Tuesday, March 16, 2010

Residential construction still appears to have bottomed

The release of housing starts and building permits for February showed that activity softened a bit, but considering the weather, the results were a bit better than expected. In any event, as these charts show, it continues to look like we have seen the bottom in residential construction activity, which occurred last April, when housing starts were 17% lower than they were in February '10. Building permits in February were 23% higher than they were last April.


Benjamin Cole said...

I am glad we hit bottom, but what a bottom---off 2/3rds from the high, and well below previous bottoms.
For housing, it is even worse than a depression.
This is ugly time for anybody connected to housing--cabinet-makers, floor guys, furniture guys, interior designers etc.
After the previous two bottoms, we seem to chart steady growth. Let's hope for that.

Investors are still skittish, and perhaps with good reason. The financial system we have today is the same system that collapsed at th end of the Bush Administration-and when I say collapsed, I mean blue-chip outfits like Merrill Lynch, Citicorp, Bear Stearns, Lehman Bros. etc were vaporized, and saved only by socialist taxpayer bailouts.

We have exactly the same financial systemn today, and Obama has changed nothing, except for silly posturing on bank bonuses.

Is it possible to invest in housing or equities without worryiong about another financial melktdown?

The Long Term Capital Management scenario also worries me. Even a single outfit can spell danger for investors at large.

Warren Buffett calls financial derivatives "financial weapons of mass desruction." He called his unraveling of derivative posistions acquired at General Re as a "descent into hell."
Bill Gross of Pimco says derivatives can wreck the entire global financial system.

If you own equities, you must understand that at some point the financial system can be damaged or wrecked by people trading positions that are leveraged 100-to-1 or even more. Thus, you will be less certain of the potential value of your equities, and will pay less for them.

And we still have the reality that it is the issuers of bonds who hire the rating agencies--meaning a triple AAA rating is worth the paper it is printed on. Yet some investors are leveraging on those triple AAA's by 100-to-1.

When a Bill Gross and a Warren Buffett both say financial derivatives are very dangerous---and we have an Obama whining about bank bonuses instead--is it any wonder investors are skittish?

Who is going to build housing, knowing that the financial system is so feeble?

alstry said...


We are constructing units at a slower pace than we did in the fifties when our population was a fraction of the current level.

What is interesting is despite very low rates, we still seemingly can't get housing jump started.

With government about to layoff millions of workers including teachers, firefighters, and police officers.....what impact do you think that will have on housing demand and prices going forward?

Scott Grannis said...

Benjamin: I think you exaggerate the dangers of derivatives, as do most people. Derivatives are not inherently dangerous; in fact, they are almost always structured to minimize the risk of undesirable consequences. For every buyer there must be a seller; collateral is required to secure accumulated profits. Consider that futures markets, which have been around for hundreds of years, give people the ability to use enormous amounts of leverage, yet there has never been a case of default for exchange-traded futures. Never.

The problem with derivatives is that they can be very difficult to understand, especially for the layman and the politician. That makes them an easy target for blame. If you really want to find the blame for what happened in '08, you should look beyond derivatives to goverment institutions like Freddie and Fannie, government regulations like the CRA, and the erratic monetary policies of the Federal Reserve. That's where the really toxic stuff can be found.

Scott Grannis said...

alstry: Construction activity had to decline hugely in order to work off excess inventories of housing. Current construction rates are way below what is needed to keep up with a growing population. Therefore it is a mathematical certainty that the pace of building will have to pick up dramatically at the point inventories are exhauseted. The only question is when.

alstry said...

Therefore it is a mathematical certainty that the pace of building will have to pick up dramatically at the point inventories are exhauseted. The only question is when.


The only thing that is a mathematical certainty is if a person doesn't have a job, he or she can't afford to maintain a home, much less own one. Right now, we are losing more jobs than our nation has ever lost before...especially if you factor those working parttime for barely any income.

Under such conditions of increasing unemployment, the only mathematical certainty is poverty and homeless will skyrocket....which it is mathematically doing right now and it appears that in the future we are about to layoff millions of government workers with little prospect of employment.

My only question was what impact do you think firing millions of government workers will have on housing?

Benjamin Cole said...


I think it is time to retire Fannie and Freddie, and the homeowner mortgage interest tax deduction--although there is the legitimate complaint of those who invested in property under existing ground rules.

(BTW, it is time to retire many elements of the 1930s, including the USDA and all its rural supports, or cross-subsidization of rural economies).

But your position on derivatives seemed rooted in a political or ideological faith prism.

The globe endured a property and financial collapse in 2008--surely, no one can reasonably suggest that Fannie and Freddie caused that, or that the commercial real estate market (office, retail, warehousing) was artificially boosted or warped by Fannie and Freddie.

As you probably know, there are hotel-resorts in OC right now selling for 2/3rds peak value.

There are office buildings in downtown Los Angeles selling for less than they did in the mid-1980s. Aside from the usual interest tax deductions, these are relatively free markets--and they plummeted.

Free markets sometimes crash, without goverment help. Sea South bubble, the dot.com bust--sometimes investors are given to excessive exurburance. I cannot fathom why invesyors paid over-the-top dollar for commercial real in SoCal in 2007--yet they did.

I cannot fathom why Moody's rated subprime debt triple AAA-yet they did, without government interfrence.

I am fully aware of the use of derivatives to hedge--and I myself have traded oil futures in my own account (with poor results).

Sure, there are reasonable uses of leverage. Then, there are those who figure they can leverage up 100-to-1 and bet the house--knowing if they bet wrong, there is no debtor's prison, and there is a corporate shield. And sometimes, the betting is done with "OPM" other people's money (think Long Term Capital Management).

Did Fannie and Freddie cause Long Term Capital Management to collapse, and damage the global economy and financial system?

Are you saying Bill Gross and Warren Buffett (especially Buffett, with extensive personal and professional experience in derivatives) are simple and laymen? That is simply not credible.

If we retain an FDIC (and even you, a libertarian, seemed to support that), then we have to accept that depositors will give their money to whatever bank pays the highest rates. It is risk-free, thanks to deposit insurance.

You really want banks leveraging up 100-to-1 through hedge fund subs?

Right now, our banks could collapse again. Both reserve requirement and other safety measures are sadly lacking.

You really should read Warren Buffett's commentary to shareholders regarding derivatives. I do not think you can reasonably dimiss Buffett as a "layman."

Buffett certainly has deep insights into derivatives, and cannot be dismissed as a "layman."

Scott Grannis said...

Let me just say that I have spent 30 years of my life working with and understanding derivatives. I have spent dozens of hours explaining derivatives to corporate boards. I have been intimately involved with the decision to use derivatives in a variety of portfolio contexts. I think I understand derivatives better than 99% of the people out there. They are extremely complex, and they can be misused and abused, but so can just about anything. But they are not inherently dangerous. They were not the proximate cause of the 2008 financial meltdown, but they probably exacerbated the problem.