Emmanuel writes:
Channeling David Lereah, I'd say the inventory buildup is in expectation of a blockbuster holiday home shopping season. Everything can be spun positively, if delusionally ;-)
Emmanuel | Homepage | 11.30.06 - 1:57 pm | #

4shzl writes:
Superb presentation of the data, CR. Showing sales as a record percentage of ownwer-occupied homes demonstrates the extent to which speculative fever infected the market as a whole.
4shzl | 11.30.06 - 2:20 pm | #

Bob_in_MA writes:
CR,

Your second graph was really a great idea. It really distills things.
Bob_in_MA | 11.30.06 - 2:34 pm | #

WeThePeople writes:
Eh ***shrugs***

Markets will do what markets do.

The frieght train of population growth and full employment will render the current pullback a temporary pause.

http://research.stlouisfed.org/f.../series/ CNP16OV
WeThePeople | 11.30.06 - 2:47 pm | #

Calculated Risk writes:
4shzl and Bob_in_MA, thanks. I spend more time looking at new home sales - because of the direct impact on the economy. But when I looked at this chart, I was amazed. This takes out growth issues and shows the level of sales has been extraordinary. It is very possible that sales could fall back to 5% of owner occupied units - the same level as current inventory! Ouch.

Best to all.
Calculated Risk | Homepage | 11.30.06 - 3:12 pm | #

MTHood writes:
"The frieght train of population growth"

OK, I'll bite. The graph you reference shows roughly 100% growth in US population from . . . . 1950 to 2000. Fifty years, 100% growth. 2% growth per year = freight train?

How about housing prices going up 100% and more over 5 years? Bullet train? Flash Gordon's rocket ship? Einstein's speed of light thought experiments?
MTHood | 11.30.06 - 3:17 pm | #

winjr writes:
"If sales fall back to 6% of owner occupied units that would be 4.5 million units per year - a significant decline from current levels."

If years from 1997 -2006 are excluded, the median is well below 6%. 1997 is the year that Congress passed an extraordinary tax break -- exclusion of up to $500K for the sale of a personal residence for taxpayers filing married/joint. Previously, gain was excluded only to the extent that the price of a new (replacement) home exceeded the net sales proceeds from the sale of the old home. (Many states, (including PA) were slow to even allow this.)

With the new Congress looking for ways to raise tax revenue without disproportinately hitting the middle class, I expect this overly-generous provision to be considerably scaled back, if not eliminated entirely.

In other words, I'm not confident that the mean reversion here ultimately will be 6%. I expect it to go lower, though we may not see this for a number of years.
winjr | 11.30.06 - 3:26 pm | #

Tom DC/VA writes:
Nice post, CR.
Tom DC/VA | 11.30.06 - 3:41 pm | #

Stormy writes:
Should the data accommodate population growth?
Stormy | 11.30.06 - 4:37 pm | #

dryfly writes:
With the new Congress looking for ways to raise tax revenue without disproportinately hitting the middle class, I expect this overly-generous provision to be considerably scaled back, if not eliminated entirely.

I think they let that sleeping dog sleep and let inflation steal its bone...

v-e-r-y s-l-o-w-l-y.

;)

dryfly | 11.30.06 - 4:51 pm | #

dc1000 writes:
"Having said that, consider that the ratio of single-family housing starts to sales is now at the lowest level since the government started recording this data in 1963."

http://tinyurl.com/yxssrk

Otherwise crap article but it does bring up that one good point.

Is this metric worth look at?
dc1000 | 11.30.06 - 5:59 pm | #

Calculated Risk writes:
dc1000, the only way to work off the excesses of the last few years is to build fewer homes (well, and discount heavily to sell more homes). So I'm not surprised that starts to sales is low (I'll have to check how low). Whether this is a good metric or not, I'd have to think about it. This is the second bullish view on the builders I've seen today, so maybe I'll post some excerpts from both pieces.

