From Mark Kiesel at Pimco:
Still Renting
(This one is worth the click)
One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent. Back in late 2005, I became anxious about my investment in the “American Dream,” after spending a considerable amount of time and effort researching several factors that I felt would influence housing prices. At the time, I was nervous about housing and ended up selling my house in early 2006 after owning for eight years, and then, upon closing, published For Sale, our U.S. Credit Perspectives, June 2006 publication. A year ago, I suspected housing prices were set to take a sharp turn for the worse and more “For Sale” signs were coming.
Based on the current outlook for housing, I will likely be renting for one to two more years. While many factors that influence housing prices have turned negative, I suspect we have not yet hit bottom. In fact, housing prices should head lower throughout the rest of this year and next year as well. Why? Housing inventories remain high, delinquencies and foreclosures are set to rise as homes purchased over the past few years by speculators and individuals with teaser-rate and adjustable-rate mortgages come back on to the market, affordability is low, and sentiment and risk appetite has shifted negatively. Most importantly, the availability of credit is set to take a turn for the worse as lenders tighten credit standards.
This is all great news for renters and buyers who are patient. Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the U.S. housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ½ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.
…
Housing was an asset bubble influenced by bullish sentiment, robust risk appetite and speculation, lack of fundamental analysis, cheap money, inflated appraisals and easy lending standards. These factors helped to drive housing prices up to new levels and the unwinding of these conditions is expected to drive housing prices down. Never before have we witnessed so many people lever-up real estate with so little money down or “skin in the game.” This growth in mortgage debt and risk appetite helped fuel consumer spending and corporate profits. As such, the unwinding of this bubble will have broad consequences for the overall economy.As the housing bubble unwinds, what are the implications for the overall economy and credit spreads? The U.S. economy will likely experience sub-par economic growth for the next year as declining housing prices lead to weaker consumer spending, slower corporate profit growth, a decline in business investment and less job creation. This environment favors reducing credit risk, especially to cyclical industries and lower-quality sectors of the market. As lending standards tighten and risk appetite turns more conservative, housing prices are likely to face a further leg down.
What’s the big picture? Declining housing prices will lead to a pullback in job creation and a sharp slowdown in corporate profit growth, causing the Fed to lower short-term interest rates by the end of this year. Despite lower short-term rates, mortgage rates may not follow downward, because more cautious lenders will charge higher spreads relative to Treasuries. In addition, credit spreads should widen as consumers rein in their risk appetite for housing and investors turn more cautious on the outlook for the U.S. economy. We will now turn to an analysis of the supply and demand factors influencing housing. These factors should help to illuminate the future path of housing prices over the next year.
Not to be pointing fingers here…but a lot of PIMCO bigwigs (Gross, Kiesel, etc) have been spending a lot of time in front of the camera lately.
Their stories are eerily calibrated to emphasize certain points: housing 20% overpriced…Fed needs to lower 50-75 bps…affordability spreads at catastrophic levels, etc.
Just saying.
I may be premature with this, since I have just breezed thru this and Whitney’s article. I’ll have more time later to read both in detail.
It seems as if Kiesel is diplomatically saying cya. In contrast Whitney appears to be aggressively stating that you’re f*cked. Maybe its just two variations of defense; an aggressive, half court, match up, zone or a full court, trapping, man to man.
Nobody whips the recession horse better than Gross.
Clot [1],
In addition to your just saying. China must allow/force the yuan to strengthen. On the other hand, silence/boredom regarding the yen. HMMNNN.
Their stories are eerily calibrated to emphasize certain points: housing 20% overpriced…Fed needs to lower 50-75 bps…affordability spreads at catastrophic levels, etc.
Reading that one might think it was a great time to buy bonds, or at least a stake in the Pimco Total Return Fund..
jb
Is Roubini on their payroll?
BTW – Roubini made this incredibly good point. A lot of the job loss in the RE sector has been under the radar because so much was off-the-books/illegal and such…..freakin’ fascinating actually
These folks certainly didn’t “consider the source”…
Lerach Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against Toll Brothers, Inc.
