Sunday, August 29, 2010

Housing Bubble Post 3 years afterwards

There is more coming, as the adjustment is going to go on for awhile. Here is an analysis I did at Prudent Bear in July 2007 that I found on a site in China.

There is bad information out there. It has people looking for a bottom when there is no bottom in sight. I don't think the prosperity of the USA suddenly went to such new heights that old data about new homes sales has become irrelevant. In fact, I believe that the prosperity of the average Joe has in fact declined over the past 20 years, 30 years and 40 years.

I wrote some on this Friday, as I was kind of stunned when I saw some posted links for data. Here is one that is official, at least as official as they get.

Official New home sales

There isn't a new paradigm, a new source of population or a new source of permanent prosperity. Then why is there a new source of wealth to purchase a significantly increased number of homes? This isn't a market where people are suddenly demanding and buying cracker boxes, where they are economizing and doing less actual building, but the opposite. Thus, we are looking at a demand curve that is to the extreme.

Priorto 1997, new home sales had topped 800,000 units twice, both in the1970's, 1977 and 1978. I was in college, but I worked in the residential business during the summer in the family office during that time. You couldn't list a house and keep a sign in the yard if the house was decent and the price was close to right during that time. Thus we had a national mania going on, where the average price nationwide was going up double digits. There was reason for the peak inthe late 1970's, as speculation for inflation hedges and the post war population boom were all coming together to shift demand for everything outward.

That is not the case today. Beginning in 1996, new home sales have been at least 757,000 units, a number topped only the 2times I mentioned above. This will be 12 straight years we have had new home sales that will be at a minimum among the top 14 years all time. Every year since 1998 beat the all time high established previous to1998. The depressed sales reported last month beat the all time prior to 1998 sales pace. Last year made 9 straight years where the pre bubble all time high in sales had been exceeded. There is no reason for it in any shape, form or fashion?

Why am I writing this? You might read this, then read on.

Market goes up on higher than expected new home sales, denver post

Here you see the annual sales pace reported in July is 820,000 on an annual basis. If you refer back to the government data, you find 820,000 units annually still exceeds the pre 1998 all time high. We have a market that is broken, not just a subprime crisis or a housing glut. You might see how the sales figures always went down when the market had problems in prior years. I mean it went down to the 450,000 to 600,000 range.There hasn't been this type adjustment at any time during the past 12 or so years. (no recession adjustment in supply)

Total sales in the 1970's was 6.552 million units. That is an annual average of 655,200 homes. The last time we saw a year that low as 1992. Remember, the 1970's was a houing boom era with skyrocketing wages and artificially low interest rates for most of the decade.(not to mention a huge new home buying population) From 1963 to 1969, there were 3.586 million units built.That averages out over the 7 years to 512,300 annually. The 1960's were the last really prosperous decade the US has seen in all facets of the economy. This is to demonstrate the sales in the 1970's were high and not low.

Now we might use the pent up demand argument for bad times in the 1980's. Can we? We might make an arugment for that, but the population trend in the 1980's was downward, not upward and the economy was bad the entire decade with high interest rates. Sales in the 1980's were 6,090,000 units for an annual average of 609,000, not that much less than the 1970's and far above the 1960's, a prosperous,low interest rate, under 4% unemployment decade.

What have we seen over the past 10 years? Well the data I have here doesn't bring us up to current, so I will use the last 10 years on this sheet then make some assumptions for the years from 2000-2006 for a 7 year average.

Taking the years 1995 to 2004, the ending 10 years of data on this report, I add it up to 9.041 million units sold. That is an annual sales rate of 904,100 homes. If you compare that to prior data, you find the 10 year average is in excess of any year prior to 1998, 1977's record sales of 819,000 units. The sales in the above report are also in excess of the 819,000 unit record prior to 1998. Total sales in this period exceeded the 1970's decade record by some 2,489,000 units. This is cutting the game off at 2004 and starting the count in 1995.

If I assumethat sales in 2005 and 2006 matched those of 2003, the sales for 7 years in the 2000's is 7.219 million units for an annual average of 1.031 million units annually. Now I think if I took the time, I wouldfind the sum of sales in 2005 and 2006 (combined) was greater than 2 times the sales in 2004, but this is for expedition of time. (not to be entirely accurate with exact figures. We know now the sales in 2005 and 2006 were record level)

The point here is the market continues to feed an excess supply at current prices. Maybe new home sales plummet or more likely the supply of pre-owned homes keeps spiraling upward. Eventually both occur and foreclosure numbers go through the roof.

I think there is a lot going on that not anyone is going to mention.(the people on CNBC are going to play blind). I think the Fed and Wall Street are riding this game as far as it can go, hoping something straightens it out while they aren't looking. I guess you could justify sales this high if it was merely population of the country projected outward, but the number of prosperous people in the US isn't increasing at anywhere this fast a pace. Maybe it is accounting for the abandoned homes in the midwest and other declining areas, but I doubt the decline in the rust belt is on any faster pace than it was during the 1980's.There is nothing to justify a sales rate 70% higher than the 1980's.This is 2007, not 1907 in the US.

The point here is that either sales drop to a level that I doubt the economy can stand up to or the problem gets worse. The problem isn't that sales aren't high enough on new homes. The problem is they are too high and they have been too high for a decade or more. At least they have been too high since 1996, which is now counting up to 12 straight years. Apparently, 2 million or so units too high if the economic history and prior demand are any good?

The bubble will have absolutely burst when you can't give a house away. It will be like dotcom. Problem is dotcom has come back, but we aren't seeing so much of the new supply in dotcom.Instead it is the few that made it plus Google for the most part and its inflation adjusted value I would venture is less than it was in 2000. I think we will find the same thing in housing come 2015. There are too many units out there and too many units being put out there to allow the market to clear itself.

see about 20% down the page.


I think the reader has to read between the lines of what I wrote here. It has turned out to be 100% accurate, as we are now stuck with massive supply and a market that cannot absorb even record low sales. History indicated that to 2007, the market constructed 3 million more homes than would normally be demanded. I date the housing bubble to the mid 1990's and Doug Noland wrote plenty on FNMA long before it because a problem noticed by most. So, out to 2007 we have a realistic market for 700K units a year and a industry that constructs 300K a year, we have a surplus that will take 7 years to absorb. This gives us 2014, provided nothing changes. Of course, we are going to hear on CNBS that there is going to be a housing shortage at any time now. They aren't counting on the shrinkage in demand that is going to come with a depression, fewer children, fewer illegal aliens, etc. I don't buy that demand should be higher in the 2000's by a significant number than the 1970's because the boomer generation was the rabbit through the snake and everything since has been mouse sized.

I have wondered where this was and I think it is pertinent to the HOA post because we are going to see the HOA stuff come to pieces as we go forward. We are also going to see the acts to restore demand fall by the wayside because real demand was never as high as what they are trying to restore. The US needs to cut its losses and get past this mess instead of following the advice of Bill Gross and other mortgage paper pimps.

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