Hard to find a silver lining in this data.
Housing starts in May fell to a 593,000 annual rate, according to numbers released this morning, June 16, by the Department of Commerce. That was a 10% drop from April’s annual rate of 659,000. The April rate itself was revised downward from 672,000. The drop was the biggest since March 2009.
Building permits, an indicator of future housing starts, fell to an annual rate of 574,000. That’s a one-year low.
Economists had been expecting that housing starts and building permits would both fall because government subsidies to home buyers expired at the end of April. Under the program home buyers had to sign a contract by the end of that month to qualify for a credit of up to $8,000.
But they hadn’t expected starts and permits to fall quite this sharply.
The median estimate among 78 economists survey by Bloomberg News was for housing starts to drop to a 648,000 annual rate. The rate actually came in 55,000 or 8.5%, lower.
I’d expect that we’ll now see inventories of new homes for sale start to climb again. Sales of new homes had climbed in April reducing the number of new homes on the market to the lowest level since 1968.
Of course, the current inventory is so low because builders had been cutting back on construction as demand remained sluggish in good months or actually fell.
I don’t think this data will make the stock market happy today.
Ooh, forgot the smiley 🙂
Yes, jokes are situational. YX has a history of being anti-government intervention, and my comment was to YX. But for those who may not know YX’s postings, or who are overly sensitive, I’ll rephrase it:
YX, you are a manifestation of brilliance! Government statistics show that housing price inflation has outpaced wage inflation for about 50 years, with the Great Recession reversing that trend. Obviously housing price inflation outpacing wage inflation is unsustainable by definition, as the price rise squeezes middle America more and more with each passing year. Not surprising to many is that soaring housing prices are correlated with government intervention in the housing market. It seems to me that GSE providing cheap loans spurred housing demand, which can be shown through home ownership % among the population, and which demand caused prices to rise faster than a non-intervened market would. The irony is the GSE’s were praised as creating “affordable housing” when ultimately they very well may have done the exact opposite. What good does a lower interest rate do when the sales price is double? That’s not affordable at all. Higher housing prices have not created prosperity. They do the opposite as they squeeze other wants and needs out of the family budget, thus causing a lower standard of living. YX, your comment is 100 % correct IMO. You get it fully. I’m sure others will label you (and I) as gun toting, bible clinging, Southern rednecks for thinking this way. Ooh, by the way, I think claiming to hate racism but saying redneck is hypocritical.
There, there. Now YX wasn’t insulted but this will most likely step on many others’ toes. So which is best? Or should we not say anything that insults anyone? Or maybe preface every single comment with 10 paragraphs of history and explanation. Or maybe we can grow a little thicker skin perhaps?
Suggestion:
Avoid using pejoratives when addressing others posting on the site. This will decrease the possibility of hurt feelings.
Jim and others,
I’m wondering about the “starts”. First off let me say that I totally agree that we should expect that taking away the handouts should a great effect on real estate sales (and that I didn’t trust economists to predict it correctly). But I don’t see how “starts” predicts this correctly. As I see it “starts” are the builder’s guess at what they can sale, and they have to do it even before the handouts stop. I would think that this wouldn’t be a good way to predict the overall real estate demand. I would think the sale numbers for all real estate would be much better. What I’m I missing?
yx, Sigli, everyone, …
I saw that the comments were meant as a joke, but it was a pretty dry joke, with not even a smiley face. The main reason people started putting in smiley faces and such in text conversations is because in text it is really hard to tell when people are joking or other emotions. And that last line had me questioning it. So far I have thought everyone posting here have been exceptional. All you have to do is look at the posts on MSN and you can see it, but given this is in text, I think we should be extra careful. The last thing I would want to see is people attacking people here. And Jim doesn’t have the time and resources to police people so if it comes to that you might end up closing down some really good discussions.
“Comedy” is 90% (or make up your own large percentage) non-verbal and very situation dependent. Jokes in a forum like this, particularly in the form of phony personal attacks, have about a 2% chance of success because people don’t come here for humor. …and with the current market-driving news, they’re not likely to be very happy either!
Sigli – I read your comments and I didn’t pick up any hint of joking. I don’t see the comedy in it and I think you need to be more considerate when you post.
yx,
If you’re referring to commodity-based REITs, then I’ll agree with you that they are a different story. But any property-based REITs are the ones most at risk, since their underlying value is the property itself. Even rents will be affected as the market values drop, which will inevitably hit the dividends you can collect.
Yes, YX, I was joking and thought you’d see it. Sorry it was offensive to you. I’m sure you’ll see some comedy in it if you reread in a different light.
Folks:
What do you do when someone pushing and shoving in his/her rush to the sawyer? You get out their way.
Ed:
Regarding your REIT “is about to loose principal ” comments. You were probably talking about mortgage-backed REIT which essentially are bond fund. Not all REIT holds mortgage. Some REIT hold the property and collects rents. Others operates the business (such as timber REIT). These REIT’s dividends are depend on the underlying business. Just my thought. How do you think?
sigli,
Thanks, but no thanks. I won’t be buying any REITs anytime soon, no matter how good they look.
