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Guest Post: Housing Starts And Permits: Euphoria May Be Premature
Submitted by Lance Roberts of StreetTalk Live,
"The Most Bullish Development On The Entire Globe"- this was the always bullish Joe Wisenthal's headline this morning following the release of the New Home Starts and Building Permits data this morning. "It's hard to think of a bigger bullish trend right now, at least in the short term," he stated.
That is indeed a very bullish statement about a sector of the economy that is still running at very recessionary levels of activity. However, the reports for September showed that on a seasonally adjusted basis new home starts surged to 872,000, a 15% gain for the month, and a rise of 34.8% from a year-ago. While it was once again the multifamily component which jumped 25.1%, the single-family component also improved, gaining 11.0%. Housing permits also jumped 11.6% in September to an annualized pace of 894,000 which was up 45.1% from a year-ago. This is good news, however, it is not quite worth the euphoria that Mr. Wisenthal attributes to the report. However, I have never know Mr. Wisenthal to be anything BUT exceptionally bullish. An in the famous words of Jerry Seinfeld: "There is nothing wrong with that."
However, let's analyze the data beyond the headline to determine what is really occurring.
As we have discussed so many times in the past, it is not the monthly data point that matters but rather the trend of the data that is much more important. The chart below shows new housing starts and permits. Clearly, while the data has ticked up in recent months, we are still a very long way from calling it a recovery.
Secondly, the seasonal adjustments, as we saw with the retail sales, were exceptionally large in September. The series is highly volatile to begin with so seasonal adjustments are used to smooth the data. However, in the most recent month, the seasonal adjustment was larger than normal and the entire trend has been diverging from historical norms. The chart below shows the Seasonal versus Non-Seasonal Housing Starts data going back to the peak of 2006. Just for the record the number of new home starts in September, on a non-seasonally adjusted basis, was 79,000 up from 70,100 in August.
Housing starts tend to peak around June of each year and then trail lower through the end of the year. More importantly, the seasonal adjustment in September is normally lower than, or roughly equal to, the June adjustment. That is until the last two years of the "housing recovery" where the seasonal adjustments have been pushing the data higher. The seasonal adjustment for September, on a percentage change basis from August, was the largest on record at 15.28% going back to 1959.
While it should be expected that by now we should be seeing some pickup in housing - the majority of the activity is still occurring in the lower end of the price spectrum. The problem going forward remains the economy.
The underlying fundamentals, especially in the 25-35 cohorts, are simply not in place to create a sustainable upturn in housing. This is particularly the case as consumer liquidity remains severely impaired by high unemployment, stagnant wages and negative real income growth. Furthermore, there is a disconnect between new home starts and real-estate related loan activity at commercial banks. The change in lending from August to September was up a mere 0.2% and is only up 1.6% from a year ago.
Of course, that data represents all real-estate related lending and covers both existing and new homes, however, the level of activity is still well shy of something that would support such a rampant increase in the latest month's data. Furthermore, when it comes to new home sales in particular, there are many exogenous related factors that can skew the data in the short term such as requirements on builders to maintain lines of credit, unusual weather patterns as we saw at the end of 2011, shifts in lending requirements, over anticipation of demand by builders which leads to excessive spec-home building and contractual requirements on developers.
One of the areas that we would expect to have seen increase sharply at this point would be residential construction workers. The mainstream media has been touting the housing recovery for well over a year now yet residential construction has remained stagnant.
The disconnect between the housing data and the real demand for construction workers is important and suggests that the demand for new homes has not yet reached a level where builders are forced to take on more full time labor. One of the reasons why home construction has historically been very important to the economy is the impact of the multiplier effect from construction. Without employment turning up the "multiplier effect" remains muted.
This is why the impact from housing on GDP is questionable. While the upturn in housing does have some effect on the overall economy the impact has been greatly reduced in recent years as the economy has shifted into the global marketplace. Today, total private construction spending makes up less than 2% of GDP where it was greater than 5% at the 2006 peak.
Since the turn of the century globalization has changed the drivers of the domestic economy. While the economy was once driven by domestic manufacturing and housing - today it is driven by expenditures on equipment and software and exports to our trading partners. The drive for higher profits while delivering cheaper products to consumers required companies to invest heavily into productivity, outsource manufacturing and aggressively cost cut to maintain profitability. At the same time the globalization of the market place made exportation of products and services a much greater percentage of overall domestic corporate profits. Expenditures on equipment and software currently makes up more than 8% of GDP as exports comprise more than 13% of the economy.
The recession in Europe and slowdown in China, as witnessed by reports from many international companies including Caterpillar, Norfolk Southern, FedEx, UPS, Intel and IBM, is impacting the domestic economy. The slowdown in exports is likely to be a more substantial headwind to economic growth than the roughly 2% contribution from residential investment can offset.
