If homebuilders truly are increasing the pace of new home construction, into the wind of the biggest collapse in the history of US home buying, well, that'd be insane. Record US home inventories combined with more unwanted new homes being splashed on the market equals total devastation.
Supply, meet Demand.
So bring 'em on I say. Nothing like more unsold inventory to make sure this housing bust is one for the history books.
But alas, my guess is that the Commerce Department report is simply bogus. That'd make more sense...
Anyone ever see the "Trouble with Tribbles" episode?
Housing Construction Rises for 2nd Straight Month in December
WASHINGTON (AP) -- Construction of new homes rose for a second consecutive month in December, raising hopes that the severe slump in housing may be leveling off.
The Commerce Department reported Thursday that housing construction rose 4.5 percent in December to a seasonally adjusted annual rate of 1.642 million units.
Analysts cautioned that the December figure could be overstating the extent of the rebound since it was probably influenced by warmer-than-normal weather last month.
January 18, 2007
FLASH: Either US Homebuilders are insane, or Commerce Department report is laughable
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I was thinking about this on the way to work this morning. The ONLY thing in my monthly budget that has become less expensive during the past three years is my rent payment. I've watched what is being charged in the area and if I wanted to do one last move before buying a house, I could decrease my rent payment even more by say 10% or so but I don't want to go to the trouble of moving again. Supply and demand.
crashing rental prices due to massive over inventory of homes and condos being used as rentals will artifically reduce the US inflation rate
http://tinyurl.com/3aut8w
The feds role in the housing crash of 07.
If you have land you have paid for and cannot sell, you have building materials you have paid for and you could only sell it for a significant loss, and you have employees who have contracts that stipulate that they have to be paid whether they work or not.
So, you have incurred an expense, so it is better to build the house, since you've essentially incurred the expenses to build it, in the hopes of finding a greater fool to defray the costs or even make a profit when you sell the house.
No?
Homebuilders are like a barge that's really tough to turn around on a dime. They're trying as hard as they can right now to turn it around and they can't, so many of them will probably go out of business soon.
Kind of like GM and Ford building so many unwanted cars and trucks, even though they knew they weren't wanted and couldn't sell for a profit.
Here in the Temecula area of So. Cal. they have been building like crazy. New McMansions everywhere. The area is deffinately slowing and prices are falling. On top of all the houses under construction they have hundreds of acres of land (that used to be hills and orange groves) freshly terraced for new homes. I wonder what is going to happen to those scars? Will the county make them finish the projects or can they walk away? Maybe projects like this can account for the rise in building, possibly the builders are not doing it out of choice but are simply commited now.
Also, with less construction going on in recent months, builder costs have dropped so they can sell a soon to be built home for less than those already standing and maybe even make a similar profit to what they had been raking in as prices are still not low. And don't forget, if they are not building and selling homes, then they are not making money.
Today many material costs are down.
Today new land aquisition costs less.
Today they are not paying overtime to the crew.
Etc, etc...
Oh, I'm sorry, I should have just said, "Supply and demand."
Do not trust the data the government is spewing out. It is so political and corrupt.
I cannot wait for the day we have a strong third party so we can get some honesty back in our system.
Insane or not, it's good news for bubble sitters.
The more inventory that gets shoved into the pipeline, the more pressure is exerted on prices.
My thesis from way back was that home builders would be the biggest factor in price crashes. They had, and probably still have, huge profit margins and are still viable even now.
Be of good cheer. Things are proceeding exactly as predicted. Mortgage lenders are weakening as the bad loans start to show up. No full panic yet in that sector but I've got more puts up in there for the summer.
remember, homebuilders will not willingly enter unemployment.
They will discount, and build. Build. BUILD!...
....until the money runs out.
yep, the homebuilders know they could get alot of the action in 2007 .Wonder what the quality will be like ?
Also the mortgage applications went up in Dec.2006, but that was a rush to refinance toxic loans by the FB's .
I've run a small business for over 20 years, and I see some strange stuff in the economy at the margins. Customers who used to order like clockwork are now playing coy with the sales people and some are stretching their payments past 45 days. Good, reliable vendors are having trouble delivering on time and the freight companies are off their game too.
It's a weird vibe - I don't like the way 2007 is starting off.
goof balls
this means existing homedebtors are beyond screwed as homebuilders can cut prices to the bone and still make a small profit
homedebtors however cannot cut or they'll go belly up
I stopped believing everything my government tells me a long time ago. How these fools get themselves re-elected time and time again is a testament to how lazy and stupid Americans have become. As for the homebuilders, well if they aren't building they are out of business. So I am not surprised to see them trying to hang in there and build into this thing. If they sold at only 10-15% over cost they would still profit and home prices would come back to reality.
