Slippery Starts and Conflicting Data

You may have heard the news on housing starts and permits today, or maybe you haven’t. The news is housing starts and permits were up, but not only up, they were “through the roof” and “explosive”.

Housing Starts Explode

January Census Dept Report (PDF)

What gives? Everyone said the slowdown was on, and now the starts and permits numbers look like they are breaking records? Who do you believe? My advice is to look at the data and numbers yourself, and draw your own opinions. Take a look at this chart (From Briefing.com):

It should be obvious that it’s easy to spin this data, it’s incredibly volatile. In November ’04 the housing market ‘crashed’. In January ’05 it ‘rallied’ back, and then ‘tumbled’ in March, then ‘skyrocketed’ in April. I’m sure you get the idea. The number goes up, the number goes down.

So what happened in January? Maybe it was just volatility, maybe it was the weather, maybe it was a number of things. But here is something to keep in mind when thinking about big builders and housing starts. My opinion on the issue is a bit complicated, and it has to do with contracts. In the past few weeks, Toll Brothers, KB Homes, and some other large builders reported an increase in the number of cancelled contracts. Many of these contracts are nonbinding, the buyer can just walk away scott-free, others would forfeit the deposit, but walking away is still an option. These contracts represent a significant portion of their revenues for the upcoming year as the large builders are currently running heavy backlogs. Builders realize consumer sentiment is changing, they see it in the sales numbers, they see it in the existing homes inventory numbers. So what do you do? You’ve purchased the land, you’ve got the manpower and equipment to do it, so you do it. You build like hell.

KB Home Warns Home-Order Cancellations Up

Home said the number of canceled home orders rose in the first two months of the year while net orders for new homes fell — a trend that could force the company to adjust revenue projections if it continues.

Toll Orders Fall As Luxury Home Demand Slows

Toll said the cancellation rate rose to 8.8% in the quarter. He said a big chunk of the cancellations came from the company’s Las Vegas market, where the company’s delivery time significantly increased, prompting the company to offer buyers the opportunity to cancel. Also, he said some buyers had a difficult time selling their old homes, causing them to cancel their new home order.

Caveat Emptor!
Grim

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25 Responses to Slippery Starts and Conflicting Data

  1. Richie says:

    That only puts pressure on existing homes. The new homes will be price competively enough that existing homes are going to have a harder time to sell.

    I’d much rather prefer an unused home with a warranty over an “as is” cozy starter.

  2. Anonymous says:

    As a stock investor too, the builders (TOL, KB, etc) are always the canary in the coal mine. They’re 6 to 9 months ahead of the typical RE market.

    They peaked mid 2005 so figure March 2006 when things get interesting.

    Just food for thought!
    Tom
    http://www.dbreakfast.com

  3. Anonymous says:

    Richie, I think in NJ the two markets (old homes vs new homes) are different, as most new construction is farther out from the city (e.g., jobs).

    Two different types of buyer, IMHO.

  4. Anonymous says:

    Grim,
    FYI – it seems the bar graph shows the crash was in November 04 not December.

  5. Anonymous says:

    Something other RE blogs are discussing

    http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf

  6. Anonymous says:

    sorry, here it is in full:

    http://www.firstamres.com/pdf/MPR_
    White_Paper_FINAL.pdf

  7. Richie says:

    Not entirely.. They’re building 700+ units (condos, homes) in West Paterson NJ. (30-40 minute truo

    Most new construction in areas close to the city are knockdown/build ups. There’s plenty of that going on all over the state.

  8. grim says:

    Thanks for the correction, will make the change in a bit. Blogger is running a bit slow today.

  9. grim says:

    I’ll only make one comment on that payment reset piece:

    No matter how you sugar coat it, those numbers scare the hell out of me.

    I’ll leave the rest up to folks like SoCalMtgGuy at Another F’ed Borrower to go through the piece. He’s in the industry and could probably explain some of the numbers and stats better than I ever could.

    grim

  10. Metroplexual says:

    IMHO,

    The record starts and permit #’s say to me that they are trying to get out while they think they can. Better to sell that lot with a house on it this year for slight ly less than to be stuck paying loans and taxes on an “alligator”.

    While developers are not really bearish on housing yet, some of what I am hearing is that they are starrting to assess what they have in inventory.

  11. Rob Ryley says:

    When I heard the data today, I thought that anyone who thinks this is good for homebuilders is crazy.

    There is rising inventory in all of the hot markets, and this will only add to the inventory, putting further pressure on prices.

    The homebuilders did rally today, apparently on the news (if you believe the media).

    I was expecting something of a pop in this sector this week, with options expiration, and the fact they had been very beaten down in the past month or so. Looks like I got it.

  12. Anonymous says:

    A couple points:
    1. There isn’t that much volitility. Your chart axis starts at 1800 which exagerates the apparent volitility by ~400%.

