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alstry (35.02)

Alstry vs. The Ecomomist on housing starts

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July 17, 2009 – Comments (18)

Scott Grannis is a very highly respected Economist who writes an excellent economics blog at http://scottgrannis.blogspot.com/.  Mr. Grannis is in the Larry Kudlow life is always Goldilox camp.

Scott posted this on today's increasing housing starts:

Housing starts in June rose to the highest level in 7 months, after falling for 3 1/2 years to the lowest levels since records were first kept in 1959. Residential construction as a percent of GDP also fell to its lowest levels ever. After languishing for 9 months, the stocks of major home builders are now beginning to rise. It would appear that we have finally seen the bottom in the housing construction market.

This is good news for housing in general, since it means that the inventory of excess homes has been cut substantially, and will likely fall further unless construction starts ramping up soon. This will help put a floor under housing prices. And to the extent we can feel better about housing prices no longer falling, that should provide a huge boost to the financial market, since it eliminates a big source of the uncertainty underlying the valuation of subprime mortgages and the institutions that hold them. 

For those of you that remember the epic Alstry vs. FB dialogues......my response may bring back memories, altough FB had a much better command of housing:

Scott,

Not to burst your bubble, but Residential Contruction is DOWN! WAY DOWN in terms of dollars.

And after all, GDP is measured in dollars.

Homebulders today are erecting $100-200K homes where they used to build $500-$1MM dollar homes.

If you look at the dollar value of every public homebuilder's backlog, it is way way way way down. And that is after hundreds of private homebuilders have gone bankrupt.

So yes we are building a few more homes, but many of them are not much more than doll houses compared to the homes being built just a few years ago.

You will get updated confirmation of the above when a number of the public builders report in the next few weeks.

It is very difficult to service huge debt loads and cover the overhead of being public on selling entry level homes, especially at today's relatively low run rate.

My guess is $$$ backlog will be practically non existent....we shall find out for sure in a few weeks;)

Just as I thought I closed the door on Mr. Grannis by my response....he stated this:

alstry: You are just not thinking about this the right way. Everyone knows that construction is way down. It's never been down so much no matter how you measure it. But that is not the point. The change on the margin is the most important. On the margin, construction is no longer falling. At the very least it has stabilized, and it could be increasing modestly. It has taken 3 1/2 years of construction cutbacks to get rid of excess housing inventory. Inventories will continue to decline of course, but if construction doesn't pick up then in a year or so we will have a housing shortage developing. So the bottom in construction activity is foreshadowing an improvement in construction activity. It also means that housing inventories have shrunk significantly and that will help keep home prices from declining further.

Not the right way????  The change on the margin?????  I wasn't sure what margin he was talking about so I responded.......

Scott,

Economic growth is measured in dollars, not units.

If you are running a business, it is a game of dollars, not units.

In the end, profit and loss is measured in dollars, not units.

The ONLY way to look at it is dollars.

If you are forced to sell twice as many units for half the revenues, PRICES ARE CRASHING!

Which is exactly my point, there is no recovery in housing if you want to be intellectually honest...unless you want to include's Mattel's Barbie houses into the unit calculation.....but my undertanding is that Matel's revenues were down 19% this quarter as well....with Barbie doing even worse.

After languishing for 9 months, the stocks of major home builders are now beginning to rise.

Scott,

Didn't the dot.com stocks rise before they crashed?

Have you looked at the debt coverage ratios of the public homebuilders?

Considering overhead and debt payments, at the low per community sell through and margins that builders are operating now, many would be financially better off shutting down.

I think you might find the next two quarters of earnings reports portraying a very different picture than your current perspective.

And to the extent we can feel better about housing prices no longer falling

Prices are crashing. It is just that the rich are being forced to liquidate their higher end homes at fantastic discounts bringing up the median prices. It is now hitting coastal properties as well.

When housing comes close to a bottom, I will be the first to cheer.


ALSTRY LOOKS FORWARD TO CHEERING........but based on the fact that states will likely make HUGE cuts to its budget, likely causing millions of job losses and wage cuts.....I think we have a way to go.

18 Comments – Post Your Own

#1) On July 17, 2009 at 11:48 PM, alstry (35.02) wrote:

My friends,

What is coming is unlike anything we have ever experienced before, simply based on current UNPRECEDENTED very NEGATIVE trends.....

1st.  Never in history has government been such an important aspect of our economy

2nd.  Never has revenues to government evaporated so severely and so quickly.

