>

"We do expect an adjustment in home prices to last several months, as we work through a buildup in the inventory of homes on the market. …This is the price correction we’ve been expecting — with sales stabilizing, we should go back to positive price growth early next year."

– David Lereah, economist, National Association of Realtors
The New York Times, September 2006

>

 I am out of pocket most of today, but I wanted to reference something of Doug Kass’s from some time ago.  Doug
discusses the details of his debate with NAR’s chief economist last
year (CNBC’s "The Real Estate Boom") and what it might mean going
forward:

"Back in April 2005 (on the CNBC special), Lereah and the managements of Hovnavian (HOV) , Prudential Realty and LendingTree were fully convinced (you might say glib) that the housing market was destined for a long boom. They saw a new paradigm of uninterrupted, noncyclical growth. One month later, Lereah was quoted as saying, "We simply don’t have enough homes on the market to meet demand."

Forgive my preoccupation with the housing markets, but it has had a disproportionate role in economic growth since 2000 (and maybe before). This merits a continued discussion as to the possible slope of the decline, and the nature of the inevitable recovery. The housing cycle, among other variables, is a key influence on aggregate economic activity.

I expect a hard landing, and I have roughly quantified my expectations as to when the housing market will bottom (2009). It is folly to think that an unprecedented rise in home prices (in real and nominal terms) will be over in relatively short order. Yet this has been suggested by Lereah and others.

More from Doug:

"Housing cycles are long, and they play out over many years. We have
learned that the peaks are surprisingly high and the up cycles
unexpectedly long. Unfortunately, so too are the depth and duration of
the down cycles.

Days/months inventory have only begun to rise as the glut of homes
will be exacerbated by continued overbuilding, disposition of land, and
the selloff of homes by flippers. And, as discussed previously, the
consumer enters the current downturn in a weak position. Consumers are
highly leveraged after the overconsumption binge of the last decade and
after massive cashouts of home equity.

Consider the dramatic sale of D.R. Horton (DHI) homes in the Daytona
Beach market in Florida. Please note the message at the bottom of this
advertisement: "Realtors Warmly Welcomed!" That’s never a good sign.

These discounts include up to $90,000 a unit or as much as 30% (plus
a free washer/dryer and refrigerator). This is not unusual: Most
homebuilders have offered large price discounts and/or large incentives
(vacations, car leases, reduced mortgage rates, etc.) for several
months.

The ramifications of an extended housing downturn are broad — far
broader than many realize. For example, the apartment REITS, a sector I
am short, argue that there has been no new construction, so
supply/demand favors an escalation in rents. But just wait until
speculators, unable to sell their condominiums and homes, resort to
renting the units.

Or consider the implications for building materials companies like
Eagle Materials (EXP), which warned on Tuesday. What about the sale of
pickup trucks, which are often used on the construction trade? What
does an extended downturn portend for carpet, gypsum, lumber and
appliance manufacturers? Or for subprime and some prime lenders? And
what do you suppose happens to the plethora of real estate agents and
mortgage brokers? (Do they become daytraders again?)

You get the point: The housing decline is just beginning to be felt.
The fixed-income market recognizes this. But for now, equity market
participants don’t. Common sense has taken a sabbatical.

Don’t believe the housing soft-landing advocates, and do recognize
the broad economic impact that a protracted downturn will have on our
economy.

The worst is yet to come."

Thanks for the realism, Doug,

>
Source:
Housing Headed to the Woodshed
Doug Kass
Street Insight, 9/29/2006 10:14 AM EDT

http://www.thestreet.com/newsanalysis/investing/10311968.html

Category: Economy, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Kass on the Soft Landing”

  1. Chris Wine says:

    This came over from a wild eyed bond trader. Not sure why it is all caps, but it is damn funny.

    OPTIMISTS TRIUMPH! THE TOP 5 LIST OF THINGS THAT NEVER HAPPENED:

    1. 47 CATEGORY FIVE HURRICANES PLOW DIRECTLY INTO THE GULF OF MEXICO AND TEAR APART EVERY INCH OF PIPELINE, EVERY RIG, AND EVERY OUNCE OF REFINING CAPACITY. NAT GAS TRADES AT $273/MMBtu AND UNLEADED GOES FOR 12 BUCKS A GALLON. RTH GOES TO ZERO, AS DOES ALL CONSUMER SPENDING, CARS SIT ON FRONT LAWNS LIKE UNUSED RUSTING HULKS, PEOPLE BURN FURNITURE FOR HEAT, AND ROVING GANGS ARMED WITH CHAINS AND BATS ROAM NEIGHBORHOODS.

