Yesterday’s housing data were suitably glum, with single-family starts and permits both down (0.7% and 3.4%, respectively).
And what about my favorite metric, the number of houses under construction? It fell a hefty 5.3%. Which puts the number of single-family homes under construction at its lowest level in decades:
After the expiration of the new home buyer tax credit, only 286,000 single-family homes were under construction at the end of June. That’s down modestly from the 298,000 to 318,000 levels of the past year, when it looked construction was trying to put in a bottom. Just one more sign of continued weakness in housing markets.
The Economist asked several experts to recommend options for resolving Fannie Mae and Freddie Mac, the two failed mortgage giants.
In addition to comments, the magazine’s web site allows users to recommend responses they like. It’s hardly scientific, but since the rankings (as of 9:15pm eastern time) work to my favor, let me rank them in declining order of recommendations:
My co-author Phill Swagel (a whopping 13 recommendations) describes our joint proposal for fully private GSEs that purchase an explicit backstop from the government for their mortgage-backed securities. Pros: The relationship is explicit and transparent, taxpayers are compensated for bearing risk, the portfolios are eliminated, the government backstop will soften severe mortgage meltdowns, and competition can discipline the Fannie and Freddie duopoly. Cons: There are still risks from the remaining government role.
Larry Kotlikoff (11 recs) outlines another proposal to restructure the companies into more sensible private entities. His model: mortgage mutual fund companies.
John Makin (7 recs) wins the award for brevity, arguing that they should be liquidated over 5 years.
Mark Thoma (4 recs) suggests a continued role for the firms, as long as they face much tighter regulation.
Tom Gallagher (4 recs) proposes putting them back on the federal budget as real agencies. This avoids some potential pitfalls of having them run as private companies.
P.S. As an anonymous commenter helpfully points out, the entries over at the Economist have these newfangled things called “dates” associated with them. Not sure how I missed that. The two highest scorers are also the oldest. Also, I must confess that I clicked the recommend button on Phill’s piece, lifting it to 14 votes. Because of some weird interaction between Safari and the Economist site, however, that resulted in it believing that I recommended all five pieces. Ah the perils of technology.
The Bank for International Settlements has a great chart of house prices in its latest annual report (p. 39):
The rise and fall of U.S. house prices (red) is painfully familiar. The U.K. (brown) outdid the U.S. on the upswing, but hasn’t corrected quite as much. (Some other European nations also saw strong booms, but they are averaged into the figures for the Euro area (green)).
House prices in Canada (black) and Australia (olive green) have been showing notable strength. But is it sustainable? Or are some places (e.g., Vancouver) in bubbles?
And then there’s Japan (blue) and its persistent declines. If you worry that the U.S. is turning Japanese (an increasingly popular view with 10-year Treasury rates below 3%), you may want to ponder what a continuing, relentless decline in house prices would do the American financial system.
Today’s housing data are driving some optimistic headlines about the 1.6% increase in housing starts in March and the upward revisions to February data. Looking a bit deeper, however, one finds that single-family starts actually fell in March; all of the gain came in multi-family units.
As I’ve noted in previous posts (here, for example), I think it’s useful to look not only at the number of housing starts, but also at the number of houses under construction (which reflects the pace of both starts and completions). Why? Because that gives us a sense of how much construction activity is actually taking place:
As you would expect, the chart shows that the number of single-family homes under construction fell off a cliff in early 2006. Almost 1 million new single family homes were under construction in February 2006. Today there are just 305,000.
The precipitous decline ended last summer, and housing construction has now been flat for several months.
During the initial years of the housing downturn, optimists sometimes offered the following argument: “Everyone has to live somewhere. If a family loses their home to foreclosure, they will become renters. Their new residence might be smaller and less desirable than their former home, but from the perspective of housing units it’s a wash: their former home becomes vacant, but a previously empty rental becomes occupied. That should limit downward pressure on housing overall.”
That argument contains an element of truth: many foreclosed homeowners do indeed become renters (some even become homeowners again). But I’ve always wondered how many former homeowners follow a different path and instead move in with their parents, friends, or roommates, rather than getting their own place to live. Similarly, I’ve wondered how many young adults have delayed starting their own households and instead have stayed at home longer.
On Wednesday, the Mortgage Bankers Association released a study by Gary Painter (sponsored by the Research Institute for Housing America) that examines this question. His answer? America lost 1.2 million households from 2005 to 2008, despite ongoing population increases. Oh, and we likely lost even more households in 2009.
Needless to say, that retrenchment contributes to the ongoing overhang of vacant homes and rental properties.
