Tag Archives: Business

Cheap Houses or Pricey Shares?


Interesting comments here from an article in The Economist this past week.  They touch on the relative value of real estate vs equities:

“Anyway, to take a more cheerful line, the fall in the housing markets is creating some bargains. A recent postshowed that US house prices look cheap relative to gold. The chart shows that they also look a much better bet than the stockmarket, on a long-term view. Judging by the latest plunge in pending home sales, it doesn’t appear that many bargain-hunters are interested.”

Given the 30%+ decline in housing and the incredible rebound in equities I can’t help but wonder if true value investors aren’t in agreement with the conclusions above.  Despite all the attempts to manipulate the real estate market, the government has largely failed in attempting to stabilize prices.  In other words, it’s undergone a much more natural price discovery process.  The equity market, of course, has been intervened in at every step of the way and the government has undoubtedly succeeded in propping up this market.  Various valuation metrics are at odds with regards to equities, however, it’s difficult to conclude that we’ve done anything other than engage in the same old tactics that helped create the unstable environment that existed before the equity market crash.  Given this risk and what I’d call a more natural price discovery process, it’s not unreasonable to conclude that real estate looks like a better relative value vs the broad equity markets at this juncture.


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The Housing Decline in Perspective



By Chart of the Day

The US real estate market continues to struggle. For some perspective, today’s top chart illustrates the US median price (adjusted for inflation) of a single-family home over the past 41 years while today’s bottom chart presents the annual percent change in home prices (also adjusted for inflation). Today’s chart illustrates that, prior to the financial crisis, the inflation-adjusted median home price rarely declined more than 5% in one year (gray shading). It is also very important to note that due to a large number of distressed properties, a high unemployment rate and stagnant wages, the inflation-adjusted median home price has declined 7.9% over the past year — an annual decline larger than any that occurred during the 35 years prior to the financial crisis.

– Does the real estate plunge continue? The answer may surprise you. Find out now with the exclusive & highly regarded charts of Chart of the Day Plus.

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Remodeling Market Headed to Recovery

Remodeling Market Headed to Recovery

The National Association of Home Builders Remodeling Market Index (RMI) increased to 46.5 for the first quarter of 2011 from its previous reading of 41.5 at the end of 2010. This is the highest level for the RMI since the end of 2006. However, the fact that the RMI remains below 50 indicates that still more remodelers report activity is lower than report it is higher (compared to the previous quarter).

The RMI fell to a low of 22.1 in late 2008 during the height of the financial crisis. After that period, two tax credits (the Internal Revenue Code Section 25C remodeling credit and the 25D solar and other power production tax credit) likely provided a significant boost to the marketplace.

IRS Statistics of Income data for 2009, for example, indicate that nearly $6 billion in tax credits were claimed for these two energy-efficient remodeling tax incentives, which we estimate were used in connection with at least $20 billion in home improvement projects. These incentives likely boosted the market in early to mid-2009 and at the end of 2010. The 25D credit remains in place today, but the stimulus version of 25C expired at the end of 2010 and was replaced by a much more limited 25C credit.

The current release of the RMI also contained a special question asking remodelers to report the top reasons prospective customers are holding back from remodeling their homes:

  • Customers think it is hard to get financing (90 percent of remodeler respondents)
  • Customers have lost equity in their homes (81 percent)
  • Customers are uncertain about their future economic situation (74 percent)
  • Reluctance to invest in home when not sure home will hold its value (67 percent)
  • Negative media stories making customers more cautious (62 percent)
  • Inaccurate appraisals are making financing more difficult (54 percent)

Remodeling is important as both an economic activity for homeowners and those in the residential construction sector, but it also tracks well with total existing home sales.

So improved confidence among remodelers, as seen in the RMI, may also bode well for the growth path of existing home sales later this year.

ABOUT THE RMI: The RMI is based on a quarterly survey of professional remodelers, whose answers to a series of questions were assigned numerical values to calculate two separate indexes. The first index gauges current market conditions and is based on remodelers’ reports of major and minor additions and alterations, plus maintenance work and repairs, on both owner- and renter-occupied dwellings. The second index summarizes indicators of future remodeling activity  and is based on remodelers’ responses to questions about  calls for bids, amount of work committed for  next three months, job backlogs and appointments for proposals.

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USDA Announces Referendum for Establishment of New Softwood Lumber Research

Inspector General for the U.S. Department of A...