Best Wishes.
Calculated Risk | Homepage | 11.30.06 - 6:19 pm | #

Mike writes:
Could someone explain the second graph i'm having trouble wrapping my mind today.
Mike | 11.30.06 - 6:25 pm | #

WeThePeople writes:
The best thing, purely theoretically, that could happen to the housing market from a bull perspective is for starts to go to zero until inventory nearly clears.
WeThePeople | 11.30.06 - 6:30 pm | #

Lama writes:
Mike,
I think you're confused with the "Year over Year Growth" line?
That might be better named "Percentage Increase or Decrease Versus Prior Year".
Maybe they became too comfortable with the use of "Growth" in their various analyses.
Lama | 11.30.06 - 7:00 pm | #

Lama writes:
Woops,
I scrolled down too fast. On to Graph 2.
I think that's the percentage of total owner occupied homes that were sold in that year and the percentage of owner occupied homes for sale (must be the average inventory for the year).
Lama | 11.30.06 - 7:21 pm | #

Calculated Risk writes:
Mike, the second graph is as a percentage of total owner occupied units in the U.S. Right now there are about 75.65 million owner occupied units.

Existing home sales will be about 6.5 million this year, so about 8.6% of existing homes will be sold (some will be 2nd homes and investment homes - so it's not perfect, but this gives a good estimate of normal turnover).

Normalizing with owner occupied units removes population growth and changes in the number of people per housing unit. So this is a pretty good comparison over time.

Hope that is clear.
Best to all.
Calculated Risk | Homepage | 11.30.06 - 8:26 pm | #

Mozo Maz writes:
Think: Auto Industry. What happens if we push 18 million units of new autos into the market? They do get bought by somebody... and old cars get crushed (or at least parked in back yards in Kentucky and rust away).

The other side of the inventory solution is to remove old structures.

Watch to see if codes become tightened up... Maybe a law requiring all buildings with lead paint to be deleaded and all two prong electrical swapped to 3 prong. Many owners of crummy buildings would just sell them to redevelopers rather than bother upgrading.
Mozo Maz | 11.30.06 - 9:52 pm | #

WeThePeople writes:
Yes, SoCal housing is in a hideous death spiral:

http://i12.photobucket.com/ album...1PriceSmall.png

I doubt if we'll ever recover.
WeThePeople | 11.30.06 - 9:53 pm | #

Captain Spaulding writes:
Informative, as always.

Given the incredible 4% surge in the home builder stocks today, however, I have to wonder if anyone really cares. An analyst observes that foot traffic has increased in many of their surveyed markets and, absent any tangible evidence that this has resulted in an increase in sales or prices, the market goes nuts.

The volume speaks for itself. And what is unique about this latest craziness is that it has happened without the benefit of a broader market rally. It was a rally squarely focused on the home building sector.

Just to be sure, I went back to this week's housing data. Inventories up, sales down significantly. But wait! Foot traffic up in November.

Simply incredible.
Captain Spaulding | 11.30.06 - 10:29 pm | #

sharkbait writes:
I sense some tax cuts coming my way --- dc1000 dont worry be happy -- you will get lost of rate cuts coming your way. The bond market been rallying nicely the past few weeks.
sharkbait | 11.30.06 - 11:04 pm | #

Robert Coté writes:
Yes, SoCal housing is in a hideous death spiral.

The County of Ventura median home has lost $18,000 in the last year. That's $4.5 billion.

WeThePeople is typical of the whistling past the graveyard perspective. Ventura was supposed to be different. Ventura only overbuilt rather than massively overbuit. Ventura did better than most in jobs housing balance. Yet Ventura is already down 3.1%. Looking at past performance is not going to help. We are in uncharted territory.
Robert Coté | Homepage | 11.30.06 - 11:11 pm | #

4shzl writes:
dc1000,

Assuming it's accurate, the starts-to-sales ratio cited by Mike Norman has the kind of superficial plausibility that makes it a suitable inclusion in his puff piece on the Fool website. I know the past month's rally in the builders' stocks has a lot people questioning their sanity -- and that's exactly why it's taken place. Team Wall Street knows that it is only through manipulation these shares and the CDS market that it has a prayer of sustaining the illusion of prosperity 'til the end of the year when bonus calculations are finalized.
4shzl | 12.01.06 - 12:02 am | #

ron writes:
The builders insiders are selling:
My guess is that the housing slow down caught some large pension, hedge fund and others that have large positions by surprise. It going to take a awhile for them to unwind their positions, similiar to the broadband situation in 2000-2001,
those stocks were bought on the dip but in reality the big boys were unloading.
ron | Homepage | 12.01.06 - 12:34 am | #

