Saturday, November 18, 2006

Bottom? What Bottom?

Regarding the US market, this is food for thought:
...Indeed, if the bulk of the housing recession is behind us, then this would go down in post-war history as one of the shallowest housing corrections on record.

This week, the news out of the Homebuilders belied the "Housing is Bottoming" meme. The simple truth is that 46 year low interest rates (~5.125%) created a generational boom in Housing construction, sales, investment, and speculation. Now that rates have increased as much as 40%, and home prices have nearly doubled in 7 years, all the while inventory built to record levels -- the blush is off the rose.

How likely is it that this housing correction will be milder than average? To answer this we need to first determine whether the current housing cycle is less extreme than prior cycles. If you look at the dollar-volume of single-family home sales to GDP (chart 2), you will notice that this is hardly the case. The dollar-volume to GDP ratio reached a record high 16.3% in 2005, almost double the median percentage of the entire series dating back to 1968.


So, the current housing cycle isn't less extreme than prior cycles, but is the correction near the bottom? Not according to the supply-demand balance. Chart 3 shows the year-over-year percent change in single-family homes for sale vs. the year-over-year percent change in single-family homes sold. In September of this year, homes sold fell 15.7% year-over-year while homes for sale increased 30.4%. The sold - for sale spread in September was minus 46.1% - the most negative spread ever except for minus 53.2%, which occurred in July.

More charts, more discussion. Check it out.

And from the Nouriel Roubini's Blog:
For the last few weeks and months I have been writing dozens of detailed notes and blogs (see my latest here) rebutting the utter nonsense that has been spewed - based on little or no data - on the alleged bottoming out of the housing recession. Even Alan Greenspan - the allegedly careful reader of macro data - had joined this cheerleading clown show and the NAR spin of half-lies that "we are near the bottom of the housing recession". The actual data that were coming out of the housing market in the last few weeks were clearly inconsistent with this cheerleading non-sense and spin. So, maybe these delusional optimists will now shut up for a while and listen to the numbers after today's announcement that housing starts fell over 14% last month and that they are now at their six year low. Even worse, building permits, that are THE leading indicator of future housing activity, fell further by 6.3% and they are now at their lowest level since 1997.

And even at these low levels of permits and housing starts the housing sector is nowhere near its bottom. In previous housing recessions, housing start fells as much as 40% to 50% from their peak; so, with starts now being only 27% down, the housing bust has still a very long and ugly way downward to go. And lower permits today mean lower housing starts ahead, and lower starts mean lower construction and lower construction means much lower construction jobs; expect over 800K jobs to be lost in housing in the next year.

So beware of the new spin that you will hear soon claiming that, with starts now down 27%, the bottom of the housing bust is near; building permits and housing starts are likely to fall at least another 20% in the next 12 months before any bottoming out of the worst housing bust in the last five decades is reached in 2008.

2 Comments:

Blogger Veronica Lodge said...

For the last few weeks and months I have been writing dozens of detailed notes and blogs (see my latest here) rebutting the utter nonsense that has been spewed - based on little or no data - on the alleged bottoming out of the housing recession.

It's refreshing to find an impartial source of information on the real estate crisis. Only those with an ulterior motive will be trying to spin the dismal facts into a cheery predictions.

The real estate circus has folded its tent. Once the equity goes flat, or into negative territory, all of the bills will come due. There will be no more phony equity to bail out distressed home debtors. Then, the spiral of death begins: The economy shrinks, foreclosures increase, the economy shrinks more, foreclosures increase more, the economy shrinks even more...and then, CRASH!

It's all over but the shouting. This will be a hard landing.

Nov 18, 2006, 10:31:00 PM  
Blogger Lisa said...

Agreed! And once the fairy tale of 20% annual appreciation is debunked, the siren's song of RE will vanish as well. Who wants to have 40%+ of one's take-home pay feeding an asset that's likely to be flat or declining for the next few years?? Why bother?? This will add to the death spiral.

Fear & greed fed the monster on the way up, and it will do the same on the way down.

Nov 19, 2006, 9:52:00 AM  

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