by Calculated Risk on 5/23/2006 02:59:00 PM

From Dow Jones: Housing Downturn Taxes Toll Brothers

Toll Brothers ... slashed guidance for fiscal 2006 as the company continues to struggle with sluggish sales and big inventories.
...
Toll blames the weak market conditions on big inventories in the market ... Exacerbating the situation further is a surge in cancellations and a glut of speculative homes built by home builders sitting in the market.

"We believe that once this excess inventory is absorbed, demand should once again exceed supply," Toll said. When this happens, "we believe those buyers who have been on the sidelines will come back into the market and prices should start to rise again."
...
Banc of America analyst Daniel Oppenheim, who rates the company at sell, is skeptical demand will rebound in the second half of fiscal 2006.

"We remain concerned that supply has not slowed sufficiently to result in improving inventory levels and expect the slowdown may impact the market far longer," Oppenheim said.

I expect inventories to continue to rise all summer. And sales to continue to fall.

by Calculated Risk on 5/22/2006 05:17:00 PM

From Reuters: Fed's Fisher says inflation running too high

Dallas Federal Reserve Bank President Richard Fisher on Monday said U.S. inflation was running too high for comfort ...

"I think we must continue to be wary of the onset of inflation and the onset of inflation expectations," Fisher told reporters ... "I am guided by what we call the trimmed mean PCE (calculated by the Dallas Fed) ... I personally believe it is a better measure. It is time-tested. ... The trimmed-mean PCE ... gives rise to some discomfort on my part, but we shall see what ensues."

The Dallas Fed's last release showed its trimmed mean PCE inflation measure rising by 2.3 percent over the 12 months to March. April's data will be released on Friday.

Here is the Trimmed-Mean PCE Inflation Rate from the Dallas Fed.

And on housing:

Fisher ... said that while the U.S. housing market appeared to be moderating, there was still a lot of strength in the economy.

"(Housing) is clearly cooling ... there are other offsets -- there is a very big expansion in capex and business expenditure ... the real issue is what will be the impact on consumption," he said.

Here is Fisher's speech: Globalization's Impact on U.S. Growth and Inflation

by Calculated Risk on 5/22/2006 02:24:00 PM

Following Home Depot, Lowe's is reporting that Q2 might be "soft". From TheStreet.Com:

On a conference call, Lowe's management said May same-store sales were running at the low end of its guidance for 3% to 5% growth. After Lowe's larger competitor, Home Depot, also reported top-line softness for its first quarter, investors are worried that the nation's home-improvement chains, longtime beneficiaries of the U.S. housing boom, could feel pain if the situation deteriorates.

"This ties in with higher gas prices and is a more direct signal of at least weaker spending trends than others that pointed to similar trends last week," said Credit Suisse First Boston analyst Gary Balter in a research note. "In a nervous market where concerns over interest rates and the direction of the economy are leading stocks down, this will add fuel to the fire."

My guess is this "softness" is because of the slowing housing market, rather than higher gas prices. With less home equity extraction, I'd expect fewer home remodeling projects.

by Calculated Risk on 5/21/2006 04:23:00 PM

From the Las Vegas Sun: Home sellers beware


Click on graph for larger image.

... a number of home-sale indicators show how the Las Vegas Valley is now experiencing a buyer's market.

A record number of resale houses - 18,467 in April - are on the market, along with another 4,000 new homes.

Resale houses are taking longer to sell - up to three or four months, compared to two weeks or less when the market was hot - and some sellers are accepting lowball offers.

Builders are offering purchase incentives, including free lawn maintenance, swimming pools, washers and dryers and even the cost of packing and moving customers into their new residences. Some incentive packages have been valued by builders at up to $100,000.

Builders are offering higher commissions to real estate agents - up to 6 percent in some cases.

With contract cancellations reaching 38 percent in some new subdivisions, builders are cutting staff and prices on new homes by tens of thousands of dollars.

This same story - a buyers market with rising inventories - is being repeated in many housing markets. See this site for other markets: Bubble Markets Inventory Tracking

by Calculated Risk on 5/20/2006 10:15:00 PM

Here is OC Register's Jonathan Lansner Q&A with local mortgage broker Norm Bour: Insider Q&A: A lender's perspective. A few excerpts:

Q. How slow is it?

A. No question loan originations are down, both in the purchase and the refi market. Speaking for myself we're down by 40-50% year-to-date since last year and certainly the year prior and most people I know are saying the same.

Q. What does the kind of business you're doing today say about the state of the O.C. housing market?

A. I can only speak for myself, but ... We're concerned. ... If the economy DOES become soft (likely), and people are pressured, will they SELL to get out of their jam or refi to get cash out even at a higher rate than they have now?

Q. What's the most popular loan today? Why? Is that different from, say, a year ago?

A. ... the majority of people are still going with (adjustable) ARMs, though more hybrid ARMs rather than the more volatile Option ARMs. I'd say 5/1 (5-year-fixed,) 7/1 (7-year-fixed,) and 10/1 (10-year-fixed,) are the majority of what people want.

by Calculated Risk on 5/19/2006 04:15:00 PM

Click on graph for larger image.

The California Employment Development Department reports that seasonally adjusted California construction employment fell by 8,300 in April. This followed a loss of 9,900 construction jobs in March.

For overall employment:

California's seasonally adjusted unemployment rate was 4.9 percent in April, up 0.1 percentage point from the revised rate in March, and down 0.5 percentage point from one year ago. In comparison, the U.S. unemployment rate was 4.7 percent in April remaining unchanged from the rate in March, and down 0.4 percentage point from one year ago.