JAFO
goof balls
++++++++
No it is
Tribbles!
So, you have incurred an expense, so it is better to build the house, since you've essentially incurred the expenses to build it,
Ya, no one will buy blueprints anymore.....
It's all about the comps and who blinks first..
tribbles: born pregnant
homedebtors: born bankrupt
They (builders) rode the wave to the crest and they are hanging ten on the way down. More power to them - I say keep on keepin' on dudes and keep putting up shacks at discounted prices. This is going to be like the old saying about cars - don't buy one that was built on a Monday or a Friday because of quality concerns. The shacks that these guys are going to be building in 2007 and 2008 are going to be of some very questionable quality (IMHO).
Builder are only in the business of building. They have to finish out the projects & can be more competitive that individual home owners by accepting lower profts by cutting price or tossing in extra upgrades or paying for transaction costs and/or financing. Several flipper are now realizing this. Flippers are not just trying to sell it for waht they paid & cover the closing costs, but the developer is tossing in more and selling for less, takinc care of closing & financing just to move the unit & turn off their financing, plus thte home is NEW. Only people who match a developer can sell if they are in competition, and most individuals are unwilling to do so.
750,000 excess homes and builders are adding another 1.5 million
sweet!!!
The building industry built far in excess of demand in the past two years," said Eric Landry, an equity analyst with Morningstar. "What it's gonna take is sopping up this excess demand."
That means builders will need to reduce the number of houses for sale, which would allow them to push prices higher again if demand remains stable.
UBS analyst Margaret Whelan estimates excess inventory at 750,000 homes based on her analysis of current supply and demand. If the economy slows, as is expected, demand could also ebb, exacerbating the gap between supply and demand.
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&Date=20070116&ID=6346565
As long as they can keep building and make money, or at least break even to stay alive, they will continue to build.
That said, given the profit margins of the last few years, they have a lot of room to drop their prices, outcompete recent purchasers, and remain solvent.
Kudos to them for continuing to build and lowering prices!
The goverment says inflation is under control
Higher unemployment in the summer as construction workers get terminated. According to my friend who is VP with California homebuilder this is one last gasp to unload overpriced land which builders had to complete construction of homes. Carrying costs outweigh completion construction costs. They are hoping for a flurry of buying in the spring.
Anonymous said...
The goverment says inflation is under control
Thursday, January 18, 2007 8:03:30 PM
---------
W/ dropping prices in housing & autos & oil inflation is under control.. They are getting waht the wished for, but now they have to wonder if they went too far becasue we might have deflation & recession take its place!!
As ever the numbers are statistically totally unsound. The original press release is :
http://tinyurl.com/ywr866
From that a press precis should read as :
"Housing starts in Dec were 1.642 milion units. This is as 4.5% increase(+ or - 8.8% ) over Nov. So the actual number is somewhere in the range of a decrease of 4.3% to an increase of 13.2% over Nov. When the range contains zero as it does in this instance, the results are NOT statistically significant.
Year on Year, housing starts were 18.0(+or- 7.1%) FEWER than December 2005. That number doesn't span zero so IS statistically significant.
But, publish and be damned - what do I care ? At last, (famous last words? :-) ) the equity market is slowly leaking down and equally important, market moving ( NOT the contrarians) experts on TOUT TV are predicting a downturn. CRAMER yesterday advised people to dump most Tech. - and not buy till tomorrow. Fast Money ( I bet the estrogen enhanced and gays watch that show for reasons quite different from mine ) yesterday had a consensus of a market downtown of several points. On the MONEY had that biggest bull of all - Joe Batapaglia predicting a downturn - And, never mind the spouting feel the action. APPL dumped 7 points, IBM in aftermarket action today dumped 4, both despite "record" results.
-K
I agree with all those who have pointed out that the builders have no way to make money except to build. Surely some number of them will go out of business, but not before undercutting the specu-vestors and bringing prices back into a range where ordinary folks can buy without weird loans. Have posted on some other blog that I am currently a tenant in a ($575K?) spec house that cannot be sold. My rent is $1000/mo, covers about 1/3 of the builder's carrying costs. But he was an amateur, putting an over-designed work of art on a parcel whose ocean view is insufficient (too much blocked by trees). Centex and the others are not operating in the area where this house is located, so perhaps he'll have a chance to sell it if he's willing to bring his price down closer to his debt ($400-$450K). At this point, I think he's still in denial, hoping for a better spring/summer (property in northeast, not AZ).
