patrick.net

Strategist says

Irrelevant. We need 1.5 million units a year,

This statement right here... this thesis was the thesis that I was 100% sure that all the housing economist, economist and housing analyst were going to be to wrong in this cycle on their growth projections

Allow me to explain

1. What timing too as I am going to the UCLA Anderson Conference next Thursday but the one I attended in 2013 this was the core thesis

A. 50 year average on total housing starts is 1.5 million we will have no problem getting their very shortly
B 50 year average of new home sales roughly 700K so we should have no problem getting to that level in this cycle

--- Because new home sales, starts and permits are working from their lowest level ever recorded in U.S. history and interest rates are low...

This is the baseline thesis for the 20%-30% sales growth estimates over the years that started in 2013

Now back to planet earth....

April 19th 2016

"Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent (±11.1%)* below the revised February estimate of 1,194,000, but is 14.2 percent (±11.7%) above the March 2015 rate of 954,000."

Even with the strongest activity in recent modern day U.S. economics...for multifamily construction, since the 1970's we are between 1,100,000 - 1,200,000

New Home Sales

Even in year 8th of the economy cycle

512K on the last print, a headline number which is normally tagged with a recession now the 8th year of the expansion, especially when rates have been under 5% since early 2011

Fallacy of Logic thesis was to think that not only could the economy grow at 3% with prime age labor force peaking in 2007, but that you could actually have a 1 to 1 model of economic output in terms of high growing rate of sales just because the low level number was working from the lowest levels ever recorded.

That the millions and million of homes already out there in American today, the existing home crop which have much cheaper and have a geographical advantage over a new home .. that someone all these homes were going to be irrelevant and people were actually going to buy more expensive homes at the fastest clip of sales we have ever seen in recent

history

Tsk.. Tsk.... this is a lack of discipline or as I am going to say on Thursday

An investment thesis said by those who have $$$$$ in a builder trade and can't explain why their super growth thesis and 3 years missed double digit sales estimates have gone wrong

You had

A. long economic expansion Check
B. 43 year low in unemployment claims Check
C. All full time jobs recovered check
D. Lowest interest rate curve in recent Modern day history Check
C. Higher inventory than any period from 1999-2005 when demand was strong Check

All equals the weakest recovery on record for the new home sales sector

#Demographics

Ironman says

Strategist says

My friend, we need to build 2.5 million per year for many years just to catch up.

Catch up to what?? The younger portion of the population can't afford to buy a car unless they string it out over 7+ years. How many can afford to buy a house?

If you can make the high rent payments, you can make the mortgage payments. Especially so in the the Mid West where CAP rates are high.

Logan Mohtashami says

You had

A. long economic expansion Check

B. 43 year low in unemployment claims Check

C. All full time jobs recovered check

D. Lowest interest rate curve in recent Modern day history Check

Which will translate to higher demand for housing. No one wants to live in a parents basement for ever.

Logan Mohtashami says

C. Higher inventory than any period from 1999-2005 when demand was strong Check

So what. Still not enough inventory, which will push prices higher.
Ironman says

Strategist says

My friend, we need to build 2.5 million per year for many years just to catch up.

Catch up to what?? The younger portion of the population can't afford to buy a car unless they string it out over 7+ years. How many can afford to buy a house?

My dear friends. Wether people buy or rent, they have to live somewhere.
We will have:
1. Much higher home prices.
2. A hell of a lot of construction activity.
3. A booming economy.
4. Very high stock prices.
5. Very very very high homebuilder stock prices.
6. The best economy in decades.
7. The highest standard of living ever.

My dear friends, you will owe me a beer along with airfare at the Yard House somewhere in the Caribbean, and you will be able to afford it.

Ironman says

If you can make the high rent payments, you can make the mortgage payments.

Another thesis that hasn't translated to higher new home sales in this cycle

Huge expansion on rental demand and net rental payments and yet the housing demand from mortgage buyers has never been weaker in any economic cycle adjusting to population growth

#Demographics

Strategist says

Which will translate to higher demand for housing. No one wants to live in a parents basement for ever.

They sure did in this cycle!