    2. THE ISRAEL/LEBANON CONFLICT SPINS OUT OF CONTROL, DRAWING IN IRAN AND SYRIA. OIL SPIKES TO $142/BARREL, RTH GOES TO ZERO, AS DOES ALL CONSUMER SPENDING, CARS SIT ON FRONT LAWNS LIKE UNUSED RUSTING HULKS, AND ROVING GANGS ARMED WITH CHAINS AND BATS ROAM NEIGHBORHOODS.

    3. BERNANKE TURNS OUT TO BE A DONKEY AND RAISES FED FUNDS TO 600BP. PERSONAL BANKRUPTCIES RISE AS ARMS RESET, PEOPLE WALK AWAY FROM THEIR HOUSES AND HAND THE BANK THE KEYS, ENTIRE UNOCCUPIED NEIGHBORHOODS ARE ROAMED BY ROVING GANGS ARMED WITH CHAINS AND BATS.

    4. GM AND/OR FORD DOWNGRADES TO JUNK CAUSE THE ENTIRE CREDIT MARKET TO MALFUNCTION. THE TANGLED BIRD’S NEST OF DERIVATIVE OBLIGATIONS TAKE MONTHS TO BE FIGURED OUT BY COMPETENT AND DEDICATED BACK OFFICE PERSONNEL. LIQUIDITY SEIZES UP, FOULING THE ENTIRE COUNTRY’S CREDIT MARKETS. ROVING GANGS ARMED WITH CHAINS AND BATS ROAM NEIGHBORHOODS.

    5. WITH SUBTLY RISING INFLATION AND ZOOMING COMMODITY PRICES, THE DOLLAR BEGINS A “DISORDERLY” DECLINE. IT BECOMES PROHIBITIVELY EXPENSIVE TO TRAVEL ABROAD, PEOPLE HOARD GOLD, LAMPPOSTS, AND MANHOLE COVERS, AND ANY HARD ASSET IN LIEU OF HOLDING CURRENCY. ROVING GANGS…YOU GUESSED IT…ARMED WITH CHAINS AND BATS ROAM NEIGHBORHOODS.

    SPOOZ ON THEIR HIGHS AND SENTIMENT ON ALL TIME LOWS. EVER WONDER WHY SKEW EXISTS?

    ALL OF THESE FEARS SEEMED VERY REAL AT THE TIME. FEARS LIKE THESE ARE NOT REALIZED VERY OFTEN. THE HIGHER-PROBABILITY GAMBLE IS TO BET AGAINST
    THEM.
    THE QUESTION IS: WHAT IS THE PARANOID DELUSION OF THE DAY?

  2. Incognitus says:

    Let me have a crack at it.

    The paranoid delusion of the day, which most people seem to be forgetting when they talk about the housing market, is that the housing market is the primary driver of money/credit creation. Increases in mortgages answered for more than 50% of 2005′s credit creation.

    If that market goes down (in terms of trading, not necessarily price), a lot less credit will get created.

    And, you guessed it, in the end roving gangs aremed with chains and bats end up roaming the neighboorhoods.

  3. Mike says:

    THE QUESTION IS: WHAT IS THE PARANOID DELUSION OF THE DAY?

    How about the idea that stocks will continue to go up and corporate profits will stay at record levels in a deteriorating business environment? Seems to be the most popular delusion anyway.

  4. David Silb says:

    I think the housing market is about to start a downward trending. With all the people who want to own a house probably own two.

    As inflation (mild by the CPI measures but wild by all other measures.) starts to creep into the credit market and interest begins to climb. Wages hold flat as labor sees little change in the job market.

    In Miami Florida, where I live, I predict the owners of condos who live overseas “walkaway” from un-resellable properties leaving associations with ever increasing deficits in collection of fees causing foreclosures and bankrupties of the asociations leaving the owners to foot the bills. Hence leading to another round of “sell-offs.” Whereas some enterprising managment company comes in and buys the whole building reverting it back to apartments and renting it to the previous owners.

    We will then see the begining of roaming gangs armed with chains and bats wandering through the neighboorhoods.

  5. KirkH says:

    Not to be a jerk but Kass could link to GlobalEconomicAnalysis Blog.

