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Goldman Back To Economy Bashing Mode

Tyler Durden's picture




 

It appears lately Goldman can't get enough of bashing the economy. First the Oracle of Delphi's bank debt short-selling enabling trading desk (i.e., Hatzius of Goldman Sachs for the slower readers) had some harsh words about GDP and why at some point soon he will be once again within 0.0001 bps of the actual result, even if the short squeeze inducing ploy worked out just perfectly last time, thanks, signed Goldman prop. This time around Hatzius take the entire housing space to the woodshed. Who knows, maybe it is time for readers to do what the prop desk says this time (quadruple reverse psychology: beware).

 


 

A Renewed Sag In The Housing Markets

During the spring and summer, most US housing market indicators took a sharp turn for the better, with sales, starts, and prices all rising.  This led many economists, ourselves included, to raise their housing forecasts, and some to project a “traditional” housing recovery with 20%-30% annualized growth rates in real residential investment in 2010 (the upgrade to our view left it well short of a traditional recovery).

In recent months, however, the housing news has turned less encouraging.  Consider the following:

1. The improvement in new home sales and housing starts has stalled.  On Wednesday, the Commerce Department reported that housing starts fell 10.6% in October to 529,000 (annualized), the biggest monthly drop since January.  This likely exaggerates the weakness in the housing market for two reasons: first, the drop was heavily weighted to the more volatile (and lower value-added) multifamily sector, and second, it may well have been influenced by a wait-and-see attitude among homebuilders in the face of uncertainty about the extension of the homebuyer tax credit. But even excluding the latest drop, the recent data have been noticeably sluggish recently.  After a sharp upward move (at least in percentage terms!) from 479,000 in April to 590,000 in June, housing starts have at best been treading water.  Moreover, the monthly homebuilders’ index has been unchanged on net since July and thus paints a similar picture.  Finally, new single-family home sales have also essentially stagnated around the 400,000 (annualized) mark.

2. Existing home sales continue to surge… By far the strongest housing-related indicator has been the turnover of homes.  The September reports on existing home sales (i.e. sales which have closed) and pending home sales (i.e. signed contracts) from the National Association of Realtors showed big monthly increases in both measures, and year-on year growth rates of 9.2% for existing home sales and 19.8% for pending home sales.  We do not yet have data for October, but anecdotal reports from regional realtors’ associations points to further large gains.

3. …but mortgage applications for home purchase point to a setback.  In marked contrast to existing homes sales, the weekly purchase mortgage applications report—a long-standing leading indicator of home sales—has plunged in recent weeks and now stands at the lowest level in 12 years on a seasonally adjusted basis.  This could suggest that the surge in existing home sales will reverse over the next few months, although it is admittedly difficult to say given the noise introduced by the uncertainty about the homebuyer tax credit (which ultimately was extended).

4. Home price indicators turn more mixed.  There are some tentative signs that the increase in home prices—a major surprise earlier in the year—may be coming to an end.  Although the most recent Case-Shiller index (20-city composite) showed a seasonally adjusted 1.0% increase for August, it is important to note that this information is by now quite stale, especially because the Case-Shiller data are reported on a three-month moving average basis.  In contrast, there are several timelier measures which hint at a renewed weakening.  The purchase-only FHFA (former OFHEO) index fell 0.3% on a seasonally adjusted basis in August, the most recent observation.  For September, several indexes are showing declines, at least on a seasonally unadjusted basis.  Specifically, the Loan Performance index fell 0.4%, the Radar Logic index 3.2%, and the Zillow.com index 0.1%.  At a minimum, it therefore appears that the home price picture has turned more mixed.  Our current working assumption is a 5%-10% drop in home prices through the middle of 2010.

5. Excess supply is still increasing.  The housing vacancy report for the third quarter showed a quarter-to-quarter increase in both the rental and homeowner vacancy rates.  Indeed, we can use these series to construct a “composite” vacancy rate, defined as all vacant housing units for rent or sale in percent of the housing stock.  (Note that we only include vacant units “on the market” in the numerator; we exclude seasonal/vacation homes or homes vacant “for other reasons” from both the numerator and denominator.)  This series is shown in the chart below.  It hit 5.4% in the third quarter, the highest level on record, suggesting that excess supply remains a very serious problem for the housing market.  The only slight ray of light is that the shift in the composition of vacant units toward rental units, whose per-unit value is lower, implies that the picture is a bit less bad in dollar-weighted terms.