The bottom line here is that the recent months reports are certainly good, and welcome, news in an otherwise fairly weak and stagnant economy. However, let's not get the "cart in front of the horse" in assuming that the economy is about to come roaring back to life. The protracted stagnation in the housing market which remains at recessionary levels well into its fourth year of activity gives little to be excited about. The current activity falls well within the bounds of normal volatility, and we will likely see revisions lower in the coming months ahead, as seasonal variations began to negatively impact the data towards year end.
The important point, however, is that while the housing data on the surface is showing improvement the more important components to sustainability from employment to lending are not. As stated above - the impact on the economy from the recessionary drag in Europe and slowdown in Emerging Markets is likely to have a far greater impact on the domestic economy today than housing can offset.
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Once Romney is elected, the Seasonal Adjustments will go the other way, the fiscal cliff hits, the economy tanks and the media scream about the stupid public that ruined the recovery.
It should be obvious to anyone with a functioning central nervous system that this data, in particular, should be viewed even more skeptically (and scrutinized more carefully) than usual. That it was so affected by the now infamous "seasonal adjustment" methodology, coupled with how large a statistical deviation it represented are enough to warrant such skepticism (additionally, there are many insightful comments about the reliability-- or lack thereof in this case- regarding the actual process of counting "permits" based on how and when these permits are issued, which may or may not indicate indicate that an actual residential unit will be constructed).
Most of us see what is now a pretty clear gameplan by the Fed for what it is; The Fed has shifted much of its ammunition towards soaking up more of the bad debts existing in the form of underwater mortgages currently being carried on the balance sheets of banks.
This is yet another example of radical interventionism by the Fed that prevents efficient market clearing mechanisms to take place, and actually constitutes another set of taxes on investors, savers and anyone else who now has to make decisions (or consequently chooses to not make a decision) in an environment whereby the stock of yet another asset class is being strongly manipulated (which affects prices dramatically).
By soaking up so much banking sector MBS, the Fed is burying what could be quickly cleared inventory of housing stock, that ordinarily would sell at far lower prices, in the black hole of its balance sheet, comprised of all sorts of other assets.
This reduces supply (since the houses secured by this stock of MBS), drives up prices of existing and new homes, drives up the prices of materials used to renovate or build new homes (or elevates prices far above where a free market would baseline them), crowds out a large % of potential buyers, has a very skewed, artificial affect on rental rates as well, and increases uncertainty on the part of everyone as it's no longer clear when the Fed's ongoing accumulation of such assets will make its way back onto the market, or at what speed.
The Fed and it's supporters would argue that such a reflationary policy is a portion of their goal, and beneficial, but there are potential disastrous assumptions baked into their line of thinking (e.g. that the Fed is increasing aggregate demand [I think not]; e.g. that the Fed will be able to tamp inflation down quickly-- i.e. within 6 months or so using rate hikes-- should it get out of control [history doesn't support this claim]; that the Fed is producing results that are net-positive to the economy, even adverse consequences tallied for [I am hugely skeptical that this is the case]; that the Fed will be able to unwind its current balance sheet, never mind what its future balance sheet will be given its ongoing accumulation of a wide array of assets in concessionary and accomodative manner towards the banking sector, in a relatively orderly fashion [I highly doubt it]).
The Federal Reserve is pulling so many levers and manipulating so many elements that are far better handled by free market forces that it is literally guaranteeing that a much larger successive crash will take place, and at a point in time that's sooner rather than later.
Anyone who has any faith that the Fed will be able to thread the needle here given how radically they've intervened in every aspect of the economy and given how much they've distorted price discovery, not to mention the massive pile of assets ranging from treasuries to MBS they've accumulated, is simply delusional.
I've been in real estate and homebuilding for the majority of my career and I can say, with complete certainty, that those calling for a current bottom to this cycle haven't the first fucking clue about that which they're postulating.
I second that- still seeing the same huge glut of shadow properties on the market here in Florida- no signs of any pickup in hiring construction workers, either...
But hey, when have facts ever gotten in the way of Government data?
Typical end-of-year seasonality in these numbers- couple of big builders file a bunch of starts, then pull them in Jan.
So many people have been burned by the bubble bursting and so many young people loaded up with student loan debt, exactly where are all the new buyers going to come from and blow this baby back up?
Hey I put an offer on a foreclosure yesterday and you guys are bumming me out by saying my timing was bad again. Give a break and let me live in denial. Can't you see all the green shoots? Oh yeah it's fall isn't it?
Apparently the sheeple think they're going to come from all of the part-time, temporary jobs that NObama has been manufacturing.