Ages 18-24 who cares they're in school it's 25-34 that are living at home

A. The ability for someone who lives at home to be able to buy a new home which is much more expensive that an existing home, that's very suspect at best

B. Most like that person living at home would have to rent first

As always

1. Rent
2. Date
3. Mate
4. Marry
3.5 - 6 years after marriage = kids = home buying

2020-2024 story line not a 2009-2019

Way too young in this cycle. However, that shift is changing, age 25 is biggest in America today, they will be starting their renting process this year or next

Strategist says

So what. Still not enough inventory, which will push prices higher.

Exactly, so people shouldn't be blaming the weak sales on low inventory

#Demographics
#Affordability

Not tight lending, Not inventory...

Still favors cheaper existing homes with a geographical advantage, too much existing crop from 2006-2011 .. bought as distress.. great for investors looking for yield and for making $$$ profits

Ironman says

The bottom line, if an area sells 1000 houses a month and there is 4 months inventory (4000 houses), then there is PLENTY of inventory. You may not like the crap that is on the market, but there's no shortage of available houses to buy. Now, if your wife is looking for purple toilets and polka dot counter tops, with 2 years of inventory she won't find what she's looking for and will say "there's no inventory".

I don't know why that concept is so hard to understand to some people.

The same logic applies with 10 houses on the market. Buying a home is a major decision, and people naturally tend to be more picky.
The last home we purchased a few months ago was after checking out dozens of homes. We only liked one, my wife had to have it, and I had to pay. :(
Inventory in some high demand areas is around 2 months. :(

Logan Mohtashami says

Strategist says

So what. Still not enough inventory, which will push prices higher.

Exactly, so people shouldn't be blaming the weak sales on low inventory

Here is what can be blamed:
1. Low inventory, which makes buyers put off making offers until they find their dream home.
2. Tight lending, especially for first time buyers.
3. Economic uncertainty (about to change)
4. Not enough new homes in the desired locations.

Strategist says

1. Low inventory, which makes buyers put off making offers until they find their dream home.

2. Tight lending, especially for first time buyers.

3. Economic uncertainty (about to change)

4. Not enough new homes in the desired locations.

1. wasn't the case in 1999-2005
2. 3% 3.5% down payment, what else do you want, 620 min fico, 43% debt to income ratio, this format isn't going to get easier
3. My lord 43 year low in unemployment claims and 16 year high in job openings, one of the longest expansions on record. If you're not secure of your place in the economy by now you're a service sector worker who is renting
4. This has always been the case and no matter how much they build people who always have this issue

However, on a very bright point

Demographics for ownership is starting to change for the better and 63.4% could have marked the bottom on the home ownership dive

Ironman says

See.... That's a BIG difference between low inventory and being picky.... Apples and Oranges...

Now compare it to buying a house and having a roof to stay dry and warm versus living in a cardboard box out in the elements. Would a person with those two options really be "picky" and say there's low inventory with 10 houses available when they would be happy with ONE?

Ha ha ha.
The homeless have no right to be picky about anything.
The renters don't have to be very picky.
First time buyers can be a little picky.
Move up buyers are extremely picky because they know exactly what they want, and are willing to pay for it.

Picky Renters = Lucifer - torturing souls as well as being tortured himself in hell. Limbourg brothers - 1411-16.

The biggest competition for new homes are existing homes in this cycle as the price gaps are very wide.

In that existing homes vs new home article, the mortgage demand curve YoY looks good for existing homes, yes it's been soft in this cycle. However, the price points to mortgage buyers has been growing in smaller priced homes this year.

This is what you want to see and this will force the builders to start building cheaper homes, yes that will take a bite out of profits margins.

However, this cycle has had a 10-1 existing home sales to new home sales number... typically that gap is 6-1

Lets just say the 1.5 million number that was supposed to happen very soon coming out of the recession is going to take a lot longer than first thought.

Which has been the main thesis I have said, Starts, Permits and Sales have legs for the new home sector but no where close to what people had thought.. A lot of this has to do with demographic economics and the fact that we have built out a lot homes over the years and simply homes have a longer life span that humans.... a lot cheaper existing homes out there .... slow and steady at this stage of our economic history is a more prudent economic thesis

Drop in median sales price, with 5.8 months of inventory, both bullish to get low level digit sales growth this year

"Sales of new single-family houses in March 2016 were at a seasonally adjusted annual rate of 511,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.5 percent below the revised February rate of 519,000, but is 5.4 percent above the March 2015 estimate of 485,000."

