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10/30/2009

Late to the Game

Did we cheat when we called this game?  (Insider tip - We already had the numbers!)
Category: General
Posted by: peggy.hamilton
Late to the Game?

        Good news for home sellers and investors: The demand for resale homes is going up as the inventory of new homes continues its decline.
        In November 2008, we reported that "new builds were down 41 percent year-over-year and dropping (October 2007 = 1,182,000 over October 2008 = 760,000)." This was bad news for builders who need production and sales to keep their revenues flowing, particularly if they are publicly-traded companies.
        Building permits for new, single-family dwellings were also off 41 percent (October 2007 = 809,200 over October 2008 = 480,800). Fewer permits now mean even fewer new, finished homes in 12 to 18 months.
        Today The Commerce Department reports that new home sales are off 3.6% month over month at an annualized run rate of 490,000. This fact is really no surprise as the best of this inventory is already sold and most likely the slower selling lesser inventory is what remains. This is the hangover from learning to sell homes like "used car sales" that home builders learned by over the last decade. We believe this inventory draw down will continue to slow due to less than ideal location.
 
LOOKING & SLIDING BACKWARDS
        Now, ten months after publishing our new permit opinion, The Commerce Department says that construction of new homes and apartments is at a seasonally adjusted annual rate of 590,000 units. This is a weaker showing than the 610,000 (not including apartments) that economists had expected. This means about 480,000 home completions, well below the required 1,340,000 units per year for normal 1 percent annual growth for a country with a population of 310,000,000.
        Permit applications are down 1.2 percent month over month, the second setback in the past three months and the biggest decline since a 2.5 percent drop in April. This means construction will weaken, partly because builders have been trying to complete projects before the tax credit expires on November 30, 2009. (Bets are on that the tax credit will be extended.)
 
ONLY THE SHADOW KNOWS?
        California foreclosure expert, Sean O'Toole of Foreclosure Radar, identified an important fallacy in the argument that shadow inventory held by banks will flood the market and drive down prices even further.
        "Shadow inventory continues to be a hot topic so we decided to go back and review the foreclosure sales since September 2006 to determine how many bank-owned (REO) properties have now been resold vs. how many they continue to carry as inventory. As we estimated a couple of months ago, there is NO shadow inventory of bank-owned homes. Given that it takes banks on average seven months to resell a foreclosed property, the number of properties currently in inventory is less than expected given the normal process of eviction, rehab, listing and sale.
        While there is no shadow inventory of bank-owned properties, the number of homeowners underwater, delinquent, in default and scheduled for trustee sale would typically indicate a wave of foreclosures is yet to come. With the threat of bankruptcy cram downs and other government intervention, banks are unlikely to dramatically increase foreclosure sales any time soon. As such, we continue to believe that there will be no wave of foreclosures in the near term. With declining foreclosure sales, and dwindling bank-owned inventories we expect housing supply to remain constrained in many parts of California in the months ahead."
        O'Toole believes the intake of defaulted properties is significantly lower than REO disposition with no indication this asset recovery vs. asset sale imbalance will tip to the recovery side of the equation. Add government intervention and the asset recovery is projected to slow even further.
        We believe that concerns about increased inflation are leading up to a period of heightened demand. The mainstream media is missing this data as they are still fixated on the bad news coming from Washington.
 
WRONG VS RIGHT-BURB MISMATCH
        The market needs more reasonably-priced houses located within manageable commuting distances to economic hubs. Homes for resale and new infill homes help solve this problem. "New builds," typically built in "far-burbs," add to the problem; include costs of gas, wear and tear on the car, and hours spent commuting, and the total cost of home ownership jumps from reasonable to unaffordable.
         We believe that there are surprises ahead in housing demand based on two things: arbitrarily delayed supply and inflationary pressure. 
        A property bought on fundamentals should pay for itself with appreciation and tax incentives. Values indexed to inflation are considered as bonuses.
         The current market remains the best in a generation with demand by investors outstripping desirable properties. Once again, the best investment is income real estate in areas that are close to economic hubs.

"MAKE LOVE NOT HOUSES!"
        And we continue making population not houses. Net population growth, plus all immigration continues at an historic 1% per annum, meaning that the U.S. population is expected to rise from 310 million to 325 million in less than 10 years. This population growth exceeds our new/replacement dwelling building rate.
       This demand, buying well located residential real estate on fundamentals, is a long term winning strategy.

Best,
Andrew Waite, Publisher
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