There were 14,951,100 seasonally adjusted jobs in total nonfarm industries in April, down 2,600 jobs from last month. This followed a 13,400-job loss in March and a 31,400-job gain in February.

The second graph shows construction employment as a % of total employment in California. Note that "construction" includes non-housing related construction too - so this is just a general guide to the impact of the housing slowdown. Also, there are many other housing related jobs (real estate agents, mortgage brokers, etc.) that will also be impact by the housing slowdown.

For California, Dr. Thornberg estimates:

Construction employment will lose 200,000 jobs statewide over the next three years, with an additional unknown number of jobs lost in the informal sector.

This is just the beginning of the job losses.

For Arizona see: Housing decline triggers layoffs

by Calculated Risk on 5/19/2006 02:13:00 PM

Greenspan says the housing boom is over. Bernanke suggests the cooling is "orderly". Leamer and Thornberg predict prices will be flat for a number of years, unless employment falls. What is likely to happen?

Although every bust is different, and this boom was larger than previous booms (so the bust might be worse), taking a look back at previous busts might give us an idea of what to expect:

Housing "bubbles" typically do not "pop”, rather prices tend to deflate slowly in real terms, over several years. Historically real estate prices display strong persistence and are sticky downward. Sellers want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices. This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes.

Even though prices tend to deflate slowly, they can still drop significantly over time. On the following graph are the nominal price declines for three busts: Los Angeles in the early '90s, San Antonio in the mid '80s (the oil patch bust) and Hartford starting in '89. The peaks of all three housing booms are aligned on the left and the relative price declines are plotted by quarter after the local market’s price peak.

Click on graph for larger image.

For all three busts, the prices steadily declined over many quarters. Although these are three of the worst busts of the last 25 years, the price action is representative of other housing busts. In real terms (adjusted by CPI less shelter), the price declines are even more dramatic:

Data Sources: OFHEO House Price Index, BLS CPI less Shelter.

In real terms, prices in the Hartford market declined for over 8 consecutive years before reaching a nadir of almost 40% off the peak price of 1989. The other markets experienced similar declines:

Percent Decline (Real and Nominal), Years from Peak to Trough

	Real	Years	Nominal	Years
	Decline		Decline
Los Angeles	34%	6 3/4	21%	6 3/4
San Antonio	33%	4 3/4	18%	4
Hartford	39%	8 1/4	15%	6 1/2

NOTE: Most of this post is excerpted from my post last year on Angry Bear: After the Boom.

by Calculated Risk on 5/19/2006 11:12:00 AM

A couple of quotes from the UCLA Anderson Forecast economists:

"The housing market was like a rocket that has gone up and now it's lost its fuel. Some people think it will stay suspended up there magically. We think it's going to come back to Earth -- sales will drop even more, and then next comes weakness in pricing."

Dr. Leamer, May 18, 2006

"Appreciation (in Bay Area) has been flat for six months. This is how a real estate bubble pops. It's not a price pop. It's a volume pop. ... It's not going to be pretty."

Dr. Thornberg, May 18, 2006

Both Leamer and Thornberg think prices will remain flat for a number of years unless the job market deteroriates (see Phoenix). In addition to jobs, I'd be concerned about any area with a heavy concentration of exotic mortgages. Either the loss of jobs, or rising foreclosures due to execessive leverage, could lead to significant price declines.

by Calculated Risk on 5/19/2006 10:39:00 AM

The Arizona Republic reports: Housing decline triggers layoffs

Home builders are laying off construction superintendents, subdivision sales agents, finance specialists and other employees, a telling sign that metropolitan Phoenix's new-home market has taken a radical turn from last year's selling frenzy.

Builders are struggling with reduced demand brought on by skeptical buyers hit with higher prices and rising interest rates. The pileup of unsold houses helped push Valley home building down nearly 24 percent in March and more than 16 percent in the first quarter, following a record 2005.

Many of these jobs are relatively high paying with skills that do not transfer easily to other high paying jobs. So these people might have to sell their homes too, putting even more pressure on the Phoenix housing market.

The Phoenix economy is especially vulnerable to a housing slowdown:

Housing is the Valley's biggest industry. At least one of every $3 in the area's economy is generated by housing, according to Republic research. A downturn in home building will be felt throughout the state's economy.

by Calculated Risk on 5/19/2006 02:21:00 AM

From AP: Former Fed Chair Alan Greenspan Says Housing Boom Over and Consumer Spending Could Taper

Former Federal Reserve Chairman Alan Greenspan said Thursday that Americans' consumption could taper off somewhat now that the U.S. housing market's "extraordinary boom" has ended.

Greenspan, in his first public U.S. speech since retiring in January from a storied tenure leading the Fed, predicted there is no danger of a total collapse of the housing market.

His comments come on speculation the Fed could pause its cycle of rate hikes as a housing slowdown feeds a cooling of the U.S. economy.

"This has been quite an extraordinary boom," Greenspan said in remarks at the Bond Market Association's 30th anniversary dinner in New York. "Home sales are off, applications are off, everything is going in the same direction. The boom is over, and you can say that with a fairly strong degree of confidence."

Greenspan said he doesn't see home prices falling on a national basis, but instead in certain areas of the country. He warned reduced access of Americans to equity loan extraction would have an economic impact, which has had an "important effect" in stimulating the economy.