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Construction Spending And The Housing Quagmire
Wolf Richter www.testosteronepit.com
Among the “good” economic news today was private residential construction spending, which rose 2% in November and 3.4% year-over-year, according to the Census Bureau, confirming similar trends in building permits and housing starts reported earlier. Construction creates lots of jobs and contributes significantly to GDP. Everyone, from the President down to local politicians, wants it to grow. It gets them reelected. But for homeowners, banks, and tax payers, these trends are costly.
Today's housing market is a consequence of the credit bubble that the Greenspan Fed engineered. It sparked a speculative boom. Developers went crazy. Lenders made liar loans. Values soared. People bought houses sight-unseen to get rich. Cities and states collected taxes. Everyone was happy. When the construction bubble peaked in January 2006, housing starts hit an annual rate of 2.3 million units. But after years of overbuilding, the frenzy dried up. What was left was a housing glut. And vacant units became the root cause of the decline in home values.
There were a lot of them of vacant homes: 18.8 million in 2009, according to the Census Bureau. While reasonable people may have quibbles with that number, everyone agrees that the inventory of vacant units is immense. Whether it's 18.8 million or 12 million units only changes the duration of the healing process, not the problem itself.
But the healing process is in trouble. If you rent or buy a home and move into it, you also move out of the property you’re in. Hence, no net impact on the inventory of vacant homes. What impacts it are wildfires, hurricanes, or rot. And household formation. Household formation is a demographic force that can mop up vacant homes in a hurry. Yet, it has declined over the last few years and was even negative for a while. In 2011, only 600,000 households were formed, a far cry from a range of one to two million a year in prior decades.
A blip caused by the financial crisis? Probably not. At least not entirely. Researchers have put their fingers on a number of issues, including the record low marriage rate and record high median age for first marriage (Pew Research Center)—a trend that has also manifested itself in other developed countries and is unlikely to reverse.
So, if the industry builds homes at the current rate rate of 685,000 units in 2012, and household formation stays at 600,000 for the year, then the inventory of vacant homes will grow by 85,000. OK, some of those homes may replace teardowns, but still. Any increase in residential construction spending simply worsens the problem.
In March 2011, the Case-Shiller Home Price Index hit a preliminary low—down 33.4% from its peak in June 2006. After a slight uptick over the spring and summer, the index started to decline again. The most recent data, published on December 27, reflected price levels of August, September, and October: down 3.4% from last year. As the index picks up seasonal price declines typical for the winter months, it will likely hit new lows. And so it will continue: periods of false hope followed by declines and new lows.
Price declines entail foreclosures, already a horrendous problem. Over 6 million borrowers are currently delinquent more than 30 days, and two million homes are in foreclosure. It’s a vicious cycle: foreclosure sales put downward pressure on prices, which causes further delinquencies and foreclosures. Banks are getting hit with losses—and so are taxpayers through the never-ending bailouts of Fannie Mae and Freddie Mac. For that whole debacle, read.... Bailing out Zombies, Again.
The solution to the housing quagmire, as unappetizing as it may sound, is for residential construction to fall in line with demographic realities—if you’re in a hole, stop digging. And then, maybe, the inventory of vacant homes can be mopped up over time. Alas, the generation we’re counting on to do the mopping, the very generation that all our hopes rest on—they’re already in a pickle. Skyrocketing tuition is saddling them with mountains of student loans. For how a good idea has been perverted into a systemic nightmare, read.... A Dysfunctional System Is Bankrupting A Generation.
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You cite demographic factors like late marriage. There are other 'demographic' factors that are a barrier to household formation:
There is a whole class of young paople that are out of the market. Whether they live at home or rent, they are not home buyers. The fact that builders are building is due to one thing and one thing only - ZIRP money that has no better 'investments' to go into. So it goes into building more unneeded homes. ZIRP is at the heart of all of it.
Government trying to make housing 'get a bid' is just a way for them to try and keep this aspect of the ponzi going a little longer and try to enroll more mortgage debt slaves.
It's true, so many people are in incapacity of getting their own home or they are just not in the position to make this step. I consider myself one of the lucky ones because I have inherited my house from my parents and now I am actually starting a new home decorating project. How many people can say the same?
Housing is going to get a bid soon.
Government HAS to create a floor under housing and they will do so by using tax policy just as thye did in 1981.
They will offer accelerated depreciation for rental property. This will give real estate investors a 6-8% tax sheltered yield. That will do the trick.
