Friday, December 28, 2007

New Home Sales - Runaway Train Never Coming Back

Heading into the final weekend of my vacation. I always start to miss the work day routine after more than 4 days off. Today does not even feel like a Friday. I like my job and I actually look forward to going back to work. If you cannot say the same, that stinks. But we all have to do what we have to until we can do what we want to, you know?

Buffet Effectively Finishes Major Insurers
Mish over at his site has been covering the saga of MBIA and Ambac, two major bond insurance companies that are looking at serious problems. All the talk on the message boards for both MBI and ABK over the past few days has been buyout and takeover rumors. The stocks of both were moving higher in anticipation of some event. Today that event occurred, from Yahoo Finance:
Berkshire Hathaway Opening Bond Insurer
Friday December 28, 4:48 pm ET
By Stephen Bernard, AP Business Writer
Berkshire Hathaway Opening Bond Insurance Business, Buys Insurance Unit From ING
NEW YORK (AP) -- Town governments, school districts and other municipalities looking to borrow money got a new option Friday when trying to insure their bonds: billionaire investor Warren Buffett.
Buffett's formation of a bond insurance company provided some validation to an industry that has been battered by fears of collapse in recent weeks.

"If I was thinking of investing in financial guarantors, this would give me comfort," said Donald Light, a senior analyst with Celent. Light owns Berkshire Hathaway shares.
Though analysts said the move by Buffett provides a stamp of approval for the broader business model, which has recently come under fire, shares of Buffett's newest competitors were hammered Friday.
"Any capital new to the space for reinsurance would be a net positive," said Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co., in an interview. But if Buffett "uses capital simply as competition, it is a negative," Stelmach said.
MBIA Inc. fell 15.9 percent to close at $18.74 Friday, while Ambac fell 13.8 percent to $25.12. Earlier in the session, MBIA shares hit a 52-week low of $18.43. (No misprint!)
The New York Insurance Department expedited the licensing for Berkshire Hathaway Assurance Corp. The state's insurance superintendent, in a statement, said the state was doing what it could to help insurers win regulatory approvals needed to keep their businesses going.

I feel kind of sorrow for the guys playing the MBI/ABK stocks over the past week. They were correct in thinking there was going to be an event that would move the stock, they were just hopelessly wrong about what was going to happen.

I am no expert in this area, for that I direct you to Mish's site. I include this piece here to highlight the credit crunch mentality we are seeing. Nobody believes that poorly capitalized companies like MBI and ABK can make good on their insurance policies. This is killing the market for insurance of all kinds of paper, especially for municipal bonds. I am not one of these people that thinks everything Buffet does is absolute gold, but the man is usually very good a research and avoiding bad situations. He looked over the field and say the best way to grab a major share of the market was to start fresh. MBI and ABK are basically toast now. Anyone with a brain will go for the Buffet backed insurance over the crap those companies are offering. It will be interesting to see how far into 2008 MBI and ABK make it.

New Home Sales - Runaway Train Never Coming Back
To nobodies surprise that reads this site and many others, new home sales were reported today for November, and they were even weaker than expected. Here is the headline and story:
Home Sales Plunge, Feed Recession Fears
Friday December 28, 4:52 pm ET
By Jeannine Aversa, AP Economics Writer
New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears
WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.
The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.
"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.
The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.
"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's "Sales and home prices are in a free fall. The downturn is intensifying."

I have to hand it to the mainstream media. Their ability to make bad news seem like heaven is only matched by how terrible they make news sound when they want to. For some reason the larger than expected sales plunge was deemed worrisome enough to actually make a pretty scary news item and include doom and gloom commentary form some market observers.

So what does this all mean? Even in the face of massive discounts and free extras, new home sales are still spiralling down. We have covered all the reasons before, but does this process relate to the ever feared recession talk? The wonderful blog Calculated Risk had put together a great chart showing new home sales vs. recessions for the last 30 plus years. (reprinted here with emailed permission)

A great chart with all kinds of information. I spent awhile looking it over and here are my observations:

  • The last big bust in the late 80's to early 90's showed very little in the way of new home sales being abnormally high before the crash. Maybe more existing homes were moved in that time.
  • The thing that stands out strongly to me is the amazing cyclic nature of the sales versus recession.
  • The MAJOR problem area is at the January 2002 data set. The business led recession of 2001 SHOULD have made a dent in home sales, but they instead never corrected and resumed an upward run. A MAJOR upward run.
  • The new home sales of the 2003-2005 years were about 40% higher than at any time in history that the chart covers.

I recommend spending some time with this chart, as it has plenty to offer. Clearly new home sales will need to fall into the historical 400k range to signal a bottom. The problem is the false high demand that precluded a prior correction will also have to be atoned for, so the time spent at a 400-500k sales level may be prolonged.

This information really illustrates what I have said was the amazing front loading of demand for homes into a small time span. I will more clearly go over years and numbers in my 2008 prediction post (its coming I promise) but I can say now that sales will reach about 450k in 2008 and may need to stay there for 3 years to compensate for the artificial sales made during the 2003-2005 time frame.

Ok, enough. Its Friday night and we need the rock music!

From the title of this post, Soul Asylum with "Runaway Train". The words are very fitting for the mess that is housing!

A local band Dropkick Murphys with "Shipping Up to Boston", as seen in the film "The Departed":

Found a great tribute video to the unforgettable Randy Rhoads. Please enjoy the song "Diary of a Madman". The beginning of the song highlights Rhoads' special blend of classical guitar mastery that he works into full metal. Truly a great loss:

Have a good night.


watchtower said...

It`s interesting that you brought up CR`s New Home Sales and Recessions chart, I came across this chart in the latter part of September, and remember showing my Father the chart, and adding my two cents (for what its worth) about how we are due a significant recession, or possibly a depression in the near future (not that I based my prediction on the chart alone, but a good chart goes a long way at making ones point).
If I may say it once again, you have a great site here.

getyourselfconnected said...

Thanks for the encouragement. I appreciate all visits and especially the comments. Looking at the chart it seems next to impossible that a recession is not in the cards. We should know by February, March the latest what the deal is. I am really amazed at the absence of a correction in the 2002 time frame and believe that will haunt housing for some time.