    Here’s the Blog version from Sep 27 which refers to the same D.R. Horton ad:

    That is a 30% haircut. Not only is that a 30% haircut but it is important that the entire subdivision was just repriced 30% (plus appliances) lower. Any flipper who paid full price is now 30% underwater (not counting interest expenses, insurance, property taxes, etc.)

    TheStreet.com version two days later

    You just took a 30% haircut on your inventory, not to mention carrying costs of a mortgage, real estate taxes and expenses to keep up the property (landscaping, utilities, etc.).

    Coincidence? Probably. Weird? Absolutely.

  6. Bryan says:

    If you want to see dillusional compare any speech or report put out by Lereah in 2005 with any speech or report he made after June 2006.

    Don’t hand pick them either, go random.

  7. KirkH says:

    Circumstantial observations:

    Blog:

    Add in real estate commissions and that flipper may be down by as much as 50% or more.

    UnBlog:

    And when the unit is finally sold, you have to pay a real estate agent a 6% commission. That speculator likely put up less than 20% up front (probably far less), and is now out, by my calculation about 50%.

    Now I’m not saying anything neferaious is going on. In fact I’m glad that the discussions we’re having on blogs are showing up in the mainstream media. Especially regarding Lereah. But if, and it’s a huge IF, blogs are sources for articles they should in my opinion get some sort of credit.

  8. KirkH says:

    Just so I don’t get sued.

    “Editor’s note: This column by Doug Kass is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on Sept. 28 at 8:29 a.m. EDT.”

    The blog post, if the clock is right, was online at
    “9:40 AM” on “Wednesday, September 27, 2006″

    OK, I’ll shutup now.

  9. Bob_in_ma says:

    “why do you assume the realtors have an upward bias when talking about housing?”

    That’s a pretty silly question. Maybe because increasing demand means an increase in prices, and realtors work on commission? Maybe because when prices seem likely to rise, people feel compelled to buy, whereas when prices seem likely to fall, people are reluctant to buy and sales fall way off, as they clearly have now?

    I’m definitely no permabear, I did very well long the last couple of years. But now I’m short homebuilders and lenders and so far it’s paid off, and I expect for it to do even better over the next year because so many peoples’ reasoning is similar to yours.

  10. mh497 says:

    THE QUESTION IS: WHAT IS THE PARANOID DELUSION OF THE DAY?

    THE DEMOCRATS WIN THE HOUSE AND THE SENATE IN NOVEMBER, PRESIDENT BUSH IS IMPEACHED (MAKING CHENEY THE PRESIDENT, BY THE WAY), AS A RESULT OF THE BREAKDOWN IN LAW AND ORDER THAT ENSUES ROVING BANDS OF CHAIN AND BAT TOATING GANGS ROAM THE STREETS, DONALD RUMSFELD DECLARES MARTIAL LAW ACROSS AMERICA, BUT DOES NOT DEPLOY ENOUGH TROOPS.

    OH YEAH AND THE SP500 GOES UP 10%.

  11. Cherry says:

    LOL, funny mh497…………

    Look at that flying thing up in sky!………..
    One man says: look it is a bird!
    One women says: No, it is a plane!
    One child says: No! It is the US economy!

    Right into the dumpster!

  12. jj says:

    Thomas M. Doerflinger, UBS equity strategist ………weakness in housing and a slowdown in consumer spending will eat into profit growth next year ……… “We are looking for a significant slowdown” in profit growth, to about 4 percent in 2007

  13. ilsm says:

    I think the bottom will be 2009 or maybe 2010.

    In some parts the decline will be modest, in others like the one I am in, I expect down 35% maybe more by 2010. That would be less than the early 90′s slump.

    I could buy now but Iexpect the crash and so will not.

    How much is psychology?

    I could have moved on real estate in 2003 but that was too high.

    Yes, I do not have to buy and I will wait.

    A seller in my situation, not needing to do anything, is okay.

    It is the distressed seller that will crash the market and when do those ARMs and IO’s start to be a heavy burden?

    When does the ability of the Fed to lower or keep low the interest rates endr?

    When does the dollar decline or the Chinese stop subsidizing?

  14. alexd says:

    If the major magazines start to feature moaning on the housing crisis I am going to buy.

    I remeber being in a 7/11 in 1987 and seeing covers on the bull market and then the market crashed. The guys in the press tend to be the last ones to show up at the party.

    I absolutly think you total gloom and doomers are wrong because you were right. It is a question of levels.
    Someone tell me how many days or weeks of housing overhang we have.

    If there is an overhang of anything where eventually consumers will buy up the overhang I want to know when we are close to eliminating that overhang.