Lerach Coughlin Stoia Geller Rudman & Robbins LLP (“Lerach Coughlin”) (http://www.lerachlaw.com/cases/tollbrothers/) today announced that a class action has been commenced in the United States District Court for the Eastern District of Pennsylvania on behalf of purchasers of Toll Brothers, Inc. (“Toll Brothers”) (NYSE:TOL – News) common stock during the period between December 9, 2004 and November 8, 2005 (the “Class Period”).
…
The complaint charges Toll Brothers and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Toll Brothers is a home builder which specializes in building large, expensive homes.
The complaint alleges that defendants made a series of false and misleading statements indicating that Toll Brothers’ business model, which was based on developing expensive homes for a niche market of high-end buyers, was unique and thus immune from the adverse impact of rising interest rates and other negative macro-economic factors that appeared to be negatively impacting the home-building industry during 2004 and 2005. As the truth was revealed to investors, including the deteriorating state of demand for Toll Brothers’ homes, its constrained and shrinking number of active selling communities, the insufficient inventory of lots for Toll Brothers to achieve 20% net income growth in 2006 and 2007, and the actual adverse impact of rising interest rates and negative macro-economic trends on traffic to Toll Brothers communities and demand for its homes and thus its future prospects, Toll Brothers stock plummeted, falling from its $58.25 per share Class Period high in July 2005 to as low as $33.72 per share on November 9, 2005, a 42% drop.
BTW – Roubini made this incredibly good point. A lot of the job loss in the RE sector has been under the radar because so much was off-the-books/illegal and such…..freakin’ fascinating actually
That piece can be found here:
http://www.rgemonitor.com/blog/roubini/189892/
In case any one feels the need to buy right now in Chatham on Rowan Rd, I was just emailed a for-sale-by-owner. 4 bed, 2 1/2 bath Cape, 1 garage, looks fully renovated from the pics. All yours for the asking price of $1,240,000. I kid you not. I have never seen such an expensive cape. Who on earth?
Hat tip to CR for that press release.
jb
Hat tip to CR for that press release.
jb
#10, Michele, F*SBO still have it up their waz00 from what I’m seeing.
I am more bearish than Kiesel regarding time parameters. The key, imo, lending standards tightening. Lowering interest rates will have very little effect, except for the prime borrower with cash. Also, if the fed lowers, in an environment similar to today’s inflation #’s, the dollar will get hammered and the 10 year will get hit hard.
On the flip side [just saying], I can see future “reported” core #’s declining and a massive short covering dollar rally. Future fed release? Recent readings indicate that core inflation is moderating and seems to be well contained. In conjunction with this, the recent dollar rally indicates the international markets recognize the true, fundamental, inherent value in our currency. We view past declines in our currency as being strictly technical in nature. In our view, current risk is the attainment of sustainable growth. As a result of this the committee has decided to lower the ffr to 5. Going forward, the appropriate monetary policy will be employed to balance an acceptable level of growth with price stability.
I am going to try to sign a 2 year lease on a house this weekend. There is still almost as much downside to buying now as ever– prices have not even gone down 5% from the peak. Renting is a total no brainer. I suggest that if you have someone in your life pushing you hard to move into a house (e.g., wife), take a look at the rental market. There are lots of homeowners desperate for cashflow
I was pushing to purchase a home this year, but the more I see and the more I read, I will definately waite before purchasing my 1st home. I will definately not pay millions for a house that is mearly worth peanuts. What are these sellers thinking of.
“I suggest that if you have someone in your life pushing you hard to move into a house (e.g., wife), take a look at the rental market.”
Hey now, I’m a wife, and a pregnant one at that, and if we can’t find something we like I’m happy to rent! But I also let my husband play lots of Warcraft and eat Domino’s to his heart’s content so I guess I’m not so typical;)
By the way all, seeing a house this weekend that agent suggested a 750 lowball on, listed for 799, purchased in ’05 for ….894K. We figure it’s worth a look.
I was looking hard at condos but I’m finding that sellers aren’t backing off list prices. I’m either moving to a cheaper rental or staying put in my current one and adding to the war chest. If I do it right I’ll be able to plop down 20% in 4Q 2007 or early 08.
“All yours for the asking price of $1,240,000. I kid you not. I have never seen such an expensive cape. Who on earth?”
I mentioned the same to a realtor about a $1M cape near Chatham — “Who would be dumb enough to spend $1M on a Cape?”
