Monday, May 4, 2009

Housing, Construction Spending, and Nate’s Anecdotal Housing Experience…

It’s spring! The birds are chirping, the chipmunks are chasing potential mates around the yard and Nate’s allergies are acting up as he feels like there’s 10 pounds of pollen in his eyes…

It must be the greenshoots, they are popping up all over and if you believe the pundants the chain of ever-growing Ponzi derivative securitized credit finance remains unbroken:

Econoday – Pending Home Sales Index…

Government efforts to push mortgage rates lower in combination with financing incentives and falling home prices may be turning the housing sector around at long last. The pending sales index rose 3.2 percent to 84.6 in March pointing to improvement in existing sales for April and May. Gains were centered in the Midwest and South, but a decline in the West, where the housing collapse is centered, does pose the only bad news in the report. Construction spending for March was also released at 10:00 ET and shows the first increase in six months. Markets showed no reaction to the reports at least initially, though they should give stocks an extra boost through the session and may also raise talk of easing toxic pressures on banks.

Yes indeed, the government’s action are “turning the housing sector around at long last!”

LOL, okay, if they say so. This nonsense happened last spring and it happens every spring. No kidding, pending sales picked up at the beginning of spring? That’s a surprise, who would have guessed?

Now, how about those year-over-year comparisons? No? Sorry, no pickup there, only historic plunges. But pending sales do lead the new and existing home sales so look for small increases in the next couple of months there. As you’ll see in my commentary this matches what I’m seeing anecdotally in the market right now.

And Construction Spending is also seeing an upturn on a month over month basis:

Econoday – Construction Spending…

Construction spending in March rebounded unexpectedly but housing is still on a downtrend. Construction outlays posted a 0.3 percent gain in March, following a 1.0 percent decrease the month before. The rise in March was much better than the market forecast for a 1.0 percent fall. The rebound in March was led by private nonresidential outlays which jumped 2.7 percent after a 0.7 increase in February. The public component also advanced 1.1 percent, following a 1.3 percent boost the month before. However, the private residential component continued its downward trend, falling 4.2 percent after a 5.9 percent plunge in February.

Within private residential outlays, the single-family component dropped a monthly 8.6 percent while the multifamily component slipped 1.1 percent in the latest month.

On a year-on-year basis, overall construction outlays weakened to down11.1 percent in March, from down 10.1 percent in February.

Construction outlays in March indicate that businesses may be looking ahead toward the end of recession when increased capacity is needed. And we may be seeing a rising in public construction from fiscal stimulus beginning. But the important housing sector has not yet hit bottom. However, today's pending home sales report was moderately positive, indicating that outlays in this sector could be bottoming soon. Equities rose on the news of improvement in both outlays and pending home sales.

Market Consensus Before Announcement
Construction spending in February fell again but not as much as expected. Construction outlays dropped another 0.9 percent in February, after plunging 3.5 percent in January. Weakness in February was led private residential outlays, which fell 4.3 percent. The single-family subcomponent dropped 10.9 percent while the multifamily portion slipped 2.1 percent. The other two major components actually made partial rebounds. The private nonresidential component rose 0.3 percent after a 4.3 percent drop in January. Public outlays rebounded 0.8 percent, following a 2.4 percent decrease the month before. Looking ahead, the drop in the level of housing starts on average over the last three months indicates that the residential component of outlays will likely continue downward in March, pulling down overall construction spending.

"Glimmers of hope?" More “greenshoots?”

Mass psychosis, sorry.

As many of you know, I sold all my rental properties in late '05 and early '06. I then I sold my "million plus" dollar home (on paper, but not in reality) and rented a brand new equivalent from a builder who couldn't sell it. Total cost of living? Less than 40% of what our prior house cost to own (property taxes rose from $800 per month to over $1,300 in just seven years - per month! That's nearly $16,000 per year for that one tax alone!). Thank goodness we found a greater fool and now our youngest child is leaving home to go to college as our oldest is graduating from the U of W at the same time next month – making us near empty-nesters.

So, we're looking to downsize the house to have less to take care of and to lower our overhead further still. What I have found is simply amazing... yes it's springtime and there is more activity in the market right now, but it's a different kind of activity, I would describe it as “desperate.” Keep in mind that this is anecdotal and that the Seattle area lags the rest of the market in the U.S. by approximately 12 to 18 months.

First of all, they are still building new houses like crazy all over the place and yet there are many abandoned developments around the area and many new houses that have been sitting for a year or two. Its nuts really…

I met a guy who has many rentals that are two to four years old, all very, very nice homes that he paid in the 700K to 900K range for – as rentals! What was he thinking? He would buy a house, get it appraised at a higher value, take out a second mortgage and use that money as the down payment on the next house! That’s called leverage, and he was using it to the max. He just didn’t realize that the bubble had already begun to pop when he was buying. And upper end homes for rentals? Not smart, especially considering that the Baby Boom Generation had already driven the value of luxury homes through the roof.

At any rate, this guy has several of them empty now with no renters and he is slashing his rental prices and has been trying to sell as many as he can (attempting to delever) but has sold NONE. I had a frank conversation with him and found out that he is AVERAGE $180K upside down on each of his rental properties! He's about to go into foreclosure on at least one and just can't give away the others for any amount that works. Thus he’s attempting to short sale (no one will buy even at less than he owes) or will rent for way less than his payments – anything and everything, he is DESPERATE.