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WASHINGTON, April 22, 2011 — The U.S. Department of Agriculture today announced that it will conduct a referendum to determine if domestic softwood lumber manufacturers and importers approve the implementation of a proposed new national Softwood Lumber Research, Promotion, Consumer Education and Industry Information Order. Softwood lumber is used in products such as flooring, siding and framing materials.

The voting period will be held from May 23 to June 10, 2011. To be eligible to vote, domestic softwood lumber manufacturers and importers must have manufactured and/or imported 15 million board feet or more of softwood lumber during the representative period from Jan. 1 through Dec. 31, 2010. Ballots will be mailed to all known domestic manufacturers and importers of softwood lumber on or before May 16, 2011. Ballots must be received by the referendum agents no later than close of business on June 10, 2011. The program will be implemented if it is favored by a majority of those voting in the referendum who also represent a majority of the volume of softwood lumber represented in the referendum.

An 18 or 19 member board would administer the order. The board would be responsible for carrying out activities intended to strengthen the position of softwood lumber in the marketplace, maintain and expand markets for softwood lumber and develop new uses for softwood lumber within the United States.

Domestic manufacturers and importers of softwood lumber would pay an assessment of up to 50 cents per thousand board feet, with the initial assessment rate being 35 cents per thousand board feet. Smaller manufacturers and importers handling less than 15 million board feet annually would be exempt from paying assessments. Exports of domestic softwood lumber would also be exempt. Additionally, domestic manufacturers and importers would not pay assessments on the first 15 million board feet of lumber shipped during a fiscal.

Copies of the proposed order may be obtained from the Referendum Agent, Research and Promotion Branch, Fruit and Vegetable Programs, AMS, USDA, 1400 Independence Avenue, S.W., Room 0632-S, Stop 0244, Washington, DC 20250-0244; telephone: (202) 720-9915, (888) 720-9917 (toll free) or (503) 632-8848; or facsimile: (202) 205-2800; or can be viewed at http://www.federalregister.gov/articles/2011/04/22/2011-9397/softwood-lumber-research-promotion-consumer-education-and-industry-information-order

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Existing Home Sales Resume Upward Growth Path in March


Existing Home Sales Resume Upward Growth Path in March

Existing homes resumed their upward growth path in March—the sixth increase in the past eight months. The National Association of Realtors (NAR) reported a 3.7% increase in existing home sales to a seasonally adjusted annual rate of 5.1 million units in March 2011, from an upwardly revised 4.92 million in February.  While recovering only part of the 8.9% decline in February, the March numbers return existing homes sales back in line with the growth trend that began in July 2010. Overall, in the past eight months, existing home sales are up 32.1% from the July 2010 low of 3.84 million units.  Despite the extended period of strong growth, March sales were still 6.3% below the 5.44 pace of March 2010, where sales were elevated by the homebuyer tax credit.

Sales of single-family home were up 4.0% to 4.45 million units, while condominium and coop sales rose 1.6% to 650,000 units . Across the regions, sales growth was mixed, with strong growth in the South—advancing 8.2% to 1.99 million units, moderate growth in the Northeast—rising 3.9% to 800,000 units, and modest growth in the Midwest—inching up 1.0% to 1.06 million.  Sales in the West decreased, slipping 0.8% to 1.25 million units.

The turnaround in March was led by investors, with the investor share of sales rising to 22% from 19% in February.  This reverses the decline in investor share in February (from 22% in January), which led to the decline in home sales. With the investor share rising, the share of first-time home buyers settled back to 33% and repeat buyers to 45%.

The high presence of investors in the present housing market is due in part to the high level of distressed sales.  Distressed home sales have risen steadily, advancing to a market share of 40% in March, from 37% in January and 33% in November. The NAR note that distressed homes are “…typically sold at discounts in the vicinity of 20 percent …”

Also associated with the increasing presence of investors in the market, there has been a steady increase in all cash transactions, which rose to 35% of home sales in March, up from 33% in February and 29% in December.

It appears that investors are taking advantage of their cashed up position in the current market to purchase undervalued distressed homes, which they will either attempt to turn-over for a short-term profit or convert to rental housing.

The NAR suggest that “With rising jobs and excellent affordability conditions, we project moderate improvements into 2012, but not every month will show a gain …”  The NAHB agree with this assessment.  The first quarter existing single-family home sales were in line with our forecast of 4.4 million units, but we expect the rate of growth in existing home sales to slow over the remainder of 2011, rising moderately to 4.8 million units on the fourth quarter of 2011.