Question: Who pays property tax on all those homes in warehouse or about to be foreclosed? Someone has to take a big hit ----banks, municipalities , towns ? Obviously a multiplier effect on entire economy
I've been wondering about the property tax, too. The City of Indio crafted legislation that forced banks that repossessed properties with pools (there were lots of them -- plenty of sun there) to maintain them to contain the West Nile virus. Apparently it has been copied by other municipalities accross the nation. But the property tax must add up on the huge shadow inventory.
The tax is paid when the properties are transferred. Essentially the process works like this:
1. You stop paying property taxes;
2. After a certain amount of time (statutory, varying by state; here's it's 2 years), your locality certifies the property to your respective state and, at that time, title to the property vests with the state;
3. Then, after another certain amount of time (statutory, varying by state; here it's another 2 years), your state land commissioner places the property up for public auction;
4. There will be a statutorily (again, varying by state) prescribed minimum bid at the auction (general rule of thumb is the "tax base" of the home, which is the appraised price x a statutory/constitutional percentage, from which millage is multiplied to get the amount of taxes you owe each year, but I digress). The minimum bid at auction will include the accumulated taxes between when you quit paying and the present;
5. When a successful bid is made, the clock starts ticking on the homeowner's or lienholder(s)' ability to redeem the property (pay the outstanding balance of the taxes + fees)[if the property is redeemed, then the purchaser gets his or her money back, in full, from the state];
6. If the property is not redeemed, then the state gets its cut first for the back taxes, then the remainder goes into the state funds in an account for the owner of the home (if no liens) and otherwise to the first lienholder of record, then second, etc. until exhausted [generally, in order to get the remaining funds from the state, the homeowner will have to sign a deed to the state or the purchaser at tax sale (thus changing the disposition of title and effectively ending the chances to litigate the matter].
7. If there are no bids, then the process varies, but eventually the land commissioner can probably sell the property for any "reasonable" price (generally after YEARS of sitting) and the periods for litigation or redemption will probably be severely diminished.
Essentially, at present, the lienholders are not paying the taxes (I've heard anecdotally otherwise). There is a significant outstanding balance owed on shadow inventory. In order for banks to get title to their security, they're going to eat a nice haircut to the tax man... coincidentally, the same tax man that MERS ended up circumventing through all those assignments and lobbying for law changes. Needless to say, there's no love lost there.
Further, in the interim, mortgagees have significant liability in that the properties may be auctioned and purchased by third parties (which will eventually force their hands on all shadow inventory, but we just haven't had the typhoon yet because of the length of time it takes between failure to pay property taxes and auction by the state)... If a mortgagee fails to respond in time to the purchase, then their lien is extinguished and the buyer takes free and clear. Needless to say, the mortgagees aren't the best with organization and paperwork...
I can also "speculate" that states are gearing up for the typhoon and will push through legislation streamlining this process... which generally means less time for redemption, a shorter statute of limitations for anyone having an interest in the home to challenge the sale, and smaller minimum bids.
Very concise and well done summary - Kudos to Macho Man
Question: Who pays property tax on all those homes in warehouse or about to be foreclosed? Someone has to take a big hit ----banks, municipalities , towns ? Obviously a multiplier effect on entire economy
Sounds like creeping inflation without growth because the consumer is dead without more unsustainable debt. Checkmate ! Fine, time to take our medicine before starting a new game.
I got a letter today from a major drywall manufacturer. Since 2006, they have cut production capacity by 3.8 billion feet,idling 14 wallboard lines, 4 papermills, 2 quarries and 1 speciality line. They have cut 5000 employees.
This is not the only drywall supplier that is in the same boat. Plants still open are running 3 days a week. The industry is operating at 50% capacity.
There is nothing left to cut, and now suppliers are getting squeezed by material input costs. (Thanks to Bernanke.) As of January 2, drywall manufacturers have announced 35% -40% price increases. The manufacturers have no choice if they want to stay in business at all. Because of the depressed construction market, the middle men and installers cannot take an additional mark up on the price increase, and are just passing it through to their customers.
Watch for this to happen in other industries as we race to the bottom.
Very simply put.
Dont buy a home. Put the money into replacing obselete shit. We are planning on a new roof this year to replace one approaching 30+ years. Maybe even a second floor if we can do it while at it.
Virtually all work being done around our area are add ons and expansions as well as improvement type projects. There are some large areas where new homes are being built at 135K or less and 2000 SF. However the codes have slowed them down a little bit.
