Posted By Raymond on August 2, 2009
Latter part of last month gave us a string of good economic reports from the housing industry; leading many to think that perhaps this sector is turning around. Looking “under the cover” unfortunately does not confirm this cheerleader view. It reveals that there is nothing to cheer about in the home building sector, and that our nations “too big to fail” banks are continuing their risky behavior.
To understand this lets look at the news:
July 17, 2009. The good news you heard and watched on TV:
Housing starts in June came in unexpectedly strong of 0.582 million units annualized. This continues a robust gain the month before and indicating that we may have passed the bottom in housing. Starts increased 3.6 percent, following a huge 17.3 percent spike in May. The boost in June was led by the single-family component which advanced 14.4 percent after rising 5.9 percent the month before.
The “not so good side of the coin” you may not have heard about:
The June pace was down 46.0 percent year-on-year. The multifamily component gave back some of May’s surge, falling 25.8 percent. The June gain in starts was led by a 33.3 percent jump in the Midwest, followed by a 28.6 percent boost in the Northeast. The West and South declined 14.8 percent and 1.4 percent, respectively.
What is this news actually telling us?
- In colder climate it makes sense to build when its warmer. At least until global warming reaches Northeast and Midwest this is Summer time. In warmer regions the housing starts actually declined.
The builders are betting the demand for the new houses to pick up substantially later this year and early next, and are afraid to lose the opportunity.
The banks must go along with the optimistic outlook and extend them loans.
Home construction industry is still only about half what it was a year ago and has a long way to recover before making an impact on the economy as whole.
A day before the builders reported the housing market index rising 2 points to 17 in July with gains centered in current sales and traffic. Demand may now be getting a visible boost from falling home prices, though the report, issued by the nation’s home builders, warns that credit flow is still tight.
The Mortgage Broker’s Association (MBA) purchase index reported July 15 was fleeting, falling back in the July 10 week by a heavy 9.4 percent to 258.8. Difficult job conditions and difficult credit conditions continue to limit home buying despite falling prices and low rates. A week later it stood practically unchanged at depressed levels where it has been most of the year.
Here’s a quarterly view of mortgage lending activity compiled from MBA’s reports. Do you notice a turn-around?
The US Department of Housing and Urban Development reported July 27 that the sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000. Seasonally adjusted estimate of new houses for sale at the end of June was 281,000. This represents a supply of 8.8 months at the current sales rate. Median sales price was $206,200 down 6% from May 2009, down 11.1% from a year ago and 17% from same time 2007.
This new house sale report explains the cause of the jump in sales from May. The drop in price for a whole 6% were behind the increase in sales. Putting the news in prospective the builders are still building at very low levels in comparison to just a year ago. Buyers only come when confronted with steep discounts. Builders are building at a rate of 582,000 units a year. The existing inventory is 281,000 and sales are 384,000 units a year. However, without the discounts the sales would probably be closer to the May sale rate of 346,000 units. Do the math. A year from now the builders will be sitting on an inventory of 517,000 units, if they don’t give large discounts, or 479,000 units if they do. This amounts to about a 15 month supply of houses even with heavy discounts and the current rate of sales.
The builders and their banks must be betting for a significant pick-up in sales, otherwise they would not be able to justify this, right? Is that realistic to expect?
At July 28 the Conference Board’s Consumer Confidence index report came in below expectations at only 46.6. Right when investors are gaining confidence, consumer confidence is eroding. The index fell a sizable 2.7 points. The assessment of the current jobs market is the central weakness, with 48.1 percent of consumers saying jobs are hard to get, up from 44.8 percent in June and 43.9 percent in May. The outlook for jobs isn’t any better with fewer, 15.0 percent vs. June’s 17.5 percent, seeing more jobs six months out. This is spilling over into expectations for income where only 9.5 percent see an improvement six months from now, down from June’s 10.1 percent. More also see a decrease in their income, at 18.8 percent for a 6 tenth increase. Housing readings of this report don’t point to any further improvement as only 2.1 percent say they plan to buy a house, down 5 tenths from June.
Together with the Reuters/University of Michigan consumer sentiment report, these reports are pointing to a double-dip recession. While job losses may be easing, the workers are having a hard time finding jobs. Many of them are running out of benefits, and have learned that buying a house with unemployment income is not a responsible behavior.
July 27 Wall Street Journal reports that lending continues to slow as bankers and borrowers refrain from taking risks. The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans. These numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses while loan demand is shrinking.
Are the banks preparing another housing bubble here?
According to Bloomberg’s study from July 24, bankers are betting their jobs on rapid V-shaped recovery the administration promoted earlier this year. Th banks went easy on increasing loan-loss reserves in the past quarter. Such moves help bolster bank profits, but risks them having to go after another tax-payer bailout soon if the situation does not improve rapidly and soon. The reserves to non-performing assets ratio of all the banks except Citigroup declined last quarter. The ratio fell to 116 at Bank of America, 114 at US Bancorp, 128 at Wells Fargo, 47 percent at SunTrust Banks, but increased to 128 at Citigroup.
Commercial real-estate loans are a growing threat to US banks. The property prices have declined 35% from their peak (Moody’s) and Ben Bernanke expressed his concern on growing defaults in this sector in his testimony to Congress July 21 and 22. Fed now also predicts a heightened joblessness and that the economy may not return to full health for at least five years.
Even a cursory look “under the hood” reveals:
- It is way too early to talk about recovery in the home building sector. As long as the “consumer is damaged” (Ben Bernanke), extending loans and building more homes is wishful thinking that is not supported by the current, nor by the forecasted conditions.
- Banks have apparently learned the lesson from the consumer loan bubble that they are still reeling from, but commercial and building loans seem to be coming from another division that is unaware of “easy credit” risks.
- One can only wonder how many other divisions there are in these banks that still have to learn from their own mistakes. Not only are these banks “too big to fail” they also seem to be “too big to be manageable”.