End of Year 2008 Housing Update
Housing Starts
Housing starts for November fell 18.9% from a year ago to an annual rate of 625,000 homes. This is very significant. First, let me explain how low this number really is. This is the lowest housing starts numbers since the gov’t started tracking this statistic in 1959. The lowest housing start number in the ‘91 housing recession was 798,000. The lowest housing starts number in the 1981 housing recession was 837,000 homes. The average housing starts over the last 30 years has been 1,514,000 homes. So, we are almost 1/3 of the average right now. The current # is even more significant when you consider how many more people we have living in the US than we did 30 years ago. The US Population is 37% higher now than it was 30 years ago. Keep in mind, housing starts represent about 75% new homes and about 25% replacement of old homes (tear downs) and I would argue that as housing starts decline, the % represented by home replacement goes up. So, of the 625,000 housing starts, only about 469,000 represents new homes. These numbers are awful but here’s the good news . . . a low number is good for everyone except for builders. Why? Because, this means that builders are finally making very significant reductions in new home construction, allowing inventory (of existing and new homes) to be sold off. Housing starts are an indication of Builder Sentiment. So, the lower housing starts are, the more desperate builders are . . . the more desperate builders are, the better deals they are willing to give. This is important for any of your prospects looking to buy a new home and I’ll write more on this later. So, that brings us to inventories.
Home Inventory
First, it is important to recognize that new home inventory has been falling steadily from a peak of 572,000 in July, 2006 to 374,000 in November, 2008 (in other words, it has been declining for 2 ½ years!). The media tends to skew public opinion about inventory by focusing only on “Months of Inventory”. Months of Inventory is basically how many months it will take to sell the existing new home inventory at the current new home sales pace. Of course, when the sales pace is at historically low levels, even modest new home inventory will represent a high Months of Inventory number. The average new home inventory over the last 30 years is 350,000 homes so we are only slightly over the average right now at 374,000 homes . . . so obviously, the new home inventory situation isn’t nearly as bad as the media would like you to believe. Even more important is how quickly the Months of Inventory number could drop when the housing market bottoms and sales starts going up. If we get a 25% increase in homes sales along with a 25% decrease in inventory, the Months of Inventory # would drop by 40%. It’s at 11.5 months now so it would drop to 6.9 months. The point is, in most of the past housing rebounds, home sales have increased rapidly off their bottoms and home inventories have dropped rapidly so it is highly likely that during this coming winter/spring, when I expect home sales to pick up, the Months of Inventory # will improve dramatically.
Sales
There’s not much to say about Sales other than they are low and got even lower in November. I expect December to be similar to November if not slightly higher than November. What really hurt sales in November and December was the Policy Makers leaking the information that they may buy mortgage rates down to 4.5%. All this did is put would-be buyers more firmly on the fence as they wait for 4.5% mortgage rates. I expressed my frustration with this at my Philadelphia Fed Meeting on December 9th to Charles Plosser, the President of the Philly Fed and a member of the FOMC Committee. I don’t think the Fed realized how damaging this information leak was to sales. Regardless, I believe the low interest rates have created some renewed interest in home buying in the latter half of December so my suspicion is that December home sales (seasonally adjusted) will be a little better than November’s. I do expect that we’ll see a significant improvement in Sales this Winter and Spring, regardless of what the economy does. People are going to realize that the waiting game is over and now is the time to buy that home they’ve been putting off for a few years. Also, more importantly, new home buyers will start coming into the market and stop living with their parents and this will help sales across the board because new homes buyers will buy a home from someone who will finally be able to go out and buy the home they want but couldn’t until they sold their existing home. This will play an especially large role in terms of enabling retirees to buy their retirement home (in Sussex County we hope J).