--Andrew writes:
CR, as you implied in your graphs, it looks like we're going to see a slow down in owner-occupied/primary residence sales and a flatlining of new home starts (not to mention and probable decline in prices) until the excess inventory is worked off. This will probably not be the quick one-year or less time period as the NAR and Fed seem to be representing it as.

The question I have is, as bad as this doldrum period will be for primary residence sales (given the current income level and savings rate of the average U.S. consumer), will this sales slowdown/price dip effect be magnified in the realty sub-areas of condos, vacation homes, or secondary home market. I.e., places that do not have utility in providing a traditional place of primary residence near jobs/large cities/economic hubs and thus being more of a discretionary purchase for tightly pressed consumers.
--Andrew | 12.01.06 - 12:37 am | #

calmo writes:
Siding with 4shzl-
The specific Homebuilder rally has gotten precious little attention from the press and my guess is they're too shy to proclaim it's the weather. The stock market looks jittery to me and the HB rally in particular looks positively artificial. So is it HFs with large postions on CDS that need to push these guys out for another few weeks? Are we seeing some of the disintermediation of risk right here with (atleast temporary) support for companies that really don't warrant this support? If the ploy works in attracting new investors (most of the rating agencies have improved their reccomends) only to see this rally plunge from an even greater height, is it still disintermediation or just a disintegrating disaster?
What's missing here is, as always, insider information: who bought what and why.
calmo | 12.01.06 - 12:50 am | #

dryfly writes:
dc1000 - as far as the 'Fool' piece...

My take on HBs:

Before I’d buy any of the them I’d want to see that their OPERATIONAL Cash Flow is positive (the cash they generate from operations, not including borrowing or investments, and found on their Cash Flow statements) and that their ‘Bankable Equity’ is solid (calculated from their Balance Sheet):

Bankable Equity is the base collateral that even a curmudgeonly old banker (not modern new age banker) would lend you in a pinch…

BE = A - L - Int - 0.5*Inv

A = Assets

L = Liabilities

Int = Intangibles like ‘Goodwill’ & ‘IP’

Inv = Inventories

Ideally I would want BE >> 'Current Liabilities' so I would know if they had a few more quarters of bad news &burned up cash on hand they could at least borrow at reasonable cost to keep running.

Considering their inventory is almost all land that is re-pricing and comprises the largest share of most builders ‘Assets’… I’d stay away. JMHO.

If any of the HBs DO have sufficient Bankable Equity (even with the write down in land values) and have positive Operational Cash Flow then they should be bought at these prices (again my opinion, not advice). My guess is no HB meets either criteria let alone both - but just a guess.

You looked into any of them in detail? Wanna share?

dryfly | 12.01.06 - 1:14 am | #

4shzl writes:
WeTheSheeple,

Sometime during Q3, the investment committee of the Gates Foundation acquired some HB shares on the recommendation of a consultant whose contract will probably not be renewed next year. Both the committee and the consultant know better than to bother Mr. Gates with their plans on how the foundation's assets are to be diversified.
4shzl | 12.01.06 - 3:23 am | #

a writes:
"The best thing, purely theoretically, that could happen to the housing market from a bull perspective is for starts to go to zero until inventory nearly clears."

Well that would cause a significant increase in unemployment and (maybe?) a severe recession. That will help the housing market? I think there's a rock and a hard place in this picture.
a | 12.01.06 - 6:48 am | #

Insurance Guy writes:
HBs will sometimes also have off-balance liabilities investors will want to be aware of. For instance, in certain cases, HBs have set up JVs to hold inventory. Many times JVs aren't consolidated into financial statements because they aren't 50%+ owned, but in certain circumstances the HB has agreed to guaranty the JV's debt.