And I talked to several new home builders who are also desperate and willing to RENT their new inventory in an attempt to keep cash flow going. Their preference is: first to sell, then to lease to own (this works around no down payment money), then their last resort is to rent (which is what I’m taking advantage of now). To be fair, in the past month or two most have seen a sale or two where before there were none – but again, it’s spring time and that’s what you’d expect, only more so in a normal and healthy market.

Now, the other side is that the "average" home rental prices are indeed coming up. It used to be that the upper end non-executive home rental prices in the area was about $1,500 a month. Real nice home like the one I live in are more, of course, but that was generally as much as a blue collar neighborhood would garner in rent. Now, though, that price has moved up and I'm seeing many homes in this area rent for 1,650 to $2,000. But we all know that incomes are not growing at that same rate, so we'll see how that works out - they are definitely trying to create Zimbabwe, no doubt. And that’s what gets the middle-class into trouble.

Look, you can’t blame the young couple who just had their first child for buying an overpriced home using financing that is exotic by historical standards. What do they know about history, bubbles, or finance? NOTHING, and the pigmen intend to keep it that way. It is the pigmen who approve the loan, push for higher appraisals, securitize the debt, and then sell it to unsuspecting retirement plans all without so much as a Ponzi care in the world!

Yes, some individuals have taken full advantage, but again, whose fault is it that the moral hazard was created? The CENTRAL BANKERS AND THE FED IN CONCERT WITH OUR OWN POLITICIANS.

Anyway, one builder I talked with has a 3,000 square foot luxury home for rent for $1,900, one of the better deals for the money in the area. I told him I wanted to downsize even more and he pointed across the street and said he would finish out a 2,500 sq. foot rambler the way we want and rent it for $1,775 a month, new, very nice! Custom finished rentals, yahoo!

But not for us this time, we’re not doing another new house, tired of that and suburbia and now that we’ll be empty nesters are looking for a change. Anyway, I numbered out to buy those new houses at these historic low interest rates and the cost of owning versus renting is still WAY out of whack (way cheaper to rent). I was talking to the developer and blew him away when I told him it was not a good time to buy with interest rates at historic lows. “WHAT?” He obviously doesn’t understand, like most Americans, that low monthly PAYMENTS are not the same as buying for low PRICES. That’s just how people are brainwashed with our marketing – LOW INTEREST RATES, NEVER BEEN A BETTER TIME TO BUY!

At any rate, we wound up renting a CHARMING old 1914 home on a very CHARMING and beautiful street in a CHARMING small town we never would have considered before and it’s only 8 minutes down the road from where my wife works. Walking distance to everything and mass transit via rail two blocks away. The house has been completely redone and did I mention Charming? It is, and it’s going to lower our cost of living by another 30 or 35% or so. Love it.

The people we’re renting this place from have been trying to sell for quite some time. Prime location, best in the town. Immaculate street, beautiful. They actually didn’t have the house for rent, they had it for sale. We drove by and it was so nice that we called them and asked if they would be willing to rent instead. “It must be fate,” they now say, because they were just having that conversation 10 minutes before we called. Now we have an agreement and they are going to pack up and move to be close to family in Oregon and become renters themselves. They couldn’t sell because they owe too much (and don’t have the knowledge to work a short sale – again, not trained in finance and probably have a second mortgage they used to do all that wonderful remodel work)!

Another cute house we looked at a few blocks over was for rent and we looked at it. Young guy (mid 30’s, young children) like the previous couple, just built a big new house and openly says he regrets starting it. Took them a year to build it and have been living in their new house for six months while trying to sell their old one. They had a buyer on a good agreement, but the house didn’t appraise for anything close to the agreed upon price! So he rented it out, unhappily so. Couldn’t sell it, but they did find renters in only a couple weeks of trying - $1,450 a month including lawn service! Small, but beautiful yard and the neighbors made him promise to keep the yard up!

LOL, wouldn’t want any of those “bad” renters ruining the neighborhood! And let’s face it, America has a problem in that the perception is that people who rent are not in the upper crust! And mostly that’s been true, and yes, you must be careful who you rent to. I toured several homes that renters had ruined, including one where the entire yard will have to be completely redone costing thousands I’m certain.

Now, you guys might be wondering why Nate’s not going out to BUY some defensible piece of high ground property and bunkering down? NO, I’m not. By renting way below my means I think I offer myself way more protection and it makes me free and flexible to do as I please depending on future circumstances. I will be FREE. FREEDOM EQUALS SECURITY. Those who seek SECURITY SACRIFICE FREEDOM.

I can jump on my bike and just travel. I could decide to pack up and move anywhere, or I could decide to stay in that charming house and blog forever. If the economy crumbles in a deflationary spiral, too bad… If it melts up in Zimbabwe fashion, then that’s horrid, but I’ll have the CASH (and inflation hedges) to deal with it. Anyone looking at retirement and planning to live on a fixed income should be getting prepared now.

Back to the two couples I mentioned above, they both want to sell their places but can’t. This is a great example of pent up inventory. There’s a ton of it out there. And this is in a very desirable and charming (did I mention that) town. Pent up inventory will keep prices in check as will wages which are not rising – unemployment’s rising.

And yet they keep building new houses in ever worse locations, way out in what used to be “the sticks.” The roads become bottlenecks and hell on four wheels. Kunstler is correct about that.

Our central bankers blew a credit bubble with the backing and blessing of our politicians. That’s because our politicians use central banker money to get their jobs and to maintain them. Debt is “securitized,” ground into sausage and sold creating a horrid moral hazard where no one cared about the deceit all along the chain.

FLEETWOOD MAC - The Chain (1977):