Keep building more houses. I will be ready to buy in two years when there are 10 million new and used homes sitting empty.
This reminds me of the telecom industry laying down all those fiber lines in 2001 even after the dotcom bust. The telcos went down after that (WorldCom, Qwest, Global Crossing, JDSU etc)
This IS the telecom industry laying cables during the 2001 bust.
Replace "telecom industry" with "homebuilders" and "cable" with "condos" and you get it. 110%.
And we all know what happened to Global Crossing, MCI, Cisco, etc.
It hath been foretold.
Supply, meet Demand.
"So the actual number is somewhere in the range of a decrease of 4.3% to an increase of 13.2% over Nov. When the range contains zero as it does in this instance, the results are NOT statistically significant."
Even if we assume soundness, the numbers still ain't that great.
1) Starts and Permits and seasonally adjusted, and this December was one of the warmest Decembers in memory. Starts really spiked in the Northeast, (where normally it would have been very cold), but were basically flat everywhere else.
2) Starts of SFH's were actually DOWN, month-over-month. The headline starts number was pulled up dramatically by the multi-family sector (townhomes, apt. buildings, condos). Well, I think it safe to assume that condos didn't figure into this mix, so most of the increase was probably attributable to apartments.
The reason the numbers are up 2 months in a row are they include all building including aparments , and theres a lot of those going up because as the flippers and so on need a place to live.
I would think things are going just as expected, barring a major catastrophe, just momentum would keep the builders going for awhile. Cheap oil only delays the process and stabilizes the caution which should be setting in. It's oil and the banks that'll tighten this noose over the year. I honestly hope it's a slow process as, though I haven't been part of the problem, I still have to deal with the fall out.
"Housing starts in Dec were 1.642 milion units. This is as 4.5% increase(+ or - 8.8% ) over Nov"
The headline is actually "Housing Starts May have Increased, but Maybe not." Much less sexy. This is why I read the blogs more than the rags now. Those with a passion for a subject can point out lies, while those punching a clock just fill column inches.
Just understand Accounting 101...
Many posts are indirectly getting at the key issue here with entries like:
"it is better to build the house, since you've essentially incurred the expenses to build it"
Homebuilders are manufacturers. They spend resources to manufacture housing. The costs they incur are put on the balance sheet as inventory until they sell it. That means none of their costs related to building inventory hit the income statement. If they build less units, then each unit has to carry more fixed overhead costs. If the final cost exceeds market value, the company must immediately expense some of those costs as current expense to adjust the inventory to market value. Hence, it is in their best interest to produce at the levels their infrastructure has been ramped to build.
As mentioned in some posts, this is the model of the auto manufactures. There is too much capacity, but no individual auto manufacture is going to build less units and raise their cost per unit. It comes out in the wash (the accounting wash) with gross margins. How much higher is the selling price than the Cost of Goods Sold.
Homebuilders' Management knows if they keep building, their short term income statements stay healthy. Meanwhile the stock options they received in the second quarter when the stocks were trashed, now will pay off handsomely in the next couple of quarters.
Ryland was $36 in July it has now recoverd to $53, a nearly 50% jump; big option money.
Over the next few years you will see the companies go through special accounting restructuring programs to reduce their infrastructure. That becomes a non-recurring expense, meaning Wall Street should dismiss it as a one-time expense. This allows management a few more quarters of cashing in their options.
Having said all this, this overcapacity doesn't trash the housing market; it merely softens it. The crash does not happen until there is a credit crisis, then the housing market is the clearing house for bad debt reduction. That's when it gets ugly; this other stuff with overbuilding is just a long drawn out affair like the autos and airlines. But it is note worthy that they are forced to build more homes than the market needs to keep the option-ATM-machine open.
I think this report is very significant and I hope everyone takes time to read the actual data. It shows that builders have shifted very heavily toward duplexes and multifamily properties. I'm not sure how well this will pay off in a country with such a condo glut and rental houses available by the thousands, but it shows a shift in the psychology of that industry. They are acknowledging that the loose lending insanity will be over soon. The backlash against this insanity will be huge and renters will no longer be given loans because they can fog a mirror.
In my area most builders are either laying off people or going out of business. On the upside, builders now have more time to do a little better job with their quality. I have several pics of new construction issues on my web site, www.ableinspector.com
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