Denial Ain't Just A River In Egypt
I'm not as focused on the global housing and real estate situation as many bloggers are. We've got alot of inflated asset classes and I'm more focused on the cause, what central bankers are going to do about it and the end state. Yet, it's a good time to update this topic given the crescendo calling for a housing bottom is increasing again. There is no evidence that any such bottom is developing. Home builders are reporting no positive news, unsold home volumes are not shrinking, home sales are falling and building rates are still well above trend. To boot, I just saw what appears to be a weekly television show that focused on real estate flipping. If real estate prices and activity wasn't so far above trend, that wouldn't concern me. But, they are. Therefore, why would this situation be any different than equities being well above trend post 2000? In 2001 we had a plethora of Wall Street experts telling us the markets were undervalued and the correction was over. That was hilarious. Stocks were cheaper in 2001. Rather than being the most overvalued in one hundred years as in 2000, they were the second most overvalued in one hundred years. Many of those same people are now telling us housing has bottomed. There are many measures of activity which argue the real estate situation didn't even peak until mid-2006 although by then home builder stocks were decimated. So, how is it we've hit a bottom through a few months of negative fundamentals? The world is a reflection of irrational human emotion and those calling a bottom are manifesting the good old fashioned emotion of denial.
There are many ways to determine the strength of housing including fundamentals, equity price behavior and historical trends. One fact I find interesting is that the annual sales rate for new homes in 2005 was 1.28 million units. This number varies depending on what is measured. I've seen much higher numbers but I am using an analysis done using comparative historical numbers. So, it's the comparative I am looking at. In the 1993-1995 time frame, the average annual sales rate was 670,000 units using this same data provider. The long term trend in housing is highly correlated to new household creation. Did the U.S. some how double the number of households in ten years? The condominium data set is absolutely horrific. I've read order rates for a particular Miami condominium developer were down somewhere in the range of 80% in the fourth quarter of 2006. All of this at a time when building in that market is still off the charts.
If we are to return to trend, I suspect 1993-1995 data is most reasonable. In other words, the annual sales rate could drop by approximately 50% to reach a sustainable trend. The housing market post 1995 was fueled, in part, by perceived wealth creation in the late 1990s equities explosion. Therefore, it's plausible data for those years would also be above trend and unsustainable. It should also be noted that long term rates dropped about 50% from mid 1994 to 1999 as well. This surely fueled overbuilding in a time when perceived wealth was exploding in the stock market.
I chose the Mark Twain quote as the title of this post for a reason. You've likely seen a similar chart to the one below as variations of the investment cycle have been around forever. Where do you think we are in the housing wave? Exhaustion? Is there panic running rampant? Does panic need to be running rampant for housing to bottom? Maybe not. I suspect we are in the denial phase. ie, The true scope has actually yet to unfold. I've said it once and I've said it one hundred times, it's all about risk management. Regardless of what happens, is risk in your favor in real estate, equities, other investments? That is the key question to always ask yourself regardless of what anyone tells you.
A few days ago I was given some statistics of November Florida home sales. Again, these may be different than those you might have access to but are provided by the chief economist of a large title company.
Here's a few of the worst statistics:
Daytona Beach: -37%
Fort Pierce: -34%
Fort Walton Beach: -37%
Lakeland: -36%
Naples: -45%
Orlando: -36%
Tampa-St. Petersburg: -43%
West Palm-Boca Raton: -45%
With real estate activity so far above trend for many years, I'll feel confident real estate has become a great value when the human emotions of realtors and market professionals ranges from despondency to depression. Do people feel despondency with sales off this much? No. The reported price change for these markets was still positive for some and down less than ten percent as an average. Denial - The act of asserting that something alleged is not true.
There are many ways to determine the strength of housing including fundamentals, equity price behavior and historical trends. One fact I find interesting is that the annual sales rate for new homes in 2005 was 1.28 million units. This number varies depending on what is measured. I've seen much higher numbers but I am using an analysis done using comparative historical numbers. So, it's the comparative I am looking at. In the 1993-1995 time frame, the average annual sales rate was 670,000 units using this same data provider. The long term trend in housing is highly correlated to new household creation. Did the U.S. some how double the number of households in ten years? The condominium data set is absolutely horrific. I've read order rates for a particular Miami condominium developer were down somewhere in the range of 80% in the fourth quarter of 2006. All of this at a time when building in that market is still off the charts.
If we are to return to trend, I suspect 1993-1995 data is most reasonable. In other words, the annual sales rate could drop by approximately 50% to reach a sustainable trend. The housing market post 1995 was fueled, in part, by perceived wealth creation in the late 1990s equities explosion. Therefore, it's plausible data for those years would also be above trend and unsustainable. It should also be noted that long term rates dropped about 50% from mid 1994 to 1999 as well. This surely fueled overbuilding in a time when perceived wealth was exploding in the stock market.
I chose the Mark Twain quote as the title of this post for a reason. You've likely seen a similar chart to the one below as variations of the investment cycle have been around forever. Where do you think we are in the housing wave? Exhaustion? Is there panic running rampant? Does panic need to be running rampant for housing to bottom? Maybe not. I suspect we are in the denial phase. ie, The true scope has actually yet to unfold. I've said it once and I've said it one hundred times, it's all about risk management. Regardless of what happens, is risk in your favor in real estate, equities, other investments? That is the key question to always ask yourself regardless of what anyone tells you.
A few days ago I was given some statistics of November Florida home sales. Again, these may be different than those you might have access to but are provided by the chief economist of a large title company.
Here's a few of the worst statistics:
Daytona Beach: -37%
Fort Pierce: -34%
Fort Walton Beach: -37%
Lakeland: -36%
Naples: -45%
Orlando: -36%
Tampa-St. Petersburg: -43%
West Palm-Boca Raton: -45%
With real estate activity so far above trend for many years, I'll feel confident real estate has become a great value when the human emotions of realtors and market professionals ranges from despondency to depression. Do people feel despondency with sales off this much? No. The reported price change for these markets was still positive for some and down less than ten percent as an average. Denial - The act of asserting that something alleged is not true.
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