    2. Higher starts could be land owners trying to speed up delivery so they can get some money out of the land they are holding before prices sink (farther).

  13. grim says:

    The chart is from briefing.com, don’t shoot the messenger.. As much as I love graphing, those axis choices were not mine.

    As well as the following commentary..

    The monthly national report is broken down by region: Northeast, Midwest, South, and West. Briefing recommends analyzing the regional data because they are subject to a high degree of volatility. The high volatility can be attributed to weather changes and/or natural disasters. For example, an unexpectedly high level of rain in South could delay housing starts for the region.

    grim

  14. Anonymous says:

    I dont’ know why anyone would prefer a new home – the warranties are designed to expire just when things can fall apart. And even if you had something covered under it, see how easy it is to get your home fixed when these firms start to implode.

    At least an old home has stood the test of time. I seriously doubt these new homes were built to last.
    If anyone even thinks of buying a new home, my advice is hire the best structural engineer (not home inspector – a real engineer) you can and go over that sucker inch by inch

  15. Anonymous says:

    I am going steel frame.

    CDF

  16. Roadtripboy says:

    Anonymous 7:05pm

    I think you are right on target! Consumer Reports did a story a couple of years ago on glaring instances of shoddy new home construction. New housing has been going up so quickly that many homes are not actually inspected since there are too many for the local municipalities to cover and there is pressure to just get the homes approved. The report detailed serious defects that ended up saddling the buyers with extremely expensive repairs. One of these was in the Society Hill townhouse complex in Newark, where some homes had exterior walls in danger of collapse. See the January 2004 issue for an article called “Housewrecked”. It also talks about a Bergen county couple whose 1.4M home required $375K worth of repairs due to water damage from synthetic stucco when the house was only 5 years old.

    I remember going to an open house in Hoboken a couple of years ago just for the heck of it. They were asking about $400K for this 2nd floor unit overlooking the Hoboken Exxon station and Observer HWY. It had this tiny cramped kitchen area and a large main room. The kitchen had appliances that stuck out and were actually in the way. I’m no design engineer or anything, but it looked like not a lot of thought was put into the design. Ditto for construction. The climate system was electric wall-mounted units for heating and A/C (no central forced air anything). Can you say PSE&G bill through the roof? One final insult to this place: the long balcony of this unit now has a panoramic view of the new Hoboken car wash! The wall of the car wash looks like it’s only a couple feet from this units balcony. Couldn’t have helped that owner’s property value.

    It seems like a lot of new construction is being built as quickly and as cheaply as possible for the sole purpose of making a buck.

  17. Will says:

    We lived through the 1985-1990 housing bubble and pop in Austin, Texas. Even when there were too many houses on the market, bankers woke up in the morning and asked themselves, “What am I going to do today?”. Builders woke up and asked “What am I going to do today?” Both did what they did the day before and day before that. They made loans and built.

    Keep a watch on how a few realtors continue to cram unsuspecting buyers into overpaying for houses years into the pop. That will be next.

  18. grim says:

    Talked to Ledger journalist Sam Ali yesterday afternoon about the housing market and the starts numbers.. Here is her piece on the topic:

    Housing statistics may prove deceptive

    grim

  19. Michelle says:

    Nice quotes, Grim.

    Good to see the voice of reason out there!!!

  20. grim says:

    Housing starts near 33-year high

    “It looks like warm weather had a big impact so the big jump in January housing starts can be attributed to that,” said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis. “However, the moderating trend in housing really is still in place.”

    Economists and analysts said the data did not suggest the long-awaited cooling in the housing market had come to a halt.

    The housing numbers look pretty strong, but we have to discount them due to the mild weather effects,” said Stephen Gallagher, chief U.S. economist at Societe Generale in New York. “We are getting confirmations from the companies themselves about lower orders.”

  21. NJGal says:

    Ooh, Observer Plaza roadtripboy…even during the boom, at a time when I thought I would prefer a condo to a house (temporary lapse of sanity), my realtor told us that values on those units were dropping due to the car wash. I have a feeling, with all the new construction, many units in many areas of Hoboken will be losing “views” (not that the units by the car wash had views of much but the NJ transit tracks and the Dunkin Donuts:))

  22. Anonymous says:

    Congrats on the Star Ledger appearance Grim!

  23. grim says:

    There is an old saying in real estate..

    “Don’t fall in love with the view unless you own it.”

    grim

  24. Anonymous says:

    Good job on getting the PR Grim!
    Let us know how many more site visits you get this weekend due to the article.

  25. Anonymous says:

    Sam Ali is a woman ? Live and learn.

    hey James — didn’t know you were only 29. Lots of maturity for that age (if I don’t sound condescending).

    njgal — observer highway is such an eyesore. There is also (or used to be) a car body shop there.

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