 

Data from CRisk:

The anemic economy decimated state tax collections during the first three months of the year ... The drop in revenues was the steepest in the 46 years that quarterly data has been available.

Over all, the report found that state tax collections dropped 11.7 percent in the first three months of 2009, compared with the same period last year.

STEEPEST IN 46 YEARS JUST GOT MUCH WORSE.....MUCH MUCH WORSE!!!!!!!!!!!!!!

Early figures for April and May of 2009 show an overall decline of nearly 20 percent for total taxes, a further dramatic worsening of fiscal conditions nationwide.

DRAMATIC WORSENING....not Alstry's words but the Rockefeller Institutes.

The rate of deterioration is unlike anything we have ever seen before.....and it is accellerating.

The problem is we are experiencing such rapid decay because our nation is so leveraged.  When you are leveraged, default creates even more defaults like a chain of dominos falling down.

Just like you, I am not sure where this is going.  The only thing I know is that conditions will continue to deteriorate if we maintain current Zombulation policies.

 

WHEN TAX RECEIPTS ARE DOWN 20%.....YOU HAVE A PRETTY GOOD IDEA WE ARE IN A DEPRESSION!!!!!!!!!!!!!!!!!!!

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#2) On July 18, 2009 at 12:27 AM, checklist34 (99.73) wrote:

hey alstry, the housing bottom debate will rage for at least a year after the bottom is in.  We can possibly call a bottom abouta  year earlier than whatever date the bottom debate sort of dries up.

Kind of like how we were still debating whether we were in a recession after Lehman only to soon declare that the recession was already a year old.

see what I mean?

the precipitous dropin new jobless claims 2 weeks in a row is without a doubt my "green shoot".  There's almost no doubt that the 4 week moving average of that has peaked, and thats good.

Tax reciept data is interesting.  But it is not a direct measure of economic activity as, for example, income tax revenues for governments are negatively affected by crashing markets as for markets to crash people have to sell, i.e., realize losses, and realizing those losses reduces owed tax.

Further, corporate profits are levered considerably to economic activity, and with the downswing in activity there's little doubt that corporate tax payments are well down.

And so on.

Sales tax may be a good indicator??  But tax on gasoline and other deflating things AND THE LARGE TAXES ON NEW CAR SALES that have dropped so dramatically will skew that irrationally low as well.

This is, though my good fellow, without a doubt a nice way to dig into the situation.  But you can't take the hyper-bearish attitude of 

"look, look, i found a graph that shows that the p/e of the S&P is 120, thats PROOF that stocks are way to expensive, we gotta crash, we gotta crash!!!!!!"

you have to look at it rationally and reasonably.  and seek truth not proof.  

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#3) On July 18, 2009 at 1:52 AM, angusthermopylae (39.91) wrote:

Truth or proof....either way, it's still painful.

For example, I just found this really great google tool that graphs data.  Here's the link for unemployment numbers.

The selected county is my county...and it's worse than most other areas....so much for "green shoots."

As for the "precipitous drop in new jobless claims," I say the jury is still out.  Compared to the longer view, it's not even a blip, and the ramp-up is still very steep.  Just like you don't look at a single day or week in the market and declare "Bull/Bear!", I believe you shouldn't take the latest couple of jobless numbers and say it's getting better.

I'm not really a hyper-bear...but I'm very wary of anyone declaring a recovery or turnaround without showing broad-based strength and support throughout the economy.

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#4) On July 18, 2009 at 4:37 AM, fmahnke (95.13) wrote:

Alstry,

This data is truly a surprise, and although you are right about about the size of the houses and the related effect on GDP, Scott is right about the effect on banks Balance Sheets and the value of their  foreclosed houses.

However I think both of you missed a key point.  This data means jobs and from my perspective, it is the first real green shoot I've seen in awhile.

Perhaps you're too bearish. I do remember your "two-foot putt" bet about the homebuilder bankrupcies which didn't materalize. We still have 80% of the work force employed, low interst rate and declining home prices, which could spur new home sales and most importantly, job creation.

Where is the mighty FB when we need him. I'd love too hear what's really going on in this sector it is  crucial to the economy.  

 

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#5) On July 18, 2009 at 5:44 AM, alstry (35.02) wrote:

fb,

However I think both of you missed a key point.  This data means jobs and from my perspective, it is the first real green shoot I've seen in awhile.

Please be careful, it takes more people to build a home twice as large than a smaller house.  Just because its more homes, it doesn't mean more jobs.

