I have just a short observation tonight. I read an article today predicting that companies have ringed as much as they could out of productivity enhancements and should soon be forced into more hiring. I only wish that were true. I left a comment to the article with two main points.
First, I contend that there is a fairly significant level of shadow inventory out there. Official unemployment numbers do not count those that have given up, but this does not mean they will not try again if there is any sign of decent jobs becoming available. If you read the numbers properly you will see that several percent of the employable population has simply given up. They are down, but not necessarily out.
Second, and more importantly, the employed workers have during the last few years had their hours cut rather significantly. This means, despite all the firing, employers have done what they can to keep a staff around should things rebound. And if they rebound, they have a lot of room to take in significant new levels of work without adding to ranks. After all, why hire new workers and pay benefits to new people if you current work force is underemployed. Just getting over folks working short hours will take a good bit of time, even assuming the article I read is correct that companies have already done what they can on productivity enhancements, which is a suspect proposition given the rate of tech innovation these days.
Disclosures: None.
Wednesday, September 22, 2010
Tuesday, September 21, 2010
"Surge"
Let's talk real estate for a moment. CNNMoney today ran a headline that housing starts had "surged" in August. Yes they said "surge." I just went to the site and now they are down playing the situation just a tad. The current headline notes the housing market is showing a "glimmer" of hope. From "surge" to "glimmer" in one day.
http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/
Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."
http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html
Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.
You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.
I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?
http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html
So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.
I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.
Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.
http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all
Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.
None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.
http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html
http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html
Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.
Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.
Disclosures: None.
http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/
Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."
http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html
Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.
You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.
I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?
http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html
So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.
I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.
Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.
http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all
Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.
None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.
http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html
http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html
Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.
Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.
Disclosures: None.
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