This was the headline of some financial reasearch issued by Joseph Hargett of Schaeffer Research on March 27th, 2007.
I’ll let you decide how prudent that advice was by viewing the top homebuilders’ stocks from that date until today measured against the S&P 500.
I’m predicting that even with all of the price declines, I believe there’s still a lot more.
Here is what Joseph had to say:
It seems you can’t talk about the housing sector these days without mentioning the “S” word. Subprime, yes I said it, has even wormed its way into the vernacular of many Fed watchers and Fed members – not to mention the warning shots fired from the sidelines by former Federal Reserve chief Alan Greenspan every other week or so. This morning, the Fed sounded yet another gloom and doom note for the housing sector, as Sandra Braunstein, the director of the Fed’s division of consumer and community affairs, stated that borrowers could see “more difficulty” in the next one to two years. In particular, those borrowers with recently originated adjustable-rate mortgages are likely to experience more delinquencies and foreclosures, Braunstein said.
and
Admittedly, the situation is not very flattering for the U.S. housing market. However, I think that the hype over the popping of the so called “housing bubble” is being overplayed just a bit too much. Just take this quote from a March 18 New York Times article titled “On the Homefront”: “In many quarters, Greenspan was essentially accused of cheating the country out of the depression we deserved: instead of allowing the swooning Nasdaq to bring down the United States economy and punish us for our sins, he had rolled the tech bubble into a housing bubble and allowed the party to go on.”
Blaming Greenspan seems convenient at this point, especially with Bernanke’s Fed in a holding pattern. And comparing the “Dot-com” bust to the current situation in housing seems rather irresponsible. After all, betting on virtual real estate seems a far cry from betting on housing prices and “real” real estate. I mean, can you really compare the long defunct Pets.com and WebVan to Lennar ( LEN:
sentiment, chart, options) and Hovnanian (HOV:
I have sat on this article for 5 months to see if my research was right on where they were headed… in an effort to dispel any myths. He was dead wrong, and worse than that, revealed poor research on the underlying fundamentals of the housing problem. It is and still is an affordability crisis. The decline in sales will not abate until that affordability standard is reachieved. At current course and speed, that won’t be for another 2 years at the minimum.
I believe that we will still see some of these builders declare bankruptcy (ch 11) before this bust is through.
What would you define as “affordable?” 3.5 times median income? Can you give an example?
Median income has a number of problems, many of which have been discussed a number of times on this and other blogs. It’s a rule of thumb, but can be misunderstood, and does not apply to all areas.
Better is a rent/own comparison of like properties. Once properties can cash flow on their own, or cap rates return to exceeding averages (like LIBOR), then we will have reestablished affordability.
I harp on the rent/own because they are good substitutes. SoCal is clearly out of whack with respect to rents, but some areas are worse than others. It’s easier to evaluate individual properties.
Chuck Ponzi
Given the recent years of speculating and many obtaining “creative” loan packages, it has created a market that cannot and “will not” support itself. Their are opportunities to buy in and get out, just like the early 80′s when we had interest rates in the high teen’s and the introduction of ARM’s, everybody ran out on “FEAR” as they assumed that they would never be able to buy a home. A similar pattern has occured given the demographic density of cities that were creating a sense of urgency to buy now or a real “FEARED” possibility that one would never be able to purchase. We took a hard road after the interest rate scare of the 80′s when properties could not be given away and we will see similar outcomes as the credit market has already tightened. OK, maybe not given away extreme, but their will be adjustments that will need to occur which can bring a lot of bitter feelings on current homeowners. This paper equity has already been planned for future retirement or kids college funds and this is going to take time to flush out. I read an article today on homebuilders in the Inland Empire area who are reluctant to drop their prices significantly and not upset recent homebuyers who bought at the top of the market. Instead, a slight decrease with many, many, many upgrades including swimming pools to get the inventory moving. A complete misunderstanding of the problem… it’s affordability and they will soon learn that they cannot be concerned about the recent sales where they pocketed 20-40% margings when these homes were sold in the past several years (and their telling us know they can’t sleep at night… please).
I also need to question the OC Register’s assessment of median home price calculations. I find it interesting that they make their adjustments based on current (past 4 week) activity without adjusting the base (all homes). Keep in mind that the high end area homes are seeing increases over their current baseline in big numbers but fewer residences. While areas such as Santa Ana / Anaheim who are experiencing falling prices, which have the highest residential property density and need to be re-set as all other properties (those not for sale) to be adjusted accordingly to the recent 4 week activity. Then you would see property values on the decline (i.e. adjust the total residents down in these heavly populated areas against the gains of all properties in less dense areas like… Anaheim 99,,700 housing units vs. the Newport Beach area with 37,300 housing units).
On a very different note
I have become slightly addicted to what I can do with my phone. I just wanted to give you all a heads up on a cool new service. You can find out the property value of any house by texting its address to “house” and you will get a response back in a few seconds
”
On a very different note
I have become slightly addicted to what I can do with my phone. I just wanted to give you all a heads up on a cool new service. You can find out the property value of any house by texting its address to “house” and you will get a response back in a few seconds
”
Is anyone else concerned about what the texting charge will be?
Would building a home make any sense at this time (owner builder) since it will take almost 2 yrs to be completed and materials and subs are readily available?