As one piece of evidence about changes in household formation, Painter looked at the fraction of households that were overcrowded, which is defined as having more people than rooms. He found that overcrowding rates increased sharply from 2005 to 2008 (the most recent year for which he had data):
P.S. A related issue is the extent to which people have become homeless, rather than moving in with others. I didn’t find a clear answer in some quick searches, but the National Coalition for the Homeless has a useful discussion.
This morning the Census Department released its latest look at housing activity. The headlines are that housing starts fell by 5.9% in February, mostly because of weakness in the Northeast and the South (which may well reflect February’s terrible weather). Most of the decline was in multi-family; single-family starts were essentially unchanged.
Although starts and permits usually grab the headlines, I think it’s also useful to look at another measure of housing activity: the number of houses under construction:
Not surprisingly, the chart shows that the number of single-family homes under construction fell off a cliff in early 2006. Almost 1 million new single family homes were under construction in February 2006. Today there are just 300,000.
The precipitous decline ended last summer, and housing construction has been essentially flat for several months. Perhaps housing construction has finally found bottom?
Last week, the Council of Economic Advisers released its 2010 Economic Report of the President (ERP). I haven’t had time to read it yet, but I did take a quick spin through looking at the charts and getting a feel for it.
The first thing I noticed is that the folks at the CEA have made an important innovation: the ERP now includes references to the academic studies, government reports, etc. on which it bases some of its conclusions. That’s a welcome break from a long-standing tradition (which I never really understood) that the ERP didn’t include references.
A second useful innovation is that the ERP is available in eBook formats, including for my beloved Kindle. Not to add to their already enormous workload, but I look forward to the 2011 or 2012 version having dynamic graphics and live links to the references.
Here are some of the charts that I particularly liked:
1. The boom and bust of house prices. By this measure, house prices are still historically high–except for the bubble.
2. The declining role of banks in the financial sector. Note the growth of mutual funds and ABS issuers.
3. How rising health care costs may consume a rising share of employee compensation. (Note, however, that by setting the axis at $30,000 rather $0, the chart visually exaggerates the effect.)
4. How the rate of being uninsured varies with age.
Can anyone explain the stock prices of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are supporting our mortgage market?
On Friday, Fannie’s common stock closed at $2.04 per share, up 250% since the start of August. That values the company–to be precise, the privately-owned common shares in the company–at more than $2 billion.
Freddie Mac’s common shares closed at $2.40 per share, up almost 300% since the start of August. That values Freddie’s privately-owned common shares at more than $1.5 billion.
Collectively, then, the common stock of these two wards of the state totals almost $4 billion.
This seems a trifle high, however, since most observers think their common stock is worthless (see, for example, this AP story).
I think those observers are right.
Continue reading “The Fannie and Freddie Anomaly”
Yesterday’s report on residential construction provided more evidence that step one of a housing bottom is underway — and that step two may be beginning.
Total housing starts fell slightly in July because of weakness in multi-family. But starts of single-family homes increased to 490 thousand (at an annual rate), the fifth straight monthly increase and the highest level since last October.
As the chart shows, this rebound is off of extremely low levels, so we shouldn’t get too excited. But it does appear that single-family starts bottomed last January and February (at 357 thousand).
That’s the first step of a housing bottom.
As I’ve noted in previous posts, however, that isn’t enough to declare a bottom in housing activity. Housing activity depends on the number of houses under construction, which depends on both housing starts and housing completions. Completions have exceeded starts for more than three years. As a result, the number of houses under construction has fallen for 41 straight months.
For me, the big news in the July data is that this decline may be ending.
Continue reading “Step Two of a Housing Bottom?”
Over at Time Magazine, Joel Stein has an amusing / troubling article (“Less Vegas: The Casino Town Bets on a Comeback“) about the perils of Las Vegas real estate (ht Anne Canfield).
The juiciest part of the article recounts how real estate agent Brooke Boemio advises clients to exploit the realities of the collapsed housing market:
Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that’s about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they’ve been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it’s willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.
In short, homo economicus is again stalking the Vegas housing market.
Stein notes that the renters often suffer from this ploy, since they can be evicted when a foreclosed property finally changes hands. In a nice illustration of how markets work, he then describes how renters are adjusting to this reality:
People are now paying a premium to live [i.e., rent] in apartment buildings, which in Vegas are almost always owned by a corporation.
Klein’s story has lots of other fun anecdotes from the front line of real estate crisis, including this immortal line from casino mogul Sheldon Adelson, whose wealth has reportedly declined by more than $35 billion:
A billion dollars doesn’t buy what it used to. So it’s not as tragic as one would assume.”