    The democrats getting one of the houses would be good. Then healthy gridlock would occour. This current bunch just spends money with no thought to the consequences beyond keeping power, and the only thing Bush veto’s was a bill that delt with stem cells. (did I get that right?) Real spending controls there.

    I want to see a bear on the cover of the times or newsweek then I can utilize margin. I think a divided congress would be good for the markets.

    If Bush Cheney were impeached for violating our constitution
    (and I think they did) then that would make me happy but I would view it as a personal boon. Excessive hubris in the white house.

    We will have to wait and see if I am right.

  15. Brian says:

    DONALD RUMSFELD DECLARES MARTIAL LAW ACROSS AMERICA, BUT DOES NOT DEPLOY ENOUGH TROOPS.

    That’s comedy gold right there.

  16. wunsacon says:

    >> yes they profit from higher prices/commissions but they also profit from higher velocity – panic selling could be more beneficial.

    Agreed. Realtors would rather sellers take their losses in a hurry so that volume can return to normal.

    90% volume at 80% prices is better than 70% volume at 95% prices that are still unsustainable.

    Of course, my contrived numbers don’t prove anything. It’s just an example of an outcome at lower prices that might be better for realtors.

  17. BDG123 says:

    The housing market and stock market are intertwined. If housing is to bottom in 2009, that means we can expect more than two years of selling in the stock market. That is, assuming we have a difficult 4Q. Any idea how he comes up with that number? Is there any science to it or is it a finger in the air?

    The probabilities are that difficulties will develop in the housing market but it is not a high probability we will have more than two years of selling in the stock market. Hence, 2009 as a bottom seems improbable. Using some time series work, I’d guesstimate 2Q of 2008.

  18. whipsaw says:

    per B:
    “Hence, 2009 as a bottom seems improbable. Using some time series work, I’d guesstimate 2Q of 2008.”

    ok, I’m interested, so are you talking about cycle stuff and, if so, based on what? I’d agree with your guesstimate, but only because we will be back into another political season, not because everything will actually be all better.

  19. dabiff says:

    Barry,

    Can we please have an update on Cult of the Bear.
    Perhaps a Part 4.

  20. ~ Nona says:

    Realtors’ expenses go up when the market is slow. Reason: clients want (and need) more advertising, open houses, etc. In strong markets properties sell quite readily, often with no advertising at all and occasionally with bidding wars, to boot.

    Besides the increased promotion costs, it takes longer for realtors to recoup these expenses in slow markets. Sometimes they never recoup them. Reasons vary. Would-be sellers may switch to a new broker when the contract is up if the house is still unsold. Thus, the original listing broker spent time and money — and didn’t make a dime. Ditto if a client decides not to sell after all: time and money spent for a zero return.

    Another challenge: Buyers get picky during weak markets. Brokers spend a lot more time showing houses. Worse, after weeks and weeks of effort, some would-be buyers will decide to wait. (“Maybe in another six months the prices will come down even further….”)

    But let’s assume all goes well and — finally! — there is a sale for which the broker earns a commission. Total commissions are smaller when prices come down. Thus it costs brokers more in time and money (promotion expenses) to earn smaller commissions.

    One year from today there will be fewer brokers. Two years from today, a lot fewer. The above are just a few of the reasons why.

  21. Geoff says:

    AlexD – one example, a bubble market just heading just starting to deflate – Orlando. Home sales down 35% yoy, when they were rising yoy less than 6 months back. Inventory of existing homes, now at over 10 months and rising. the marketplace news missing a turndown is not comparable to a the same bunch of morons trying to call the upswing. It’s like David Lereah saying how, after the worst month has just come, that the worst is passed…as if nothing more bad can come, since we’ve never seen something so bad. Total moron. Well, no, he knows better, total shill.

    Anon – Obviously, you dont get what worries realtors. Even if prices dont fall, a 30% decline in home sales is 30% less income for realtors, and it’s not spread evenly. There is no such thing as panic selling in the housing market….it moves too slowly. The information takes longer to sink in, but when it does, the sales rate just up dries like paint, even if prices dont budge. That is not something realtors want…because it can go on a long time, and the few sales that are forced (the people who must sell rather than want to sell, take the brunt of the price adjustment)

    ISLM hit it – on the way up, the reluctant cant reassess – some may miss a year or three of gains, and would have had to have cashed out in a very timely manner to make bank…so they can sit on their hands and likely not fret. But the buyers, who buy at the wrong time, no easy exit. Pain, and the slow pain of chinese water torture (not to be confused with waterboarding) or similar, is their fate.