I'm sure many of you have read the Barron's article. It requires a subscription.

http://online.barrons.com/articl...barrons/ archive
Insurance Guy | 12.01.06 - 7:18 am | #

Kett82 writes:
Dear Andrew

Don't know about the market where you live, but Crain's Chicago Business reported last week sales of new condos and townhouses fell 35% to 1,324 in the third quarter compared to the same period one year earlier. It is estimated that 6,500 new construction condos will be for sale in the coming year compared with 4,700 last year.

http://chicagobusiness.com/cgi-b...ews.pl? id=22930

But with sales slowing not all those buildings will get built.
Kett82 | 12.01.06 - 7:24 am | #

Moopheus writes:
"The frieght train of population growth and full employment will render the current pullback a temporary pause."

Of course it will be a temporary pause. Recessions, depressions, wars, and plagues are temporary, too, but no one looks forward to having one. Well, almost no one, anyways.
Moopheus | 12.01.06 - 9:40 am | #

yogurt writes:
The best thing, purely theoretically, that could happen to the housing market from a bull perspective is for starts to go to zero until inventory nearly clears

In other words, the builders exit the market just below the top, and let the speculators, FB's and repossessors sell into the market and take it to the bottom. And then the builders get into the market again.

What kind of sense does that make for the builders? Prisoner's dilemma.
yogurt | 12.01.06 - 9:51 am | #

Robert Coté writes:
Population flows never seem to behave as expected nevermind their public policies being able to respond rationally. For years Florida has been "banling" on the claim that 1000 people per day were arriving daily yet public shool enrollment declined this school year.
Robert Coté | Homepage | 12.01.06 - 10:04 am | #

dryfly writes:
For years Florida has been "banling" on the claim that 1000 people per day were arriving daily yet public shool enrollment declined this school year.

Exactly. Those two facts aren't that hard to reconcile given the age demographics of the 1000 moving in. The better question is how many of those 1000 are still alive in say five years? And what is the long term net population growth?

dryfly | 12.01.06 - 10:24 am | #

dryfly writes:
Bill Gates looked into them last month and bought $186M worth of HB stocks, but they probably didn't have the level of intel dirtfly has.

Does he? How interesting that if the HBs are such a good play it doesn't reflect in the disclosed public documents of public companies.

And coincidentally some of those companies if I'm not mistaken have had some difficulty with the timeliness of their required reporting - yes/no?

Sounds like a good buy for you. Maybe WeThePeople should load up - better yet load up on margin - and tell us how much money you made say - next Fall. Think how much fun you'd have gloating.

Nothing like putting your money where your mouth is. Gates Foundation did.

dryfly | 12.01.06 - 10:34 am | #

Lama writes:
Robert Cote,
I'd add to your comment that a lot of the additions to population are illegals who do not integrate and participate in the economy in the same way as natives and legal immigrants. They have less money and have low rates of home ownership.
Legal immigration is limited now due to the long and costly process required.
Lama | 12.01.06 - 10:35 am | #

Lindsey writes:
Since the subject of new homes was opened here I am going to take this opportunity to post an observation that I think deserves some attention. My uninformed observation would be that these numbers should be somewhat closely related and a big discrepancy should indicate a big problem (i.e. humongous oversupply)

When I look at the new housing numbers for October released by the Census Bureau, I see that there was a grand total of 3,000 new homes sold in the Northeast. 3,000. In the entire Northeast.

From the CB's Nov. 17 release on New residential construction October completions in the Northeast was 12,500 (Table 5).
http://www.census.gov/indicator/ ...newresconst.pdf

Am I mistaken in believing these numbers should be much, much closer?
What does that mean for construction in the NE?
Lindsey | 12.01.06 - 10:37 am | #

Lindsey writes:
Unless I'm really not getting this, it looks like the NE currently has an 18-month supply of new houses right now. Is that possible?
Lindsey | 12.01.06 - 10:46 am | #

Calculated Risk writes:
Lindsey, you are not mistaken on the NE. The supply is about 18 months.

Best Wishes.
Calculated Risk | Homepage | 12.01.06 - 10:58 am | #