BenWobbles,
How about all of them? The better question with REITs would be which ones won’t decline?
yx,
Sigli was obviously kidding. I am pretty sure he agrees with you.
sigli:
You are in agreement with yourself.
Jim:
I think it’s great that you let opinions from all walks of life get on your website. I have benefited greatly from those diversified opinions. But it’s quite different to let vicious attacks to be posted on your site. Those of us, long time readers of your blog, respect you greatly and we did not come here for this kind of vicious attacks. It’s time to draw a line between intellegent arguments and pure slander. There are places on the web that cater to people who can not live a day without a potty mouth, but they should not belong here.
YX–read it again as satire. We’re in agreement.
Ed, here’s a REIT tip for investigation that I think will be up your alley (hint: supa low debt).
FSP–a REIT with no mortgage debt going into this fiasco. It’s around book value now, but I want a discount as rent rolls are terrible right now. However, the divi is as safe as they come as it can only be cut so far due to higher vacancy/lower lease terms, but not due to solvency risk. Plus, there’s value in getting their investment bank for free. It’s an incredibly successful REIT model that gives them a huge competitive advantage. Imagine syndicating a REIT and getting to know it inside out before plunging in feet first with all the risk. Plus, you collect huge fees for your services to your loyal investors.
I’m looking for somewhere in the $10-ish area (recently hit resistance and went on a tear though, so it’s a ways away). I’d buy at $10 and pray for a 30% drop. If I saw $7 then the pickup would be doing 60 in reverse.
Ed,
what do you think the best REIT (s) to target for decline?
sigli:
(1) Wash your mouth with some heavy duty laundry detergent.
(2) I don’t argue with a piece of rock.
I agree with some of the above comments that we had an overbuilt housing market and we need to work off that inventory before we get into a construction frenzy again. It hurts the construction industry but it seems that sector was overbuilt as well. I look at this as a long term positive. And I have stayed away from companies associated with the construction industry for this reason.
Yeah suntzu, I want to thank you for helping pay for my new washing machine. I would have purchased the same machine with or without freebies, but it was so much nicer seeing you and everyone else pay 3 rebates worth $75 each. Remember, I’m saving energy now thanks to your help! I would have bought the same thing regardless, but the energy thing gave a nice excuse. We’re all helping each other, don’t you see?
YX, you’re obviously a dolt. Housing price inflation can outpace wage inflation FOREVER. It did for 50 years until 2007 came. We can afford to pay 60 % of gross income to housing. It’s no problem. Higher prices are great for all. It’s prosperity. Why don’t you see? We need more govt. interference…more GSE money! It spurs demand, which inflates prices, but shhh! there are no side effects and interference is good! Don’t you see how fannie and freddie created “affordable housing” by causing housing prices to skyrocket? The interest rates were cheap. Duh! You just. don’t. get. it. YX. You’re probably a gun clinging southern redneck aren’t you (btw I’m not a racist even though I say southern redneck every chance I get).
but if they can just prop it up a little longer they might get reelected – im seriously shocked they didnt extend the credit until november just to keep things looking good for a while.
sucks for my wife and I, who have saved patiently for 3 years and keep waiting for the real drop in housing prices to buy our first home. as long as government subsidies for housing, hgtv, and stupid people all coexist, responsible people will be screwed (and houses will get uglier).
this can’t possibly end well.
For those of you sitting on REITs, or REIT-based funds, just for those lovely dividends they put out, you might want to reconsider. Your principal is about to take a hit.
Ditto: cash for cllunkers.
Stupid question; Yesterday we discussed the value of emerging markets compared to the Developed, we also discussed Summer rally.
Do Foreign and emerging markets have the same cycle during the North American Summer?
ie; Sell in May and go away?
From what I could gleem, it was not clear that they do.
The more the government pumps into the real estate, the longer the slump lasts. It has to face the music!
The new home buyer credit was nothing more than a wealth transfer from the taxpayer to the banks. I guess the numbskulls argue that giving $8k will put a bottom in housing vs. the market dropping $8k. Yeah, that makes sense. There is a market price people are willing to pay and we found it.
Now we not only have the false hope removed, but a ton of extra debt to go with it. How much will this raise interest rates on ALL the national debt? Washington NEVER includes this part of the equation, or tells you how much your taxes are going to raise to help buy your neighbor a new house.
Thinking things threw must be a way of the past.
ganeshdn–I agree excepting the jobs associated with building.
Utah had a new construction grant of $6000, then a $4000 follow on. Add that to $8k, and you get a nice discount on a modest new home. It was possibly the dumbest idea I’d ever heard of. We’re way overbuilt and people can’t sell used homes, so let’s build a ton more and subsidize them, which will devalue existing homes even more and make it harder to sell. It’s no wonder the foreclosure rate went up and up and up in Utah. I heard this was a ZION lobby thing (large spec land holdings), and it could very well have done them more harm than good.
Ditto with cash for clunkers. It just shifted demand to the front.
Since there is a backlog of existing homes … Lower housing starts is good news for the economy ??. For lenders, builders, and communities at a time like this ….. adding to the inventory of new homes is not appropriate.
Every time when I thoguth I might have missed the bottom, it drops back again!
I hate to say “I told you so”. The moment government’s propping ups gone, it sinks.