I am just sorry that Slate for roofing is just too expensive where I am, it will last 100 years. (And did in my old home where I was raised which still stands with it's slate roof)
Several large condo developments were erected in my neck of the woods. After 5 years none of them are sold out. Many units are rented to section 8 "renters". The new paradigm is building large rental housing projects. These are "public-private" partnerships I believe. The buildings resemble college dormitories on the outside. They expect young, urban professionals to rent these. Will the target audience actually rent these things and will they pay market rates? Stay tuned.
Section 8 if I recall were highly valued.
If you were old enough and lucky enough, your name would come up for a decent place to live with a pretty low rent that is fixed and well within your social security or whatever.
One family member has it now. She is not expected to live very long so that place will go up again to someone else if the State ever reopens the aging program that got her that place in the beginning. In the old place renting non section 8 she paid about 600+ utitlites. Now she pays hardly little and can actually enjoy a little of life.
I recall another town that issued apartments to those who are disadvantaged or otherwise disabled etc etc etc. When these folks did not make the yearly cut, they know enough to sleep under specific roof top equiptment depending on season (Summer or winter) Coolers that had falling water was especially coveted in the summer.
Section 8 waiting lists are incredibly long.
The future of housing in the USA looks more like Wet Back Hotels.
There was a time when a 1100 square ft 3 bdr was considered large and very middle class.
When you take into account doubling up, the housing demand vanishes for a long time to come.
I used to care about these types of numbers; then I saw what I made last year, and found out I'll never be able to afford marriage, a house, a car, and college for my kids.
But I can afford this handy noose made in China.
I was debt free until I said I do. In the year since I am just about debt free, ignorning the credit card and student loans for now. (Yes I keep up the payments because I can but dont expect to live long enough to satisfy either one)
Cancer killed any chance for a family and College was priced out. We both got degree and some credit hours at it is worthless. There are 10 thousand more with the same shit paper in the frame on the wall. And there stands the student loan for all of us.
And no there is no one left once probate gets the estate and the debts remaining.
Looks like the housing market hasn't learned it's lesson. If they build it, somebody will default.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
green shoots, bitchez!
The majority of the increase, in fact the majority of construction spending, is on brand new welfare housing in every ghetto of America. In the past year over 20 new low income housing projects have broken ground in Cleveland. That added to the many already built over the past few years. They are demolishing the old projects the welfare queens deserved and are replacing them with 1200sq ft brick townhomes. The builders like Testa are all the more happy to build welfare parks and get paid handsomly for them. If you went on a tour of the new welfare projects you would either walk away pissed off to the point of going postal, or ready to quit your job and go on the government dime. The new low income housing is better than nearly any lower middle class person could ever hope for. MMMM MMM MMM OBAMA GONNA GIVE ME A NEW HOUSE, AHH HA. Fuck the ghetto trash. It's time to burn down some low income housing.
you guys are way behind...we built our friends in baltimore city townhomes years ago...due to the rapid deterioration, i am assuming this is caused by some strange magnetic field in this area cause the high rise housing suffered the same effect...so i guess we will have to build them stone single family 2 car garage housing next. we will see how that works out....
Ours was built around the early 1920's in which was once a large Dairy operation in a row house style. Concrete bunkers down below for coal and later oil after conversion and brick/slate roof. Walls and interior are old world craftmanship and wood you cannot find today without getting one custom ordered/cut for you.
Those row houses are still there. Now the people living in them.... not so much. It's a bitch in some parts of the city. If they have finally repealed the old fashioned land rent that will improve things.
However a Google earth visit revealed someone tacked vinyl siding facing on the brick in the second story. UGH. Not just that one home but the entire block. It indicates to me a company or group LLC owns that whole row outright instead of individual homewners who are long since dead and gone.
From Michael Olenic via Naked Capitalism: Is Shadow Inventory Vastly Larger Than Widely Believed? http://bit.ly/ydp6RS
FHFA reports that Fannie Mae’s share of total US mortgage debt, at the end of 2010, is 27.7%. If Fannie Mae really does have 600,000 homes they expect to foreclose upon we’d expect to see about 2,165,000 shadow inventory homes total .. in Florida.
It’s impossible to believe this figure is accurate. Let’s look at some data. First, the Census Bureau reports there are just under nine million housing units in the entire state at the end of 2010, 8,989,580, to be exact. According to court records between July, 2010 through December, 2011, inclusive, there were 1,044 foreclosure filings per month in Stern’s home county, Broward County, FL; 22,144 filings total. However, from January, 2009, through June, 2010, inclusive, there 2,544 monthly filings in the same county; 48,144 filings total.