6. The foreclosure pipeline is still rising.  Two reports released this week—the Mortgage Bankers Association’s delinquency survey and the Fed’s report on loan performance at commercial banks—show that mortgage credit quality was still deteriorating quickly as of the third quarter.  The chart below shows the broadest measure of troubled loans, namely the share of mortgages that are delinquent (i.e. borrowers have missed at least one payment), nonperforming, or in foreclosure.  This measure now stands at 14.1% overall according to the MBA, and at 9.8% for loans on commercial bank balance sheets according to the Fed.  Over the past two quarters, the pace of increase has slowed for the MBA measure, largely because the deterioration in the subprime market seems to have crested.  However, the Fed’s measure of delinquent loans on bank balance sheets continues to increase quickly.  Ultimately, a large share of the troubled loans are likely to end up as vacant homes on the market, which will make it harder to unwind the current excess supply quickly.

Our conclusion: while the bottom in housing starts has very likely been seen, homebuilding is likely to provide a much smaller boost to real GDP growth in 2010 than in the recovery from prior deep recessions.  Meanwhile, house prices and credit quality look set continue to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery.

Jan Hatzius

 

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Fri, 11/20/2009 - 13:19 | 137437 Daedal
Daedal's picture

Meanwhile, house prices and credit quality look set continue to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery.

Jan, you got that backwards -- can I have an MD position at GS now? A stronger economy would lead to an emergence in credit and a subsequent rise in housing prices. Somewhere along the way Bernanke managed to confuse you into thinking that increasing the price of an asset creates value.

Fri, 11/20/2009 - 13:21 | 137442 digalert
digalert's picture

It's a bummer Gilded Slacks has had a record year.

Fri, 11/20/2009 - 13:24 | 137450 JohnKing
JohnKing's picture

Predation has been a very good business model for them, especially with an assist from US taxpayer and FED.

Fri, 11/20/2009 - 13:37 | 137471 Careless Whisper
Careless Whisper's picture

I don't care what GoldSach says.

Does anyone take their opinions seriously?

You are wasting valuable website real estate by using it to post their reports. 

Fri, 11/20/2009 - 13:43 | 137481 jm
jm's picture

HY is getting the shit kicked out of it @ 12:40.

Anybody know what's going on? 

Fri, 11/20/2009 - 13:46 | 137488 Cursive
Cursive's picture

I'd rather not read GS propaganda.  Back to chart watching....

Fri, 11/20/2009 - 14:52 | 137606 Missing_Link
Missing_Link's picture

I find these posts valuable.  A lot of good information here, even if some of it is propaganda and much of it is quadruple-reverse-psychology.

If y'all don't like them, don't read them.

Fri, 11/20/2009 - 15:06 | 137630 spekulatn
spekulatn's picture

+1 M_L

 

Hope you find what you are lookin for.

Fri, 11/20/2009 - 15:04 | 137619 spekulatn
spekulatn's picture

First the Oracle of Delphi's bank debt short-selling enabling trading desk (i.e., Hatzius of Goldman Sachs for the slower readers)

 

Well  excuuuuuuuuuuuuuuuuuuuuuuuuuuuuuse me ;>]

 

 

 

 


Fri, 11/20/2009 - 15:48 | 137694 max2205
max2205's picture

Double dog fake out... this from the Fed:

 

  • 12:53 PM The Fed is reportedly scrutinizing the biggest banks to ensure they have enough capital to withstand a sudden reversal in asset prices. Supervisors want to know what banks know about the strength of their counterparties, and whether risk managers have any say in bank policies. 6 Comments
  • PS thanks fopr the easiest CAPTCHA math quiz today!!
Fri, 11/20/2009 - 17:17 | 137816 Anonymous
Anonymous's picture

Wow "quadruple reverse psychology"...so if "reverse psychology" is a 180 then QRS is a 720 which leaves us right back where we started...but dizzier for the ride???

Im confused

First the captchas, now this, maybe Ill have to stick to a less brain intensive site like Fustercluck from here on in.

heh

AndyC

Sat, 11/21/2009 - 01:31 | 138087 heatbarrier
heatbarrier's picture

"quadruple reverse psychology"...Spin 1/2 for physicists.