The response, predictably, was: “It’s Wall Street bonus money.”
Right, because someone wants to spend their “Wall Street bonus” on a $1M crackerbox…
I read that Toll Bros complaint, good stuff, impeccable timing on the part of Bob Toll etc in regard to their stock sales. Will be interesting if the SEC follows suit.
Hey now, I’m a wife, and a pregnant one at that, and if we can’t find something we like I’m happy to rent! But I also let my husband play lots of Warcraft and eat Domino’s to his heart’s content so I guess I’m not so typical;)
I wouldn’t doubt you for a second. And I’m sure there are many wives like you out there. But, alas, I’m afraid you’re in the minority if I observe correctly.
But maybe my thinking is influenced by my recently-turned-harpy GF who is pressing hard for a ring and a house.
I show her the numbers – how buying doesn’t make sense (based on her house expectations) and blows the budget out of the water. She goes right back to “how about THIS house?” like Nigel Tufnell’s “but it goes to eleven.”
William Lerach is an attorney that would make Satan look like a nice guy.
From Wikipedia:
“Executives in the renowned lawyer’s gunsights complain that they’ve been ‘Lerached.'”
Looks like Lerach needs a new target, since his client in a complaint vs. Halliburton dumped him, because he may face indictment for his alleged misdeeds while with his old firm, Milberg, Weiss. From the WSJ, 2-28-07:
“In May, the U.S. government indicted Milberg for allegedly paying kickbacks to class-action clients. Lerach has not been indicted but has been subjected to scrutiny in the matter.”
chicagofinance Says:
-. A lot of the job loss in the RE sector has been under the radar because so much was off-the-books/illegal and such…..freakin’ fascinating actually
Fantastic point. A lot of the housing related people we know – landscapers, contractors – around 50% of their income is under the table, cash in hand.
So if the illegals can’t get jobs and run out of money, what will they do? Go back to central america? I doubt it.
#21 Capt: With all due respect, then get a new girl friend, if after demonstaring the insanity of purchasing now she is still complaining, then it will only get worse.
The worst thing I have heard from friends spouses/girl/boyfriends (man or woman), is he/she made me do it. Nobody makes us do any thing.
Stand your ground, if she does nto come around let her go.
#18 Alotof them cannot, they owe too much. They will hold out as long as possible.Some all the way down to foreclosure.
“So if the illegals can’t get jobs and run out of money”
[24],
In 2003-2005, they fled the orange groves since they were paid much more for throwing up sheetrock as compared to picking the crop. I hear they are back in droves, picking oranges off the trees. Now, barring any weather related catastrophe maybe its time to short OJ. Just a thought, not in any manner a suggestion.
Bob,
What is OJ?
bear,
Trading places. Mortimer and Randolph Duke.
Orange Juice.
FCOJ… I vaguely remember that movie .. had to Google. Thanks.
Pulte Homes warns of deeper net losses
Homebuilder cites “challenging” market as new orders, closings fall
http://www.marketwatch.com/news/story/pulte-loss-deepens-amid-challenging/story.aspx?guid=%7BE1932354%2DA3C6%2D451D%2DBF1F%2DEAE9667C87C9%7D
(0.34 – 0.38) vs expected 0.0-0.10
#27 BC Bob: Not to be dense, but who picked the oranges while they were gone, and now that they are back what happened to the new orange pickers?
I would think at some point, there would be less of these jobs to go around too.
bbb,
The reference to Trading Places was an aside.
There was a huge bull market in OJ starting in 2004. A good part of this was attributed to the hurricanes, freezes and canker eradication efforts. In conjunction with this,at this time, commercials could not get adequate help in the fields. The illegals were being paid $50-75 per day to pick the crop. At the same time, builders were offering $15 a hour to throw sh*trock up. Consequently, much less crop was picked off the tree. I love your question regarding who picked the crop while the crap was being built. No question is a dense question. I have a million questions. By the way, when you have the answer, it’s too late. The trade is finished, put to bed. My guess, the same question? Pick? Whom is available to pick oranges? Result, see the chart.
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&org=stk&sym=OJK7&data=H&code=BSTK&evnt=adv
I hear, from commercials, that the workers are migrating back to the groves.