Revisions were higher, that is key... Good enough report!

With the positive revisions, the headline miss makes it wash, but still good enough to show single digit growth, as long as all the future report can get 515K

Logan Mohtashami says

Revisions were higher, that is key... Good enough report!

No, it was a disappointment.

new homes are a luxury item - it almost doesn't even matter what sales numbers they are posting. profits are good on $1M+ units.

Sales of newly built homes in March saw biggest gains in $200-300K range.
Strategist says

No, it was a disappointment.

I disagree for this very fact

Headline new home sales numbers are too volition up and down. Trend revision data is the real key because if gives you the best estimate for the rate of growth for the year

Last year, revisions were coming in negative making the headline up numbers look too good

Hence why the big sales miss call was an easy one to make last year on CNBC

Now the revisions are positive (higher) if the next month revisions is higher that means this number probably came in line ....

4-6 months of revisions in the books to get a good idea

The report was fine

All you need is 515K print to get growth, yes growth isn't great, but it's still growth...

Revisions key!

Nicer weather will allow buyers to feel good & overpay for shacks.

Yes, today's number will get revised down but still it will show growth

Ironman says

-

Yep, another totally believable chart.

I said 100% in fact my first tweet to the Chief Economist of Zillow when we talked about this

Number way to strong above 15% M2M always get revised

But... But....

The best part of the report revisions were positive and that is key for new home sales because that is more of a validating number on trend

headline up or down to wild

Ironman says

Northeast must have gotten HUGGGEEEE bonuses the first quarter of the year!!

Hence why revisions are key..

and I got new glasses to make sure no over hype in housing happens! ;-)

Ironman says

I think your glasses have a certain "tint" to them:

I got a new pair of those too

Vision has never been better, more disciplined and more focus.... ;-)

This is what I mean by wild headline swings but revisions matter and revision show slow and steady growth

Strategist is right: there is a huge deficit of housing in places like California.
I see no information on this thread why builders are not building a lot more.
Obviously the demand is large enough (at least relative to inventory) to maintain prices at the current stratospheric levels. This should provide a huge windfall to anyone in position to build a home. The demand would be even larger at a lower price level, assuming more supply.

The only rational reason why builders are not building more is because they don't have the land/permits.

Authorities simply kept a lead on construction because they desperately want to maintain high home prices. Screw people who can't pay up and keep up with the program.

They will however be forced to let more building happen because high prices are reaching a destructive level, where it hits budgets, forces people to leave, and otherwise affect the economy.

Bottom line we should see a lot more construction now. This is going to be good for builders.

You have to make money for the builders

Profit Margin game is all in bigger homes, the builders aren't dumb, they know the net demand from first time home buyers aren't going to be there until years away..

Slow and Steady grind until demographics get better, then you can build cheaper homes

This has been no cycle for homes under 150K but a massive one for homes over 400K,

At the cost of total sales you still can make $$$

They're fine with this

Heraclitusstudent says

The only rational reason why builders are not building more is because they don't have the land/permits.

Logan Mohtashami says

You have to make money for the builders

Profit Margin game is all in bigger homes, the builders aren't dumb, they know the net demand from first time home buyers aren't going to be there until years away..

Slow and Steady grind until demographics get better, then you can build cheaper homes

This has been no cycle for homes under 150K but a massive one for homes over 400K,

Home can be built in the US for $300K. Anything above that should be profits. This means on a $800K apartment, as they sell in places, builders should be able to make $500K a piece. Don't give me that profit margin argument. It just doesn't add up.

The big home argument doesn't add up either. First if that's the case they should be building luxury homes like crazy right now. The price still going up means that they are NOT answering the demand for large homes, let alone smaller homes. Second you are defending the idea that a market should remains unaddressed in spite of the large margin because the margin isn't big enough. This is not how capitalism works. If companies can, they will fight and build whatever makes money, and they will build more to make more money. I don't see any logic in the "need to focus on luxury" argument. Or it only makes sense in the context of exogenous restrictions on the number of units that can be built.