Krugmna's fellow aliens.
I can't even get a bank's propety management department to return a call when inquiring about one of their REOs.
Private bottom feeders are cash snapping up the cheaper inventory in places like PHX and ATL...sending out the false flag of a housing bottom. Just the signal for the new homebuilders to kickstart their borrowing machine if they can get away with it. All transitory.
And the majority of those are Europeans that withdrew their money from foreign banck accounts and are buying cheap real estate rather than risk getting busted for moving funds to one of the northern Euro states.
Here are some numbers and math etc. Make Nov 5 taxday or move election day to april 16
Premature Eviculation.
Love me some Lance!
:D
What came first the chicken or the egg?
The egg, obviously.
Genetics tells you that the egg was laid by a chicken-like ancestor. The hen creates something new but the chick that hatches was already determined inside the egg. It's like the economy. Years ago a collection of bad decisions were made and now the new reality is incubating waiting to hatch into something we can't see clearly but appears pretty scary. Imagine chikenzilla with fangs and lasers shooting out of its eyes, that kind of scary.
The egg produced had a genetic mutation. Chickenoid is not chicken does. The chickenoid laid an egg that carried the mutation, giving rise to what we call the chicken.
Unless it's KFC, in which case they have gone back to the chickenoid, hatched with no head, ginormous breastesses and thick thighs.
And weird, purple meat.
:/
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That’s not counting other current and contingent commitments not explicitly included in the debt figures — government support for Freddie Mac and Fannie Mae (known as government-sponsored enterprises) of over US$5 trillion and unfunded obligations of over $65 trillion for programs such as Medicare, Medicaid and Social Security. State governments and municipalities have additional debt of around $3 trillion.
As Pimco’s Bill Gross wryly observed: “What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.
A stopped clock is right 2x
My digital clock is just blank.
My guess is that all those McMansions are going to be converted to multifamily. Perhaps the next building boom will be interior renovation...turning the downstairs or upstairs into efficiency apartments for either the kids or the grandparents.
Hmmm. I should buy a nail-gun and learn to drywall...
Very insightful.
When a headline of increased housing starts causes a 12% algo ramp in homebuilder stocks, why wouldn't builders "start" as many homes as possible.
If we were really building as many homes as they claim, I would see new developments all over the place. The only single family development with any activity near me has $800k+ homes.
Perfect for the NAR to help foreigners launder more money.
Oh and the Obamaphone district keeps breaking new ground. You really can't count those as a positive for the economy, when middle class taxpayes have to foot the bill for them.
Perfect for propping up Lennar and Pulte's P/E.
absolutely bat-shit crazy... about a dozen new homes were built near me in the past 18 months, I have seen only ONE sold and occupied so far... yet all the HB's have tripled or more in less than a year... talk about channel stuffing!
- GDP barely over 1%
- real unemployment close to 20%
- nearly 50 million on food stamps
- 100k new jobs per month (not enough to absorb new entrants)
- most new jobs are low paying
- baby boomers retiring downsizing - spending less
- massive student debts (no money for a house)
- masive numbers on disability
- car sales = subprime loans/channel stuffing
- export markets collapsing
- trillion+ dollar deficit - again
- more Zirp
- more QE
- Calpers returning 1%
- and last but not least - Obama wants to get relectded so expect pretty numbers
Anyone who is buying a home now because a recovery is imminent, is going to get third degree burns from believing the bullshit.
Is Wall St so imbibed in its Pollyanna Party that it has forgotten that housing STARTS do not constitute housing SALES? This news only adds to the housing INVENTORY that puts deflationary pressure on house prices! This is hardly good news!
Fundentals ....Baby boomers downsizing, shadow inventory glutted, average wage if part time shift included is lower family income. Graduating students with unprecedented debt, food stamps all time high, ... Result is housing recovery and bottom is still delusional.
Real estate loans at banks will continue to rise. Why? Witness Wells Fargo this quarter. They put 10B of conforming mortgages on their books, mortgages that normally would be sold to Fannie and Freddie. Why did Wells put $10B of 30 year fixed rate exposure on their books, and take tremendous interest rate risk? Because their NIM is cratering.
As Bernanke's ZIRP continues to gut the economy, you are going to see all kinds of strange, risky behavior. Banks would NEVER put 30 year fixed conforming mortgages on their books in the past, not since the S&L crisis. Now Wells says they are going to put even more on their books.
This was THE fatal flaw of the bank stress tests - Bernanke never tested for rising interest rates. If he loses control of the interest rate curve, the implosion will make 2008 look mild.
need to get back to this for mortgage authorisations
http://www.youtube.com/watch?feature=player_detailpage&v=Ta3BImN_pI8#t=220s