Size matters.

We still have 80% of the work force employed

But many of them are making much lower incomes and are on the brink of bankruptcy....

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#6) On July 18, 2009 at 6:14 AM, alstry (35.02) wrote:

Further......

Current budget debates are based on assumptions of a second half recovery.

We now know conditions are getting worse, Expect more stories like....nationwide:

http://www.bondbuyer.com/article.html?id=20090716APC7WG88

http://www.philly.com/philly/blogs/heardinthehall/City_suspends_payment_of_contracts.html

Remember, we havn't even really started to feel the effects of budget cuts and unemployment is already in double digits in 15 states, tax receipts are down 20%, and imports and exports are down over 25%.

The real pain right now is being felt in small business.  It employs half the nation and many are on the brink of failure.  It is why CIT and so many small and regional banks are failing.

It will not be a second half recovery, but rather a second half discovery that we as a nation need to restructure.

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#7) On July 18, 2009 at 6:29 AM, alstry (35.02) wrote:

We will start to see more and more cuts across the nation slowing the economy even further...more jobless and less sales is not a good combination.....

Reporting from Sacramento -- Gov. Arnold Schwarzenegger ordered a large reduction in the fleet of state vehicles Friday after an audit revealed that possibly thousands of state workers have been given government cars to drive home at night without justification.

The number of employees reported with take-home cars has increased up to 20% during the last three years, according to records obtained by The Times. The state allows 8,662 workers to have such cars, costing taxpayers tens of millions of dollars amid the state's financial crisis, the records show.

When government was responsible for over half of the GDP....the cuts will be felt and ripple across the nation.

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#8) On July 18, 2009 at 7:13 AM, cmorr504 (< 20) wrote:

I have been working in construction for twenty years, running my own framing/trim carpentry thing. It's never been tighter, as far as quality jobs go. The number of homes on the market in my area is amazing.Scott Grannis seems deluded.The only green shoots I'm seeing are in my basement...

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#9) On July 18, 2009 at 9:02 AM, angusthermopylae (39.91) wrote:

The only green shoots I'm seeing are in my basement...

You wouldn't happen to live in California, would you?

[Just kidding, no offense intended...]

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#10) On July 18, 2009 at 9:03 AM, OneLegged (< 20) wrote:

I'm in construction as well.  Frankly I am on the verge of walking away.  My business is down 72% from a year a go.  The bids I have won lately are at an hourly rate that is 60% below my rate from a year ago.  My neighbor has run a successful drywall compay for 30 years.  Yesterday he was forced to put his house up for sale due to no work.  At  LEAST 25% of the residences in town are for sale.    Nothing is selling.  Nothing. 

 

Also property taxes are skyrocketing.  The assessment on my house increased by 156% for 2009.

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#11) On July 18, 2009 at 9:07 AM, fmahnke (95.13) wrote:

Alsrty.

Clearly you're right about the relationship of size and employment.

However, I'm not as comfortable about your assumption regarding bankruptcies.  Many unemployed are OK when it comes to debt service (two income, fiscally conservative), families who may now face gaps in retirement plans or paying for their kids college.

I think many of the regionals are in much bigger trouble than they know (or at least admit to).  As a former bank finance exec who reads financials and  listens to many conference calls, I fear for their existence if half of what you predict comes true. 

I listened to C's call yesterday and can't help wondering how Vikram can represent he see signs of losses begining to stabilize.  Dimon said something similiar this week  Very opaque stuff all dependent on green shoots flowering.

However, these guys have either more integrity and//or scrutiny than some of the regionals who produce unbelievable financials and very misleading press releases. I've been looking at some this morning and it is clearly getting worse

I am angered by the misleaders and am considering getting even through the legal system in at least one of the worst cases. This leads to look for an attorney as shareholders are getting fleeced. 

Any interest in learning more about (working on) this ?? 

 

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#12) On July 18, 2009 at 9:24 AM, alstry (35.02) wrote:

fm,

Many people are employed simply because the government is spending $6.5 Trillion per year.  Actually, I would argue the vast majority.

In the past, government spent based taxes received from the private sector.  Our private sector is no longer profitable and the few that are functioning are simply floating on payments from government.  There are a few exceptions but it is not material.

Once government starts to cut spending, which it must do, the spiral downwards will resume with a vengence as millions will lose their jobs and tens of millions will suffer paycuts.

What should really concern you is what happens when government runs out of money?????