The skyline of cities like SF should be covered with cranes at this moment. The fact that it is not is simply based on restrictions on permits/land.

40 year trend is your friend here and look they have a lot more supply now than any period during 1999-2005 when demand was booming.

So, why would you create more supply of something that even your high end income buyers are having issues buying

Logan Mohtashami says

40 year trend is your friend here and look they have a lot more supply now than any period during 1999-2005 when demand was booming.

So, why would you create more supply of something that even your high end income buyers are having issues buying

That's a ridiculous argument and we discussed this already. 5.6 months of supply is relative to the low sales. A better measure is the absolute number of houses for sales, and it is certainly not close to 2005.

The reverse causality is true: few units for sales means the only remaining participants are rich people. We essentially destroyed the housing market and made it into a luxury game by deliberately restricting it to rich people.

And the solution is obvious: add supply, lower the price, increase demand.

You have millions of millenials in CA that would absolutely buy a house for $300K. At $800K however, they'll live with their parents until they die.

It's absurd to believe things will get better just by waiting, or just because demographics will be better.
Right now it is getting worse every year, and the only way this gets fixed is through a MASSIVE building boom leading to lower prices.

Heraclitusstudent says

That's a ridiculous argument and we discussed this already. 5.6 months of supply is relative to the low sales

More inventory
Lower rates
Higher Nominal wages

..... #Demographics

I actually just recently talked about here

Because if you adjust the sales to demographics, which I admit there is only 4 other people in the world that I know that do this and nobody on Patrick believes in this thesis

Then the sales metric is still bad but not as bad as it looks

https://loganmohtashami.com/2016/05/22/demographics-housing-starts/

As always the Wall Street people who were pushing Nirvana in housing were all vested in the builder trade, they could care less about demographic economics

If youthful demographics made things better, Egypt and Bangladesh would be paradise; North Dakota and Norway would be hellholes.

thunderlips11 says

If youthful demographics made things better, Egypt and Bangladesh would be paradise.

Nice choice of countries

like I said, most people in the world aren't versed in demographic economics, even though the data is so obviously

Headline sensalism country

There is a group of us that are pilling up names of the new normal, secular stagnation, Great Depression Deflationary and going to make our point that these people just aren't versed in economics enough to know the difference

:-)

Logan Mohtashami says

Nice choice of countries

What, they don't exhibit large numbers of young people? Whereas Norway and North Dakota aren't heavily composed of old farts?

Ages 17-29 and ages 49-65 very heavy in this cycle and then take away exotic loan off the grid

Of course home sales and mortgage demand was going to be soft.

Come years 2020-2024 if this trend continues of soft sales, then and only take we can talk about peak affordability to rate of grow model theory.

But until then, it's kind of silly to talk about that,

thunderlips11 says

What, they don't exhibit large numbers of young people? Whereas Norway and North Dakota aren't heavily composed of old farts?

You're comparing countries that have low Per Capita Income to the United States of America, it's a silly thesis

New York has a 3 million plus bigger population than Denmark

Logan Mohtashami says

There is a group of us that are pilling up names of the new normal, secular stagnation, Great Depression Deflationary and going to make our point that these people just aren't versed in economics enough to know the difference

I find a lack of investment in basic science, inequality, lack of wages tracking with productivity gains, etc. to be better indicators. Nothing that reimposing Glass-Steagal, Tariffs, government-led subsidized affordable housing contracts, and AMT for Corporations can't fix.

Logan Mohtashami says

You're comparing countries that have low Per Capita Income to the United States of America, it's a silly thesis

Norway doesn't have a high per capita income?

Egypt and Bangladesh should be flooded with industries taking advantage of all that young, energetic labor!

thunderlips11 says

lack of wages tracking with productivity gains

I never understood why Liberals think wages would match productivity from 1970 when Globalization came and destroyed poverty and we created a massive service sector that gave everyone jobs as compared to a hard export economy that would have been a disaster for America

Working from a low population base into a mass expansion of working population

Chinese got the memo and are desperately trying to switch their economy,