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Thoughts on Residential Investment Recovery

Thoughts on Residential Investment Recovery.

by CalculatedRisk on 4/19/2011 06:30:00 PM

A few thoughts looking out a few years …

• Residential investment (RI) is the best leading indicator for the economy. This isn’t perfect – nothing is – but RI is usually a strong leading indicator for the business cycle. The slump in RI helped me call the 2007 recession correctly, and the lack of a recovery in residential investment is a key reason the recovery has been sluggish and choppy so far. Note: Residential investment, according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker’s commissions, and a few minor categories.

• In 2011, residential investment will make a positive contribution to the economy for the first time since 2005. The five years of drag on GDP from RI (2006 through 2010) is the longest period on record, breaking the previous record of four years from 1930 to 1933 (yeah, the Great Depression). The positive contribution this year will mostly be due to a pickup in multifamily construction (apartments) and in home improvement. However single family housing starts will continue to struggle.

• This positive contribution from residential investment suggests the economy will continue to grow all year and also in 2012 (point 1: RI is best leading indicator). There are plenty of downside risks, but I expect the expansion to continue.

• A record low number of housing units will be added to the housing stock this year. With more jobs, and more household formation in 2011, the number of excess housing units will be reduced substantially this year – perhaps by 600,000 to 700,000 units (or more).

Recently economist Tom Lawler took a long look at the 2010 Census data, and estimated there were about 2 to 3 million excess vacant housing units as of April 1, 2010. With the record low number of housing units delivered last year, Lawler estimated that as of April 1, 2011 the excess “would be somewhere in the range of 1.45 to 2.45 million units – with the latter almost certainly too high”. With another record low number of units added to the housing stock this year, the excess will be in the 750 thousand to 1.7 million range next April (with the latter “certainly too high”). This suggests the excess supply will be gone sometime between early 2014 and 2016.

As the excess supply is absorbed, new residential investment will increase in some areas – and will probably return to normal sometime in 2014 – or as late as 2017 – depending on the actual number of excess vacant housing units. I’m leaning more towards 2015 or 2016.

• “Normal” for housing starts will be the rate of household formation (probably averaging around 1.1 million per year in 2015), plus the net number of 2nd homes purchased, plus the number of demolitions. I think the 2nd home markets will be slow to recover, so “normal” will probably be around 1.3 million housing starts in 2015 or 2016 or 2017 (after the excess supply is absorbed) – up sharply from the current rate of around 550 thousand. For new home sales, normal will probably be in the 800 thousand to 850 thousand range – far above the recent 250 thousand to 300 thousand range, but also far below the 1.2 to 1.3 million range in 2004 and 2005.

• Unfortunately it is hard to pin down the timing better right now because the number of excess vacant housing units is uncertain. My guess is housing starts will return to “normal” in 2015 or 2016.

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NAHB Builder Confidence index declines slightly in April

NAHB Builder Confidence index declines slightly in April.

by CalculatedRisk on 4/18/2011 10:00:00 AM

The National Association of Home Builders (NAHB) reports the housing market index (HMI) declined slightly to 16 in April from 17 in March. This was below expectations for a reading of 17. Confidence remains very low … any number under 50 indicates that more builders view sales conditions as poor than good.

HMI and Starts CorrelationClick on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the April release for the HMI and the February data for starts (March housing starts will be released tomorrow).

Both confidence and housing starts have been moving sideways at a very depressed level for several years.

Press release from the NAHB: Builder Confidence Slips Back a Notch in April 

Builder confidence in the market for newly built, single-family homes slipped back one notch to 16 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for April, released today. The index has now held at 16 for five of the last six months

“The spring home buying season is getting off to a slow start due to persistent concerns about home values as more foreclosures seem to be hitting the market, increasingly restrictive lending requirements for home buyers and builders, and the slow pace of economicrecovery,” acknowledged NAHB Chief Economist David Crowe. “While pockets of improving activity are appearing in some markets, the best sales activity appears to be happening in the lower price ranges, where first-time buyers have greater flexibility than repeat buyers who must sell their current home”

Two out of three of the HMI’s component indexes posted declines in April. While the component gauging current sales conditions fell one point to 16, the component gauging sales expectations for the next six months declined three points to 23, its lowest mark since October of 2010. However, the index gauging traffic of prospective buyers rose a single point to 13 in April, marking its highest level since last June.

Builders are still depressed, and the HMI has been below 25 for forty-six consecutive months – almost 4 years.

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