  22. JGarcia says:

    I’m curious why there has not been one comment on today’s (surprisingly) strong construction number, pending home sales (UP 4.3% in AUG) or benign ISM number. hmmmm

    BTW, in my So Fla developement, lots of (existing homes) have sold….at “good” prices.

    Lots of the supply (of existing) homes for sale won’t be sold at the 30-50% markdowns predicted in the new home market…because they don’t have to sell. The arm waving about a housing led recession is reaching shriek level, imo.

    There will be pockets of pain in the new hsg for sure…but no recession.

    -employment levels strong

    -credit spreads show no recession

    -real estate loans posted their biggest weekly gain since June ($3.121 trillion, an increase of $16.4 billion compared with a week earlier) (Tony Crescenzi)

    -CP market remains strong

    -way too much cash around

    Sorry…the mob scene and crash make a good story though.

  23. Mark says:

    Benign ISM number? What were you expecting? 49?

    Housing construction tanking but being lifted by GOVERNMENT construction?

    And I’m glad you believe the NAR figures in their index. I’ll take the other side of THAT trade any day.

    And oh, credit spreads are widening. Time for you to look. Not signalling recession yet but showing “concern”.

    You like those employment numbers coming out do you? adding jobs at the rate of 100K a pop? Good on you.

    Cash levels? There’s no such thing as cash on the sidelines. When someone takes their cash and buys securities, where does the cash go? It goes to a former security holder who prefers the cash better! The only difference I see with cash is it moving from being held by the dumb money to it being held by the smart money.

  24. JGarcia says:

    “There’s no such thing as cash on the sidelines”

    That’s a good one, lol

  25. Mark says:

    JG-

    Here. I’ll let an economist explain it to you, since my A gives to B explanation wasn’t enough.

    http://www.hussman.net/wmc/wmc060710.htm

    We are close to levels we saw six years ago! Whoo-hoo! Let’s buy this market up my man!

  26. blam says:

    There is cash on the sideline – the cash the Fed has pumping into the markets all summer. Lend it to the large speculative banks at below market rates so they can use it to “goose” the indexes and commodities before the slaughter.

    The probable course of the economy is stag-deflation where the economy slips in and out of mild recessions over the next ten years as the Fed tries to let the air out of all the bubbles about to burst. Call me “goldilocks”.

  27. Mark says:

    blam-

    That’s reflation, not “idle cash”. New cash if you will. But I get your point exactly and it’s a very dangerous game we’re playing here. An exogenous event, just one, could send the whole thing spiralling and put the whole PPT playbook into play.

  28. UpwardBias says:

    While a crash in the market is a possibility, I think the more likely scenario is rampant inflation. The Fed is a largely political body, and will fear the cosequences of controlling inflation. So the housing market needn’t fear further rate hikes. Kass is right that prices will drop in the next two years, but a crash is unlikely in dollar terms — if the pain gets too great, “government has got to move.” But in real asset terms, I’m betting that the government devalues its way out of its problems. When the choice is between heavy rate hikes to protect the dollar and providing easy money to protect the (voting) homeowner, we know what the politicians will be pushing for. That smart money in cash is going to look pretty stupid if they don’t generate returns above inflation.
    I spent a decade laughing at the gold bugs, but started scaling into the metals in 2004.
    BTW, my personal pet peeve is treating TIPS as inflation-proof securities. Since when has the government properly reported inflation? It’s NEVER in the gov’t’s interest to state inflation accurately.

  29. Davidsilb says:

    What’s comedy gold is:

    DONALD RUMSFELD DECLARES MARTIAL LAW ACROSS AMERICA, BUT DOES NOT DEPLOY ENOUGH TROOPS.

    SO A DRAFT IS INSTITUTED AND ROVING BANDS OF CHAIN AND BAT TOATING GANGS ARE DRAFTED TO POLICE THEMSELVES.

    BUT NO CIVIL WAR EMINENT AND CHENEY STATES THAT THE NEW TROOPS WILL WELCOMED AS LIBERATORS IN THE MOB RULED NEIGHBORHOODS OF THE UNITED STATES.

    (Hmmm Something smells fishy in here.)

  30. Cherry says:

    Job cuts in September were highest since January, the beginning? Capacity release just doesn’t happen overnight fast, but a steady stream out, slowly filtering to everybodies favorite labor numbers.