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#13) On July 18, 2009 at 9:40 AM, fmahnke (95.13) wrote:

Alstry.

That is where our opinions differ. I don't see the gov't running out of money. I do see some gov't cuts but see much of it as positive for the long-term. If you look at the comment numbers 11 and 14 to your post yesterday

Alstrydomous 9.09.....Are you PREPARED for Change???????????????????

You'll see how I think this crisis plays out. Why don't you think this scenario is the most likely outcome ??? 

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#14) On July 18, 2009 at 10:00 AM, alstry (35.02) wrote:

FM,

Your'e right about the danger of the debt levels, but I'm not so sure that they are not sustainable at least in the short-term.  As long as there are buyers for T-Bonds, then why would it collapse ??

ALSTRY

Treasuries were purchased so long as the illusion of revenues to government were flowing in and the debt could serviced....with tax revenues and profits evaporating, in the next few months that illusion will not be able to be sustained.....and we will have to observe the reaction.

THE GAME CHANGER...... TAX RECEIPTS TO GOVERNMENT IS EVAPORATING...THIS HAS NEVER HAPPENED BEFORE!!!!

FM,

but I don't think our foriegn friends can afford to cut off the flow of funds and therefore don't see economic disaster on the short term horizon 

FROM THE ARTICLE:

But if Beijing leaders ever decide that it's just too risky to own U.S. dollars and debt, then the system is going to come crashing down.

ALSTRY,

CHINA CAN'T AFFORD TO FINANCE OUR DEBT BECAUSE WE CAN'T AFFORD TO BUY THEIR PRODUCTS ANYMORE

We need over $2 Trillion dollars in the upcoming year, China's TOTAL holdings of treasuries accumulated over the past ten years is less than a Trillion....our foreign friends don't have enough money to fund our current deficit.

THE DEFICIT MUST BE RESTRUCTURED...THE ONLY QUESTION IS HOW?

 

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#15) On July 18, 2009 at 10:31 AM, finabuddy (96.73) wrote:

and why cant we continue to issue new debt to repay the old debt?

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#16) On July 18, 2009 at 10:55 AM, fmahnke (95.13) wrote:

I don't know where the $2 trillion comes from, but if your right and they only own $1 now, this is a real capacity problem. However, to say they can't afford to finance because we can't buy their goods assumes a dramatic halt as opposed to gradual slowing, which at least theoretically, can be accompanied by gov't spending reductions and domestic consumption growth in China.

As I write this, I'm listening to a debate on gov't health care, wondering how our gov't can continue to propose short-term spending/tax  hikes, crap and fade and wasted stimulus.  We need to cut spending and and eventually, they will be forced to.

I'm don't know how this debt could be restructed in a negoitiated process.  Ultimately the ecomomy has a way of self correcting and although this process is painful, is does not necessarlily result in a catastrophic event.

You may be right about the social unrest thesis.   However, if they confine the tax increases to the super rich and keep unemployment within a few percent of whatever it is today,  I don't see potential social upheaval as the the most likely outcome. I  still stick to gradual slow down, shaking out gov't excesses, and ultimate business cycle rebounding 

Seems like this administration is trying to cram through spending initiatives as if they believe their window is closing and I do get concerned as to why  they are in such a hurry to do big things without better planning and analysis. Have you been preaching Alsrtynomics and doomsday scenarios to Obama's people ??? 

 

 

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#17) On July 18, 2009 at 1:56 PM, ozzfan1317 (79.41) wrote:

Good points and info +1 Rec

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#18) On July 18, 2009 at 4:40 PM, tonylogan1 (28.13) wrote:

alstry - keep up the posts like this that include relevant financial analysis and debate. 

For now, I agree very much with Alstry on the interpretation of the housing numbers. If public homebuilders are given access to credit, they will build more houses, whether it is profitable or not, because what else is a HOMEBUILDER going to do but build homes?

If credit gets cut to homebuilders, then they will only build as many homes as the market can support (via cashflow). If that were the case, we would see many public builder bankruptcies.

By the time this is over, you will see a lot more public bankruptcies, mostly because it would be better to start with clean books and no debt and start buying land at rock bottom prices. I'd bet you'll find some of the hedge-fund type businesses eventually effectively become homebuilders due to taking on huge land positions on the cheap, and later it will be profitable to contract out the building of the homes...

I'd suspect this is not wise nation-wide for at least another year, and not wise in (good areas) of California for at least two years, perhaps longer.

If you want to be a slumlord builder, there are places to build now in California.

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