Friday, April 28, 2006
Big Daddy Ben Loves You, Really He Does
Elsewhere in the GDP report, Americans' personal savings - savings as a percentage of after-tax income - dipped to negative 0.5 percent in the first quarter as consumer spending outpaced income growth. In the prior quarter, the savings rate stood at negative 0.2 percent.Ha, ha, ha! Gentle Ben doesn't want you to worry. We're guaranteed to have runups in energy prices and sharp drops in housing activity.
Looking ahead, Bernanke said he expects the economy's growth to moderate in coming quarters but still be sufficiently strong to generate decent job growth. Risks to the mostly positive outlook, he said, could come from any prolonged runup in energy prices and sharp drop in housing activity. For now, neither scenario is envisioned.
This all reminds me of a farmer's fable, which is told in various forms all over the country:
A city man moved into the country and decided to take up scientific farming. He decided to develop a herd of cows that required much less feed. His neighbors listened to his tales of his program with much interest at the store and said little for several months, until one day the news that he had called the vet in spread through town. The next day he showed up at the post office looking depressed. "How's it going?" they asked. "I've had a little setback," he replied. "Everything was going wonderfully. Each day I had been feeding my herd less and less. But just when I had succeeded and was feeding them nothing at all, those cows got some disease and started dying!"
It's not the time to be buying homebuilder stocks. From this article (see other link for context):
Centex shares headed for the cellar, dropping 9% in midday trading, after the Dallas-based home builder missed quarterly earnings estimates, lowered guidance and announced it was walking away from land deals in some markets. The warning offered clear evidence that rising interest rates are pulling the choke chain on the housing market.It's more than just interest rates. It's affordability. Higher interest rates do make homes less affordable, but we have seen the profusion of no-money down, I-O, option-ARMs (negative amortization) and adjustable rate loans during a time of extremely low interest rates. What's left in the cupboard? If interest rates were to drop tomorrow by 1%, it wouldn't change last year's abysmal affordability rates in hot markets.
Two posts by Mish about Florida: McCabe Research:
Jack was telling me about "mezzanine financing". I had to ask him what that meant. It seems a lot of home builders were on short term financing, hoping to get projects completed "Wham bam thank you mam". Jack is now telling me that some of those developers now have a "cash flow problem". It is one thing when people are camping out overnight to get in line to buy a condo. It is a far different situation when projects are being delayed and even cancelled.It is true that in many areas real estate-related employment (agents, mortgage brokers, loan officers, construction workers) will take a hit, but there's a definite upside for lawyers!
In fact, projects are now being cancelled left and right. McCabe told me of a development that has sold 2 units out of 250 after cancellations. Hello world! If that is a small time developer, that person has just been busted big time for speeding. The next step is bankruptcy.
Jack spoke of a project in Sarasota where because of a technical delay in condo document filing with the state of Florida, the developer had to recently do a special two week rescission period. Well guess what? It seems that 100 units that the developer thought were sold have now been cancelled. That is 100 out of 270! Given that not all of the units were presold, the cancellation rate is enormous. "Speculators are bailing every chance they get" he said.
Next Mish post - Morgan vs. Lereah. I thought Lereah did a fine job of contradicting himself. Eminent domain projects like Riviera Beach may become less common as commercial lines of credit dry up. On the other hand, every bust has its bottom just as every boom has its peak. In a few years, developers will be seeking to buy cheap in order to sell high two years later. My guess is that in most areas the bottom will hit in 2008. There are many real estate investors who sold their holdings already or are in the process of liquidating them now. They will be sitting on those assets waiting for the time to buy as this thing plays itself out. Robert of Exurban Nation is one of them.
Over the weekend I guess I'll get off my butt and start explaining HELOC portfolios.
But office condo space is relatively underbuilt in comparison to residential condos, that's for sure.
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