Friday, November 17, 2006
RE: Bring In The Brass Monkeys
The Commerce Dept. today reports on housing starts and building permits: Consensus estimates are that starts fell 5.6%, but that permits are up 0.1%. If correct, that would be the first up month since February.The actuals (at NJ Real Estate Report):
Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,535,000. This is 6.3 percent (±1.2%) below the revised September rate of 1,638,000 and is 28.0 percent (±1.2%) below the October 2005 estimate of 2,131,000.However, completions are still at extremely high rates (see Calculated Risk's post).
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,486,000. This is 14.6 percent (±7.6%) below the revised September estimate of 1,740,000 and is 27.4 percent (±5.3%) below the October 2005 rate of 2,046,000.
I have no idea why anyone was expecting permits to rise. There will be continuing strength in government building, but commercial sector building will follow the trajectory of private sector housing, which is down. The builders are now being caught in the cash flow trap, and they are racing to get product on the market to get money coming in. However, getting funding for new projects is going to become increasingly difficult. See, for example, this note in Origination News:
HouseRaising Inc., a Charlotte, N.C.-based service provider to custom homebuilders, has announced a credit program that will enable affiliated builders to buy materials and supplies from Lowe's through a master credit facility. Under the program, builders of custom homes constructed with the HouseRaising proprietary management system and with financing through SunTrust Mortgage, Richmond, Va., can buy building materials from Lowe's. Greg Wessling, chairman and chief executive officer of HouseRaising, said the arrangement will lower the cost of homes and help builders who often find it difficult to get financing for materials purchases.Don't forget that homebuilders have also been providing incentives going forward (such as making partial mortgage payments for the first few years, or paying utilities, etc). There are future costs to any building binge, and in this case there are additional and exceptional future costs built in for some of these large homebuilders. However building supply costs are also going down in many markets, which helps homebuilders somewhat.
On the affordability side, the nominal and real drop in housing prices combined with lower interest rates is generating more purchase money mortgage apps (as well as more refi apps). Purchase money apps are now down only about 13% compared to last year. The lower rates go the less the impact will be on the adjustable rate mortgages. However we are now into about the 15th month of decline in the housing market, so the year-over-year comparisons may look somewhat better without showing any real reversal of trend.
One local wild card is property taxes; in areas in which property taxes have risen sharply, the lower mortgage rates aren't yet producing any net increase in affordability. In those areas, prices will have to fall further to generate more sales. We have not seen any significant constriction in lending standards yet, but this will begin to come into play next year as defaults continue to rise and appraisals continue to come in lower.
I don't think we are even close to the bottom at this point. In order to reduce inventory we need an influx of first-time buyers, and affordability for them is still staggeringly low in most markets. I find it difficult to believe that the practice of continuing to provide near 100% financing for first-time homebuyers with above-norm DTI's can continue through next summer in most markets, and as soon as credit tightens, this new inventory coming on the market in many areas will become an indigestible glut.
As you are out there doing your Christmas shopping, I think you'll see a pattern of retailers chasing buyers which foreshadows a rough economy in 2007. If you think about it, you'll see why. It is true that wages have begun rising, but most people pay relatively high taxes on wage income, whereas when you borrow your spending money instead of earning it, 100% or more of that money is spent (consider interest deductions on home-secured loans). We'd have to see a huge jump in wages to produce the same type of economic stimulus produced by the wave of equity withdrawals, and it isn't in the cards.
In other news, foreign treasury buys are dropping, while foreign purchases of corporate debt are rising. I think the treasuries are a better deal than most corporate bonds, so color me contrarian. Japan and some of the OPEC countries reduced their holdings in September.
The Treasury TIC data....that number it totally worthless. As Hedge funds are offshore, their activity is not the real indicator of end users, and is included in that number. As far as the Japanese (and Chinese) they are currently moving from Treasuries into Mortgages. That's causing swap spreads to narrow, and option vol to decline. I agree on the view of Corporates. Pretty tight, but the money, for now keeps rolling in. That will continue until the fed resumes tightening, equities come off, or we have some systemic default. When that happens is anyones guess.
CF - In this case I do think the TIC/corporate bonds numbers are tracking a real trend, but I'm not sure how significant it is. I'd rather have treasuries than corporate bonds, and I'm expecting most equities to slump next year. I think the foreign investment in corporates and MBSs is returns chasing without regard to underlying value, and I think it says something about the world economic system. There are two possibilities - the first is that everyone feels that they can get out first, and the second is that the world has chosen en masse to ignore real risk. If it's the first, we face a risk of a sudden instability. I think it's the second, which actually would be less unstable over the next year, but which would prolong the RE decline period. I cannot believe the prices that people are paying for some stocks right now. Either I am nuts or they are.
David, I don't think they withhold, do they? If they don't, then it's probably not a factor.
I like Treasuries as well. Please keep in mind, however, that there is a lot of Central Bank interest in the Treasury/ Mortage-Corp swap, and these guys don't mark to market. that makes a HUGE difference.
Yes, the debt valuations are probably wrong, but when the company's future is contingent on those debt valuations, there's a dual problem.
Looking at a range of these deals makes me think that far too many business lines have really adopted debt packaging and selling in one way or another; it's as if the debt you have to sell is as or more important than the underlying business.
I wonder if a lot of irrationality in the market hasn't come from the very short-term method of valuing companies. That's partly produced by the analysts and partly by the investors. People seem to look quarter to quarter while ignoring underlying dangers in the business plan.
Paying CEO's on stock valuation may be counterproductive, but so is a purely technical analysis.
There are credit card companies that do not require any credit. So they are perfect for people with no credit and can be used to quickly build your credit.
My personal favorite way to build credit is thru the use of secured credit cards. Here are credit building credit cards you can apply for online for a credit card. Many of them offer instant approval. Keep in mind with a secured credit card you are expected to put down a security deposit.
Hope you find these resource useful to your blog and your readers too.
have a super day!
Links to this post: