Source: Associated Press/AP Online
Publication date: June 19, 2007
Construction of new homes fell in May as the nation’s homebuilders continued to struggle with a steep housing slump that has been exacerbated by rising problems with mortgage defaults. The Commerce Department reported Tuesday that construction of new homes and apartments dropped by 2.1 percent last month, the poorest performance since a huge 13.9 percent plunge in January.
http://www.bigbuilderonline.com/industry-news.asp?sectionID=363&articleID=521473
But alas! we do like cowbirds and cuckoos, which lay their eggs in nests which other birds have built, and cheer no traveller with their chattering and unmusical notes. Shall we forever resign the pleasure of construction to the carpenter? What does architecture amount to in the experience of the mass of men?
–Thoreau’s Walden
Replies
Three depressing topics at once? Come in off the ledge Rez. Things are getting crazy right now. I have two rentals going and the bank is giving me hell refinancing the latest one. I'm in Michigan and the first bank went as far as sending preclose docs to my house, then at the last minute they disregarded their own appraisal and were only going to give me what I paid for it plus what I put in (half of what it appraised for).
They had a problem with the fact that in two months we turned sh#$ into shineola. I guess they had never heard of construction crews before.
I feel lucky I have a good job going on right now, but after thats done I have nothing on the schedule. That doesnt worry me to much though cause I always seem to get a call when I need one.
Three depressing topics at once? Come in off the ledge Rezalways happens in threes.
MORTGAGES: Rate On 30-year Fixed Mortgage Jumps To 6.74%
June 14, 2007: 04:00 PM EST
CHICAGO (Dow Jones) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. <!---->Freddie Mac<!----><!----><!----> in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since <!---->July 2006<!---->.
"Mortgage rates moved sharply upward this week, with rates on 30-year fixed- rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, <!---->Freddie Mac<!----><!----><!----> (FRE) chief economist.
"These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.
http://money.cnn.com/news/newsfeeds/articles/djhighlights/200706141600DOWJONESDJONLINE000987.htm
I never in all my walks came across a man engaged in so simple and natural an occupation as building his house. We belong to the community. It is not the tailor alone who is the ninth part of a man; it is as much the preacher, and the merchant, and the farmer.
-Thoreau's Walden
Edited 6/20/2007 1:14 pm ET by rez
A story in the Mon or Tue WSJ cited new-home builder confidence the lowest it has been in 16 years.
They are now forecasting falling home pricing throughout the rest of '07, with no recovery now expected until "some time in '08."
The message has not gotten through here locally, with our little crowd of head-in-the-sand realtors helping equally-clueless homeowners to set the astronomical prices of '04 and early '05 on new listings. It is just crazy. Nothing is selling, except at the ultra-upper end, where market conditions such as we have now, never matter at all.
Sorry I'm a little late in the discussion. I was listening to some financial guys on the radio (up here in Canada) and they were discussing your housing market. The radio station was Canadian but the speakers/guests mght have been American because they sure had a lot of US stats and figures. Whatever they were looking at they were saying that the last time this (whatever "this" was) happened was in the Depression! The other interesting they they spoke about was some guy who looked after the largest investment portfolio in the US (so it must be in the billions and he must be good) and Greenspan who used to be the head of your Federal Reserve. The company must be very high profile to hire Greenspan right! Anyways these two high flying people are saying two completely different things in regards to the US housing market. Greenspan says it's only a blip and will last about 6 months whereas the other guy believes the housing crash will be the worst ever and take many years to come out of.
The speaker/guests all agreed with the other guy. NOT Greenspan.
roger
For a number of years I've read a number of investment newsletters with different sources from both sides of the tracks.
I notice that one thing that sells well in attention are futuristic bad news tidings and what to do about it now.
Hard to find are level headed opinions without a lot of hoopla trying to talk you into believing one way or another.
History is full of surmising and advice that never turned out the way they thought and it quickly falls to the wayside forgotten, buried and ignored by most
only to rise again later in a different fashion but saying the same things and the cycle continues.
Sometimes difficult to separate the wheat from the chaff.
The enemy will find it out. He may turn pale when the trial comes. This man seemed to me to lean over the cornice, and timidly whisper his half truth to the rude occupants who really knew it better than he. -Thoreau's Walden
Yes it is sad. I agree that there are lots of doom and gloom people as well as information saying all sorts of things. Years later someone can say "well, you were told it was going to happen, why didn't you protect yourself"
The computer glitch at the turn of the century didn't happen but Mein Kampf writings did. Krystal Nacht(crystal night) happened in the early thirties but the jewish concentration camps didn't start to later. Why did anyone stay around? We are humans and believe what we want to believe in or what we hope for.
roger
We have to remember that our recent US building boom (last 5 yrs or so) was fueled partly by house sales bought by people who wouldn't normally qualify for loans (sub prime) and banks taking their word on their income as opposed to running the checks. These are the folk who are defaulting on their loans & vacating their houses as wells as the same group that no longer qualifies for a loan with the banks returning to the tighter standards which reduces the pool of buyers for new homes.
I don't think it'll last as short as 6 months nor do I think it'll lead to another Depression. People will get hurt like the builder down the road with 3 (maybe more) still empty specs built since this news started breaking. (There were a few no cost choices he made on those hosues that I thought if made differently wold've made them more appealling but he didn't spend much time studying the area.) I also think that a lot of builders that are paying attention to the financial details will survive.
Your first paragraph was exactly what happened here in Canada in the mid seventies where people could buy a house with only 5% down and get a 5 yeay mortgage. Right when their mortgage came due the rates started to go up through the roof (80-81). There was some streets that were built during that time , many houses were boarded up. Later in the late eighties another boom started again fuelled by people buying more than one home and renting it out. Like you say the builders were building more houses than legitimate buyers and it created a building and price frenzy but again the bubble popped in about 91. My sister-in-law ended up paying for 2 properties and it took years to sell one of them. In the end she had lost $160,000.00. The last customer I was working for in Ontario in 2000 (used to be president of BMW NorthAmerica) when he heard I was moving to the west coast (Victoria area) he said he had bought a penthouse unit in a tower under construction for investment purposes and when things tanked in 91(?) he lost $100,000.00 by the time he had sold it. By the time I got to Victoria in 2002 (wierd route) I bought a small condo for the same price it was selling for new in 1992. Not until about 2004 did my condo start to move up.
I don't know what is fuelling our housing boom here in Canada (and it,s still booming) with no end in sight. For some reason I don't think it's ordinary people buying more than one house and renting it out to pay the mortgage. At least here on the west coast a small new house costs over $300,000.00 and you wouldn't get even $1500.00 a month in rent ( probably alot less) so the financial reasons don't seem to fit. In Ontario 7 years ago I could get almost a $1000.00 a month for house costing less than $150,000.00. Though to be honest I don't know about the rest of Canada and its prices. I'm only seeing one small area albeit a very expensive area.
I'm waiting for the bubble to pop, and it will pop here also.
roger
What we're seeing around metro Atlanta, GA is mostly smaller spec builders going bust because of the fallout from subprime lending. We have a huge hispanic and other recent immigrant population that got in over their heads and have defaulted. So, there's a glut of resales, and a glut of lower-end spec houses.
Custom home builders are doing swell. (There's a LOT of people with money, or good credit and a good-paying job, here and you wonder where it comes from.) Remodelers are doing swell, as everyone who can't get the price they want on their resale stays and fixes up and waits till later to sell.
Longer term, I have to think that the spec builders are going to be forced back into the starter home market (for our big immigrant population mostly) and it's gonna have to be lower priced, so they can qualify under the tighter loan criteria lenders are gonna have to use. That's gonna be big, mostly national builders who can build cheaper and can bankroll it. The small spec builder, especially at the low end is gonna be squeezed out. Or, some new government program will pop up to support this population and their housing needs. I'll bet on that.
Locale and the particulars mean everything. If I were in the trades I'd try to work some for everybody, build my business network. Remodeling is always the fallback position when new building goes sour. When the whole economy goes down, cash reserves are the fallback, I guess.
We shall see.
Small builders falling back to remodelers has derogatory like implication,I find that new construction subs don't know how to bid the demo part. Or have the "keep it clean" everyday attitude and they sure don't have the experiance of handholding their customer.
These guys coming off new construction into my field give a bad reputation and in their desperation underbid so shooting themselves in the foot.
Then when the building boom comes back the first thing out of their mouths is I will never do remodeling again its too dirty and no set of plans to follow and the customers are too hard to deal with.
I personnally like the inter relationship developed with my customers and for the most part they become a lifetime source of work and referrals.
ANDYSZ2WHY DO I HAVE TO EXPLAIN TO FRIENDS AND FAMILY THAT BEING A SOLE PROPRIETOR IS A REAL JOB?
REMODELER/PUNCHOUT SPECIALIST
I can see your point. Didn't mean anything derogatory at all about remodeling as a "fall-back" position. Simply meant it as a means of financial survival, certainly not as an area where lesser skills are required. So, if they're gonna consider remodeling as a fallback position, then they need to do some of it all along to gain the experience they need--right?In the big city here, remodeling is its own specialty. There's a lot of demand for remodeling. And a lot of preservation of historic houses/buildings is being done and that takes real careful demo and rebuilding. Those remodelers especially are highly regarded and earn top dollar. Do you have any suggestions for how the guys in smaller towns, doing primarily doing new construction, can survive when their business slumps? So they can stay off your turf?
>In the big city here,<
bj, not sure how much you've been out of Atlanta area ;-) but I think of it more as bit sprawling town and not Big City (aka Boston, NYC, Chicago). From my perspective most of the homes with geographical advantage considered favorable here in the ATL area lack the charm & character worthy of full blown remo or reno. The bulldozer is the most appropriate so. Exceptions abound like old/original Vinings, VA Highlands, much of B-head and some of the mid town neighborhods, but that's a small # of houses relatively speaking.
>suggestions for how the guys in smaller towns<
They're (this might even include me) going to be in a sink or swim situation. Either adapt or fold. Like Andy says communication skills are more important in remo/reno than the requisite good-to-excellent carpenter skills. Sadly, I don't think commo skills are easily learned later in life when you have fewer examples to follow (ie working on your own, few others to watch). Learn to track costs; learn Excel. Learn to track job times and use those numbers for future reference.
One other thing is to go mobile. While in college in OK I worked with a lot of people who were following the building boom and leaving slumped markets. (I learned the most from a guy in MI and another from NC.) NO isn't done yet.
Have a good & safe 4th. I'm off to the beach....
Don't forget the fact that a significant portion of those that will be out of work don't speak much english and not too many HOs wanting to remo are interested in inviting people into their homes that they can't communicate with.
Recent numbers on new home starts are at approximately 1,500,000 per year. This is supply -
Demand 1997 to 2005 per U S Census Bureau
Occupied homes grew from 99,487,000 to 108,871,000 - a net growth of 1,173,000 annually.
Seasonal homes grew from 3,166,000 to 3,845,000, or a growth of about 84,000 annually.
In 2005 the approximate rate of elimination from disaster, obsolesence, etc was about 100,000 units.
Thus, the basic demand over that 8 year period is about 1,360,000 units annually.
New housing starts have exceeded this level since 1997 and were over 2,000,000 annually for much of 2004 - 2006. Building 650,000 homes a year more than demand must be viewed in perspective, as this is only about 6 tenths of a percent annually in the increased housing supply. The total vacant in 1997 was 9.7 million vs 11.6 million in 2005 for a growth of 244,000 annually. However, in percentage terms, the vacant / occupied equaled 8.6% in 1997 and this grew to 9.4% in 2005.
This leads me to conclude that the normalized building rate should be about 1.4 million annually, and that at the peak of the recent bulge we were overbuilding by about 50%. Thus, 1/3rd of new housing construction work is "disappearing."
With an increasingly mobile population there continues to be a move in population to areas for retirement, or due to local economic factors with the result that Michigan is likely to see much higher vacancy rates while the Carolinas are probably reasonably strong.
While the sub-prime mortgage issue is grabbing top headlines I don't believe it is the cause of the housing slowdown. The industry was building new homes faster than the formation of new households with an inevitable result. I don't think we can look for a "recovery", because at the current rate of 1.5 million new starts we are still slightly above the apparent demand. Thinking that we can go back to 2 million starts in the next decade is like thinking that the stockmarket internet boom will soon be back.
Bill