Sometimes we tend, at least I do, to get too technical in our trading/investing scenarios. Simple common sense goes a long way.
**Two Polish hunters from Chicago hired a pilot to fly them to Canada to hunt moose. They bagged six.***
**As they started loading the plane for the return trip home, the pilot tells them the plane can take only three moose.**
**The two Poles objected strongly, stating; “Last year we shot six moose and the pilot let us put them all on board and he had the same size plane as yours.”***
**Reluctantly, the pilot gave in and all six were loaded.***
**Unfortunately, even on full power, the little plane couldn’t handle the load and went down a few minutes after takeoff. Climbing out of the wreck, Stasiu asked Wladek, “Any idea where we are?”**
**Wladek replied, “I think we’re pretty close to where we crashed last
year.”***
That idiot Corzine.
I have to admit, I could careless if this SOB ends up circling the drain.
SAS
Wonder if GOOG will ever open a shop in NJ?
or will they only stick to NYC?
anyone….
SAS
Lerach is not the type of lawyer I’d want my kid to become, there is no doubt about that, all of those securities class action attorneys are a bit slimy, kind of like a more sophisticated ambulance chaser, shareholders see pennies on the dollar once all the legal fees etc are paid, but that being said Lerach ain’t no mom and pop shop and they wouldn’t have brought the suit unless they thought they’d be able to get the $$$.
There was a big write up on the Milberg indictments a few months back in the American Lawyer, pretty interesting stuff how they were paying plaintiffs under the table etc so they’d be first in line to be lead attorneys on the cases.
At the end of the day after you read that complaint you would have to say where there’s smoke there’s likely fire considering the timing of Bobbie Toll’s etc large sales in the Summer of ’05.
Interesting article in BW. Sorry if its already posted.
Like grief, a housing downturn is a multistage process. Stage 1 is denial: If I hold onto the house long enough, I’ll get my price. For the U.S. housing market, this stage began in 2005 and ended in mid-2006. Stage 2 is anger: If I can’t sell this house, I’ll just cancel the sale of the house I was going to buy, and stay where I am. Cancellations of sales agreements now appear to have peaked. Stage 3 is acceptance: I’ll get what I can and move on if necessary.
The U.S. housing market appears to be just now entering that third stage, which will probably continue through the rest of 2007. Sales will stabilize, but until the market finishes stage 3 and gets rid of the excess inventory of unsold homes, home prices will continue to drop.
http://businessweek.com/investor/content/apr2007/pi20070418_695488.htm
Lerach vs Toll= my definition of mud wrestling.
Lerach vs Toll= my definition of mud wrestling.
Yes and we all get to watch without getting dirty:)
I’ve got to wonder if the Pulte warning will reignite mainstream fears that the housing market has not yet bottomed. The past few weeks have seen considerable positive spin towards housing bottoming. Now, with the MBA mortgage index pointing down for a number of weeks and the NAHB homebuilder sentiment hitting the lowest numbers of the year, will this be the trigger that sets off the next round of market fears?
Pulte Homes warned late Wednesday that losses for the first quarter will come in deeper than previously anticipated due to a “challenging” market for homebuilders.
In a statement, the Bloomfield Hills, Mich.-based homebuilder said it expects a net loss from continuing operations to come in between 34 cents and 38 cents a share for the quarter. The results will include between $130 million and $140 million in land-impairment charges.
The company – which is the nation’s second largest homebuilder based on market cap – had previously expected results to range from break-even to a loss of 10 cents a share. Those figures did not include any land-impairment charges, which are taken when the value of land bought for development falls.
“The operating environment for homebuilding continues to be challenging, with orders and closings remaining under pressure,” Pulte CEO Richard Dugas said in the statement.
Rangers sweep. Potvin …..
JB,
When the lone bright spot is the 24% cancellation, that half full glass is very murky, at best.
cancellation rate
http://www.brightcove.com/channel.jsp?channel=263843164&lineup=263783336
They all sound like they think a correction is coming, and soon.
So if the illegals can’t get jobs and run out of money, what will they do?
You may find them sitting outside malls, or in front of your apartment at 6 PM selling newspapers.
“So if the illegals can’t get jobs and run out of money, what will they do?”
Well, worse case scenario they may end up killing time by participating in blogs.