Bottom line, I wouldn’t be betting on home construction any time in the near future.

This is important for several reasons.  First, home construction is a very big chunk of the economy.  When homes aren’t getting built, lots of carpenters, plumbers, electricians, materials suppliers, real estate agents, bulldozer operators, bricklayers, and such don’t have work.  Second, these are skills which are being lost to the economy.  Further, if America is going to get the employment picture fixed, these people have to get back to work.

Good news — such as it is — is that the HMI is trending upward, ever so slightly.  It’s currently standing at 20, up from a bottom below 10 about 3 years ago (and a near-term bottom of about 15 earlier this year).  It needs to bounce all the way back up in the 50 range if the leading-indicator relationship holds true for it to point toward a healthy housing market.  It actually went that far in the 1991 – 1993, range, when it bounced from 20 to 70 in about 3 years.  However, that was a market with pent-up demand, good values, and a healthier lending climate.

Written by johnkilpatrick

November 30, 2011 at 3:30 pm

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