Why Buying a Home in the Next Three Weeks May Prove to be an Extremely Smart Decision
This is the real reason I wanted to blog this information. In my opinion, buying a home between now and January 20th (Inauguration) will prove to be the best time to buy a home in our lifetime. Here’s why:
So, there’s no doubt that there is pent-up demand out there and that many people have been patiently “waiting for the bottom” for a couple years now. The media reacts to reported housing numbers (sales & price). Sales always pickup before price and in most prior downturns, sales picks up very quickly. And, one month’s sales are reported about 3 ½ weeks after the end of the month so there is a delay between the actual activity and when the data for that activity is reported. Only when the numbers are published will the media report this data and make predictions based upon it. The point is, if you wait for the media to start reporting about a bottom in home sales, you will already be two or three months late and will miss the bottom. However, even more important, if the sales pace returns with a vengeance like it has in most of the past downturns, builders and existing home sellers will not be willing to offer the great discounts and deals they are now. Once it is common knowledge that the market has bottomed, home sellers will feel as if the pressure is off and will be less desperate and thus less willing to agree to huge discounts or incentives . In other words, the best deals are going to be given to the customers that buy prior to the bottom when sales are very slow because once we have the bottom, sales will pickup and sellers will significantly reduce their willingness to offer incredible deals. Also, sales are always slower during the winter so sellers are even more incentivized right now to offer incredible deals.
Here’s another reason to buy a home very soon. The window of opportunity right now to get a great deal is really only about 3 weeks long . . . here’s why: Obama’s inauguration is on January 20th. Do you think Obama is going to implement an Economic Stimulus Package very shortly after entering the White House? His economic team has already spent numerous hours working on this package so that it is ready immediately upon his inauguration. This is no secret . . . Obama has been very vocal about this. Do you think Obama’s Stimulus Package is going to have a strong Housing Stimulus component to it? You bet . . . it is becoming more and more accepted by economists that to fix the economy, you have to fix housing. So, in other words, on or shortly after January 20th, we will have a package in place to seriously kick start housing. Now, ask yourself this . . . once the package is announced and home sellers (Builders & Existing Home Sellers) know that Obama has taken steps to significantly increase demand in housing, what do you think will happen to their willingness to offer incredible deals? I can tell you . . . it will significantly decline. Why would they offer a great deal when they know that they no longer need to since the housing stimulus is going to be all the incentive buyers need? The basic point is this . . . the window of opportunity for would-be home buyers to be offered a special extra incentive or significant discount is only open for 3 more weeks. When Obama takes office, he is going to move quickly and aggressively to fix housing. Once he does this . . . even before we see the results, just knowing what he is going to do will take the pressure off housing and make the market a little less favorable to buyers. Here’s the other good news . . . for buyers who contract before January 20th but settle after January 20th, they will very likely be able to benefit from whatever stimulus Obama implements (low rates, tax rebates, etc). So, buying over the next three weeks is a “Two-fer” . . . you get the great discounts associated with the challenging housing market and you’ll most likely also be able to capitalize on whatever incentives are included in Obama’s package.
In fact, you can take this argument even further for new home buyers . . . Obama’s stimulus package is likely to be temporary because only a temporary housing stimulus will create the desired urgency and housing demand. So, Obama may do something like lowering conforming interest rates to 4.5% for 6 months only. If he does this, any new Home Buyer who waits until the package is announced may not benefit from this if their house cannot be built fast enough to settle within 6 months. New Home Buyers who buy now increase their chances of capitalizing on any temporary housing incentives in Obama’s stimulus package.
Anyway, hopefully this all makes sense. I really believe that the peak of home sellers willingness to offer huge discounts or incentives is right now. Waiting until Obama’s Inauguration to see what he’s going to do seems like a logical approach for would-be home buyers but I think it will prove to be a mistake since the certainty of knowing the specifics of his housing stimulus will make home sellers feel more secure and less willing to offer great deals.
December 22, 2008
10 Signs to the Bottom of Real Estate Markets
The bottom of each real estate market in America won’t occur with much fanfare. In fact, few people will realize that it’s even happening when they do, and they’re usually only recognized after the bottom has already hit.
The search for the elusive bottom to any real estate market is akin to finding the proverbial needle in a hay stack. Once they’re fully realized, the elevator is usually on the way up and higher prices follow.
Bottoms to real estate markets are a lot like trying to determine when stocks in financial markets are at their lowest price. Veteran investors say it’s a fool’s game to try to find the bottom to make a buying decision because as you wait, study and calculate the tendency is to over analyze as the market makes its own moves and often leaves you in the lurch.
In these increasingly complicated financial times, troubled by the credit crunch finding a market’s elusive bottom is no easy task. But here are 10 signs to ponder on whether the bottom of your market is near:
| 1- |
The inventory of listings is reducing as properties come off the market, especially those over priced places that have been sitting on the market rotting. Noticing fewer for sale signs in that neighborhood you’re interested in buying a home or condo in these days?
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| 2- | The Mass Media spurs interest with talk of a bottom. Newspapers and |
| television reporters speculate and ask the experts if a bottom is occurring | |
| like it’s a national real estate market trend when all markets have their | |
| own local bottoms and are scattered over time. | |
| 3- |
Sales volume begins to pick up, slowly at first as pent up buyer demand results in more showings.
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| 4- | People are less fearful of the market. |
| 5- |
People begin to talk about how much money there is to be made investing in real estate again.
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| 6- | Increasing telephone calls to realty offices on listings and for sale by |
| owners. | |
| 7- |
The Fed finishes tinkering with interest rates at least for a while, trying to get a handle on how the markets are moving.
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| 8- |
People commonly talk about the bottom occurring like it’s a thing of the past with increasing consumer confidence.
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| 9- | Prices finally seem to stop dropping. |
| 10- | Financing becomes easier to obtain. |
Sussex County, Delaware Home Sales – as of December 21, 2008
Happy Holidays! Looks like a lot of people will be getting a new house at the beach in Delaware for Hannukah or Christmas this year! There have been 59 new closed transactions in the past week, which is a good sign that the market is still moving and shaking, despite the current economy. Here is a breakdown of what has sold.
Single Family – 1,545 (compared to 1,514 on 12/15)
Condo / Townhome – 611 (compared to 598 on 12/15)
Mobile – 281 (compared to 276 on 12/15)
Multi-Family – 4 (no change)
Lots / Land – 332 (compared to 323 on 12/15)
Farms – 8 (compared to 7 on 12/15)
Commercial – 58 (no change)
The total for closed real estate transactions for 2008 thus far is 2,839. The average list price, as of November 30, 2008, is $369,586, with an average sales price of $343,742. Listings are selling at 93% of list price, and averaging 190 day on the market.
December 15, 2008
Sussex County, Delaware Home Sales – as of December 14, 2008
The holidays are fast approaching, and homes are selling. Why not consider buying a new home for your honey! Here is a breakdown of what has been moving!
Single – 1,514 (compared to 1,493 on 12/8)
Condo / Town Home – 598 (compared to 597 on 12/8)
Mobile – 276 (compared to 274 on 12/8)
Multi – 4 (no change)
Lots / Land – 323 (compared to 319 on 12/8)
Farms – 7 (no change)
Commercial – 58 (compared to 57 on 12/8)
The total closed real estate transactions for 2008 thus far is 2,780. The average list price, as of November 30, 2008, is $369,586, and the average sales price is $343,742. Listings are selling at 93% of list price, and averaging 190 day on the market.
December 11, 2008
8 Bailout Questions Answered
CNN viewers asked us about the proposed rescue of the auto industry. Here’s what you need to know.
Given the amount of money needed to keep the Big Three automakers afloat, it’s a lot more efficient to simply lend them the money rather than to spur sales through an incentive program.
American consumers also don’t like to be told what to buy. A rebate program would have to specify that they purchase a vehicle from General Motors, Ford or Chrysler, limiting their choices to the Big Three. Consumers and foreign-based manufacturers would likely pressure the program to open up to at least all cars made in the United States.
Also keep in mind that the government isn’t giving money to the automakers – it’s lending it to them, with the intention of getting it back in a few years. Rebates are not loans, and consumers could not be expected to pay them back.
But some workers, who retired from the automakers in their 50s, could see their benefits cuts if the pensions are taken over by a federal agency. The government doesn’t promise to pay the same level of benefits for those who retire before 60.
It’s not certain they’d see a benefit cut – it will depend upon the value of the pension fund assets and obligations when the government takes over the pension funds. But a benefit cut is possible.
First, Chrysler doesn’t have as much of an overseas presence as GM or Ford, so its health is more reliant on the U.S. market.
It could also use help making competitive small cars. Chrysler’s strength is in trucks, vans and big cars. It’s already formed alliances with other manufacturers: Chrysler has a deal with Nissan, which will build a small car for it. In return, Chrysler will build a truck for Nissan. Chrysler is also building a minivan for Volkswagen.
The benefits of GM or Ford merging with another company are less obvious. Both are international in scope, which have helped buffer the impact of market share losses at home, at least until recently.
Like Chrysler, GM and Ford could use assistance building a stronger line-up of small cars, but merging with a domestic automaker with the same problem wouldn’t help that much. Besides, Ford and GM already have plans to sell some of their European small cars here.
One real benefit of a domestic merger would be to reduce each company’s output to its current market share without having to go out of business. It would result in a “controlled contraction.” This would also give the combined company greater power in negotiating new contracts with unions and suppliers for additional cost savings.
But closing excess factories and car dealerships takes a lot of cash up front. So any kind merger in the short term is less likely because of the current credit crisis.
That will likely mean painful sacrifices for industry stakeholders like auto workers, retirees and auto dealers, not to mention those at the auto executives themselves. But an industry failure would be far worse.
Still, there is a chance we will face this decision – whether to bail out the auto industry – again. But some economists argue that even the cost of repeatedly bailing out the industry will be less than the overall cost of allowing it to collapse.
Chrysler’s Bob Nardelli and Ford’s Alan Mulally really can’t be blamed for any serious hole-digging. They’ve only been on the job for a couple of years and the problems were pretty serious before they arrived. Mulally even deserves some credit for the fact that Ford says it isn’t in imminent danger of collapse and probably won’t need to tap the bail-out line of credit it is requesting.
GM CEO Rick Wagoner may be asked to leave his job as part of a loan package. But the industry’s fundamental problems predate his 2000 promotion to the top job. GM has made changes in recent years to move away from over-dependence on SUVs and trucks, and it has also negotiated new union contracts that will bring the company’s labor costs more in line with those of foreign-based competitors. But Wagoner could be blamed for not making these changes soon enough.
Given GM’s untenable costs and increasing foreign competition, some argue that Wagoner was like a mutual fund manager in a bear market. Success may have been too much to expect. He could be credited for keeping the company alive prior to the recent collapse of the nation’s overall economy. But, with calls for someone’s head coming from Congress, Wagoner’s neck seems to fit the guillotine best. It may be time to see if someone else could do this difficult job better.
But the real problem for carmakers isn’t the workers in the factories. It’s the retirees. Before the 2007 negotiations, domestic automakers paid more than twice as much per worker hour in labor costs than Japanese competitors making cars here. But the actual hourly pay for workers was very nearly the same.
Domestic manufacturers have been making cars here much longer. That means they have many more retirees. The cost of health care for them is a big part of what drives up the overall hourly cost. And having been here longer, the Big Three have more experienced workers who command the top pay range.
In the 2007 round of contract negotiations, retiree health-care costs were shifted to an outside fund so that after 2010, those costs will not be reflected on the automakers’ books. Carmakers are now also allowed to pay new workers a lower hourly rate than current workers. That will save substantial costs in the future, with more future savings with further concessions.
This is a key argument for why bankruptcy wouldn’t work. Even if the automakers give assurances that warranties will be covered by a third party, consumers will be nervous, making it more attractive to buy from a strong foreign automaker that can still stand behind its cars.
Regarding electric cars, new Corporate Average Fuel Economy rules have already been passed that call for big overall fuel economy increases for all manufacturers. GM, Chrysler and Ford are working on new hybrid and electric cars in part to comply with those future requirements, but also to change the public’s impression that they are technologically lagging.
When we’re talking about business survival, though, it’s important to remember that hybrid and electric cars are unlikely to be very profitable, or profitable at all, for years to come.
By Peter Valdes-Dapena and Chris Isidore, CNNMoney.com senior writers
http://money.cnn.com/galleries/2008/autos/0812/gallery.auto_bailout_questions/index.html