It can be puzzling as to why a rotation of 720 degrees or two turns is necessary to return to the original state,

http://en.wikipedia.org/wiki/Spin-1/2

Fri, 11/20/2009 - 18:43 | 137913 deadhead
deadhead's picture

I find it remarkable that a housing report/forecast makes no mention of shadow inventories and the gaming going on amongst the banks in regards to their housing inventory.

I find it remarkable that a housing report/forecast makes no mention of the country's current largest mortgage conduit, the FHA.

Talk about putting your head in the sand.   

Fri, 11/20/2009 - 20:24 | 137993 Anonymous
Anonymous's picture

We're currently only about halfway through the 2nd phase of this 3 phase housing meltdown, characterized by the increase in prime mortgage foreclosures as a function of rising unemployment.

The 3d phase will commence in earnest the middle of next year when resets on exotic mortgage products ramp up in a major way. Unfortunately this phase will likely be preceded by an imploding FHA and the next leg down in housing prices, with the Fed holding the bag on 1.3 trillion in junky agency MBS.

Fri, 11/20/2009 - 20:28 | 137996 Anonymous
Anonymous's picture

We're currently only about halfway through the 2nd phase of this 3 phase housing meltdown, characterized by the increase in prime mortgage foreclosures as a function of rising unemployment.

The 3d phase will commence in earnest the middle of next year when resets on exotic mortgage products ramp up in a major way. Unfortunately this phase will likely be preceded by an imploding FHA and the next leg down in housing prices, with the Fed holding the bag on 1.3 trillion in junky agency MBS.

Sat, 11/21/2009 - 02:44 | 138117 Dr Hackenbush
Dr Hackenbush's picture

The rocketship needs refueling.  play coy, bide time, build a possible bearish head and shoulders pattern for CNBC to announce and Cramer to cringe at, do it the the week of the 10.9% unemployment anouncement, then slam this puppy to 1400.

collect bonuses and refer to yourself in saintly terms

Sat, 11/21/2009 - 09:36 | 138156 Ned Zeppelin
Ned Zeppelin's picture

Your Housing report, served up fresh: first, always keep in mind that the foreclosure problem starts with subprimes (and generally confined to very narrow geographic niches - think Inland empire and Florida) and is now moving into the ALT-As and primes, due to unemployment, which is broadly based geographically speaking. The tax credits will pull this engine for a while, so the first half of 2010 will continue at a more or less flat pace, with some volatility in the numbers. 

Right now, another issue looms. HUD has announced new condo financing rules that will, in my opinion, essentially kill or mute the ability to get a mortgage if you want to buy a townhome or a flat in a "planned community" regime (affects not only the empty condo towers in cities and Florida, but also those large townhouse developments you see - also technically "multifamily" but not apartments, which is what most people think when they think of multifamily) and it seems fairly certain the new rules will go into effect early in 2010. There was a recent reprieve from a planned effective date of December, due to howls rising from those developers who own projects that are not sold, or are still controlled by the developer (and with the grim sales pace, that is a whole lotta dirt).  Think of it this way: you'll only be able to get a condo/flat mortgage if it is a sale of an existing unit in a mature, essentially sold out development.  With the stroke of a regulatory pen, a lot of developer A&D mortgages are now in even deeper doo-doo than they were before.  It is somewhat startling that they haven't thought to grandfather the existing, approved, in-progress developments.  Classic government clusterfuck in progress.

The situation is still fluid in some sense and a reprieve may come, but it looks bad.  So look for 2 things: a complete collapse in multifamily dwelling building permits both for sale (due to the above - you can't sell it if your buyer can't get a mortgage) and for rent (lots of reasons, but let's point to poor financing availability, the depressed market for rentals - which foreclosures don't help - and the fundamentals, that the deals simply do not pencil out, land + construction costs after rents do not yield a profit except in very limited geographic areas where premium rents can be obtained.)   

Single family detached will chug along at a very muted pace. 

Sat, 11/21/2009 - 11:02 | 138169 jedwards
jedwards's picture

This guy must not have gotten the memo... Men with Sacks of Gold are supposed to be supporting everything the government wants the people of the US to believe, they're not supposed to be saying anything negative.

Do NOT follow this link or you will be banned from the site!