Several months ago, I expressed my dissent against a particular Wall Street Journal article…
There have been a slew of articles in the Wall Street Journal and other news sources recently discussing the interplay between the residential housing market, the sub-prime lender difficulties, and the economy as a whole (“Dow Stumbles After CEO Predicts Bad Year Ahead” By Tom Petruno, Times Staff Writer, and many articles in the Wall Street Journal for Wednesday, March 14, especially in the Money and Investing section). Several months ago, I expressed my dissent against a particular Wall Street Journal article (see “Housing Response” in this blog and the Wall Street Journal Article on December 14, 2006 entitled “Housing, Auto Slumps May Defy Usual Role as Recession Harbingers) that gave the opinion that the difficulties in the housing market and the automobile manufacturing market were not harbingers of difficult times ahead. We are beginning to see that my insight may have been justified.
There are several factors that lead us to this point; and by looking at the causes, we can begin to anticipate when things might change. Of course, there are any number of other factors which may come into play, but most of the things that brought us to this point could have been (and were, in this blog) predicted a couple of months ago. The sequence of events basically flows thus; we have a long period of low interest rates resulting in lenders who have saturated the mortgage market and are looking for better returns. During that period, we have builders who are taking advantage of the low rates to invest in large projects and buyers who are also taking advantage of those low rates to buy the already available properties, driving the prices up, and making the builders’ prospects look even more attractive. As the prices are going up, speculators also enter the picture to help absorb some of the inventory.
Speculators are no longer buying, but builders are continuing to build…
In comes the interest rate increases to head off inflation. It doesn’t take very long before floating loan rates begin to increase the holding costs for the speculators who start to divest themselves of unoccupied properties. At about that time (fall of last year), housing projects started during the boom times are coming on line, adding to the inventory. Speculators are no longer buying, but builders are continuing to build, and the Wall Street Journal article mentioned above quotes other economic factors to point out that housing may not indicate troubles in the economy. That seemed a bit premature to me.
As the interest rates stayed high, and housing inventory was high, housing starts began to slow and marginal borrowers found that they could not easily sell houses to get out from under the untenable positions created by the loan payments. Many of these recent purchasers bought during the real estate boom and a good portion were likely employed by the construction sector, if not directly, then through suppliers to that market. As I pointed out in December, “When housing starts slow, eventually construction laborers lose their jobs.” As the construction sector retracts, suppliers to that sector also reduce their labor requirements.
Certainly the predictions discussed in this blog in December should lead any competent investor to avoid…
Well, hindsight is great, and in this case it is as I expected, though perhaps more focused specifically in the lending sector than anticipated. Certainly the predictions discussed in this blog in December should lead any competent investor to avoid the mortgage market. But where do we go from here? There are certainly some opportunities to be had in the mortgage sector now. The current reaction is a bit over the top, but it may take a week or so for the emotions to die down. It will be a while before the rest of the housing market recovers. I agree with Donald Tomnitz, CEO of builder D.R. Horton Inc., that “2007 is going to suck, all 12 months of the calendar year," for the construction industry as a whole, and it certainly wouldn’t hurt to wait that long if you are a conservative investor in real estate. The stock market woes will keep the speculators depressed for a while, but when the market goes down, investors look to other venues for havens and real estate is one appropriate choice.
Investors in real estate will help to prevent the housing prices from plummeting, but I would not expect those prices to increase for a while. There is still a good bit of unsold inventory. Add to that insecure speculators and average homeowners who are timid about upgrading to the next big house and we will probably see a couple of flat months for median housing prices, though we may see a slight increase over last year in the number of sales as desperate sellers offer better deals to those who got out at the right time. Foreclosures will add to the inventory for sale, keeping the housing starts numbers low and the construction industry somewhat depressed. We should see housing prices start to climb later in the year, but the construction industry as a whole will suffer a bit through the rest of 2007, as Mr. Tomnitz has said.
Well, it is comforting to know that the auto manufacturers and the housing market are still the harbingers that they have always been. All is still right with the world.