If the number Stern relayed is accurate, that would put a theoretical backlog of filings, for that one county, at 26,000. If we extrapolate to the rest of this high foreclosure state it’s safe to say shadow inventory estimates for the US have been dramatically underestimated, in much the same way that existing home sales were overestimated, albeit to a much more severe degree.
One thing is certain. Either a) Stern lied during his deposition, or b) Fannie Mae lied to Stern, or c) government and non-government organizations that project shadow volume have massively blown it. On Wednesday, Dec. 21st, 2011, HousingWire reports that CoreLogic projected shadow inventory to be 1.6 million homes throughout the entire United States. If Stern relayed the information correctly, and Fannie relayed it to him correctly, that figure looks more like it could be the shadow inventory of South Florida alone. Except that would mean they expect to foreclose on about half the houses in this state, which seems … impossible.
All this calls for far more disclosure on the part of the GSE’s, regulators, and courthouses. There is no legitimate reason to keep these figures locked away behind password-protected websites. Everything from the MERS database, to the Fannie/Freddie loan-level information, to the pile of mortgages the Federal Reserve has purchased should be open. This issue rivals a pressing matter of national security: there is no reason to force investors, home buyers, and others to speculate; to search for information.
But if Stern’s figures are anywhere near accurate it makes me optimistic that 2012 will be a turning point. Why? Quoting John Maynard Keynes, the only economist who seems to know how to pull a country out of an economic depression, “If you owe your bank manager a thousand pounds, you are at his mercy,” Keynes said. “If you owe him a million pounds, he is at your mercy.”
If he’s even partially correct then congratulations, Wall Street; we’ve reached a place where the foreclosures would cause Housing Armageddon. Where the middle-class itself has become Too Big To Fail.
If I overquoted, sorry. But the numbers are simply staggering to imagine.
They've pulled these homes off the market and "warehoused" them permanently. The taxpayers own these "warehoused" homes. Problem solved.
"jingle mail." the "vast majority of housing stock isn't even counted." we do have a census in the USA. To what extent is empty housing even counted? Let me guess..."not at all." oh, and "this doesn't count as a bank bailout either."
Problem is - the taxpayers will (somehow?) pay a lot more than they're worth. A lot more.
Banks got bailed out. CDS paper peddlers got bailed out.
Even though many homes will fall apart, empty, the Smiths and Joneses got tossed out. They still have to pay taxes though.
The taxpayers paid whatever value the banks were carrying them at. The homes will ultimately rot and be bulldozed. Or just plain bulldozed.
That sure sounds like a great deal for the few at the expense of the many.
Here's Turbo Timmah trying to explain away AIG's 170 Billion bailout.
Elizabeth Warren Makes Timmy Geithner Squirm Over AIG and Goldman Sachs Bailouts
The banks pumped those values to fuel the ponzi knowing AIG would pretend to cover the risk. The banks were made whole by AIG (at least once), then they both got bailed out.
Neil Garfield knocks it out of the park in this nine-minute video.
Foreclosure Defense - What You Need To Know 2/2
Govt reporting on anything (employment, unemployment, inflation, and now housing) is BS and twisted propoganda.
If the public knew the real numbers, fewer would buy homes and more would stop paying their mortgages - something the economy (and the TBTF banks) cannot afford. Housing Armageddon indeed.
I think if the public knew that the TBTF banks were making money on the foreclosures and that's why they aren't inclined to make modifications to loans, fewer would buy homes and more would stop paying their mortgages. http://bit.ly/zOecTq
The system is set up to keep the machine running, plain and simple. Sure, it's a contract: If the homeowner doesn't pay they get the house but who among us knew the details of the deal back say, 10 years ago?
And how are we ever going to believe anything coming out of the federal system again with respect to reporting on the economy? Or most states, for that matter?
Can't print an economy tho.
You're not overquoting. It's a terrible mess.
Michael O. made a game of it. He's got a public database (still in alpha) of mortgage records you can sort through and earn points!
It's FREE and loads of fun! You might even find out that you too got hosed by TBTF!
Find The Fraud!
OMG you mentioned JMK in a favourable way!!
I did that a couple of times and got subject to the ZH Inquisition ... OK I exagerate a bit, but I'll never attempt to explain Keynes again. Might as well try to explain Marx (who was never a Communist), or run-of-the mill socialism vs fascist National Socialism, for instance. Any whichway you are likely to get savaged as a lefty, liberal, commie-loving, etc. pervert who does not understand the TRUTH of Hayek/the Austrian School, or whatever.