There have been a slew of articles in the Wall Street Journal and other news sources recently discussing the interplay between the residential housing market, the sub-prime lender difficulties, and the economy as a whole (“Dow Stumbles After CEO Predicts Bad Year Ahead” By Tom Petruno, Times Staff Writer, and many articles in the Wall Street Journal for Wednesday, March 14, especially in the Money and Investing section). Several months ago, I expressed my dissent against a particular Wall Street Journal article (see “Housing Response” in this blog and the Wall Street Journal Article on December 14, 2006 entitled “Housing, Auto Slumps May Defy Usual Role as Recession Harbingers) that gave the opinion that the difficulties in the housing market and the automobile manufacturing market were not harbingers of difficult times ahead. We are beginning to see that my insight may have been justified.
There are several factors that lead us to this point; and by looking at the causes, we can begin to anticipate when things might change. Of course, there are any number of other factors which may come into play, but most of the things that brought us to this point could have been (and were, in this blog) predicted a couple of months ago. The sequence of events basically flows thus; we have a long period of low interest rates resulting in lenders who have saturated the mortgage market and are looking for better returns. During that period, we have builders who are taking advantage of the low rates to invest in large projects and buyers who are also taking advantage of those low rates to buy the already available properties, driving the prices up, and making the builders’ prospects look even more attractive. As the prices are going up, speculators also enter the picture to help absorb some of the inventory.
Speculators are no longer buying, but builders are continuing to build…
In comes the interest rate increases to head off inflation. It doesn’t take very long before floating loan rates begin to increase the holding costs for the speculators who start to divest themselves of unoccupied properties. At about that time (fall of last year), housing projects started during the boom times are coming on line, adding to the inventory. Speculators are no longer buying, but builders are continuing to build, and the Wall Street Journal article mentioned above quotes other economic factors to point out that housing may not indicate troubles in the economy. That seemed a bit premature to me.
As the interest rates stayed high, and housing inventory was high, housing starts began to slow and marginal borrowers found that they could not easily sell houses to get out from under the untenable positions created by the loan payments. Many of these recent purchasers bought during the real estate boom and a good portion were likely employed by the construction sector, if not directly, then through suppliers to that market. As I pointed out in December, “When housing starts slow, eventually construction laborers lose their jobs.” As the construction sector retracts, suppliers to that sector also reduce their labor requirements.
Certainly the predictions discussed in this blog in December should lead any competent investor to avoid…
Well, hindsight is great, and in this case it is as I expected, though perhaps more focused specifically in the lending sector than anticipated. Certainly the predictions discussed in this blog in December should lead any competent investor to avoid the mortgage market. But where do we go from here? There are certainly some opportunities to be had in the mortgage sector now. The current reaction is a bit over the top, but it may take a week or so for the emotions to die down. It will be a while before the rest of the housing market recovers. I agree with Donald Tomnitz, CEO of builder D.R. Horton Inc., that “2007 is going to suck, all 12 months of the calendar year," for the construction industry as a whole, and it certainly wouldn’t hurt to wait that long if you are a conservative investor in real estate. The stock market woes will keep the speculators depressed for a while, but when the market goes down, investors look to other venues for havens and real estate is one appropriate choice.
Investors in real estate will help to prevent the housing prices from plummeting, but I would not expect those prices to increase for a while. There is still a good bit of unsold inventory. Add to that insecure speculators and average homeowners who are timid about upgrading to the next big house and we will probably see a couple of flat months for median housing prices, though we may see a slight increase over last year in the number of sales as desperate sellers offer better deals to those who got out at the right time. Foreclosures will add to the inventory for sale, keeping the housing starts numbers low and the construction industry somewhat depressed. We should see housing prices start to climb later in the year, but the construction industry as a whole will suffer a bit through the rest of 2007, as Mr. Tomnitz has said.
Well, it is comforting to know that the auto manufacturers and the housing market are still the harbingers that they have always been. All is still right with the world.