Anyhow you've gotten away with your heretical thoughts so far.
In any case - with the above said somewhat in jest - I reckon that ZH is about the best there is on economic and peripheral matters.
You might note that his favorable Keynes quote has nothing to do with his economic theories, but is a truism.
Also, while may not have been a card-carrying "Communist Party member" (being safely dead at the time), you're splitting hairs by saying he wasn't a Communist, given he wrote the Communist Manifesto.
And exactly WTF is "run-of-the mill" socialism? Can you be any more vague with your arguments?
I'd guess that these are the reasons you've been so "savaged" in these parts, not that you dared to challenge the gospel of Mises. Besides, Marx is wholly incoherent, as demonstrated by Eugene Böhm-Bawerk over a century ago.
http://mises.org/books/karlmarx.pdf
You are wrong about Marx, though he co-wrote the Manifesto of course, but it is polemic e.g. he actually despized the working class and considered Capitalism to be the great revolutionary force ... though he paid lip service to lamenting the destruction of traditions.
You are wrong that there was no communist party, because there were several - just like today when there are a few remaining "biggies" like the CCP and the NKCP, plus the usual batch of minor parties like the SWP and so on. Also there were numbers of socialist parties which eventually spawned mainstream "run-of-the-mill" major parties, like the Labour Party and various versions of "social democratic" parties which formed governments throughout Europe ... Sweden is one oft-cited example AND is typical in advocating a "mixed economy" (actually like the US was until only a decade or so ago). In any case Marx refused to join any of them.
You are wrong to imply that Marx articulated any kind of doctrine to do with "communism" ... that came later with the likes of Lenin and Trotsky in Russia (ironically the last place Marx believed could institute "socialism", because of lacking a sizeable working class). In fact Marx bothered little about politics. By far his dominant efforts were to analyze Capitalism - thus his opus "Das Kapital" - in both historical and theoretical terms, along with the social underpinnings ... try actually reading "Capital" and maybe a biography, before making assertions.
You are wrong that he was incoherent, otherwise neither I nor anyone else could have understood him and concepts which laid the groundwork for both sociology and economic theory which underpin even dissent, e.g. Mises would never have been heard of, without Marx to set a context (not that I pretend to know much about Mises - so I am not 'doing' to him what you've 'done' for Marx, who you know little about).
If you understood Marx (btw I am not a "Marxist" no even a run-of-the-mill socialist these days) then you'd realize that he was certainly contradictory ... actually an embodiment of "the dialectic" ... but not incoherent, e.g. he did not just babble on at random.
BTW who the hell is Eugene B-B? Why do you cite someone very few have even heard of, probably not many even 100 years ago?
No problem. The states with low unemployment and good economies are seeing immigration and home building booms. The corrupt states with high unemployment are seeing an increase in abandoned homes. Detroit loses and North Dakota gains!
and to think the commercial real estate bomb hasn't fully detonated yet
i have 6 housing developments from 1- 2yrs old with 3 homes in it to just broken ground, along with millions of square feet of warehouse space already built and more being built, i am guessing at least 75% empty...the common thread with all.....no demand...just keep on destroying woods and devalue the already existing housing....no impact meetings ...just build baby build
this is in the middle river area of baltimore cnty md.....eastern part of county
Try creating demand with something different.
http://www.villagehomesdavis.org/public/about
Low energy use, passive/active solar, common areas planted with fruiting trees.
I don't much like the anti-car bias. I think you can still achieve the same result with adequate roadway.
The cars are the problem, housing created to support auto sales in a 'drive 'til you can afford' regime.
No economic recovery until all the cars are gone. This is underway in Europe and Japan. Cars don't pay for themselves, are simply waste for the sake of waste (and fake 'status' and 'convenience').
Credit shrinkage is energy conservation by other means. Credit shrinkage means parts of the world are rendered 'car free': Greece.
All this is coming to a sprawl near you.
While I see your point of auto-induced suburban sprawl, I don't think getting rid of all of the cars is going to solve anything. I take it you live in an urban area of VA, as that's the only feasible place for your plan. Problem is though, without vehicles, all of that fresh food in the country is not going to make it to your table, so you'll have to be happy with the factory food that your nearby plant produces.
Soylent Green solves all of these problems. Maybe that's what they mean when they say we need a "green" economy.