Housing downturns: “longer and deeper than we’ve imagined”

Barron’s Alan Abelson discusses one of our favorite subjects:  the Housing slowdown. In particular, note the commentary from towards the end of the excerpt of Don Tomnitz, CEO of the No. 1 home builder, D.R. Horton:

"In Bernanke’s testimony last week, he cited housing’s diminished exuberance as rather a good thing, if only because it presumably will help restrain any untoward tendencies in the economy as a whole. Reasonable assumption, we’d grant. After all, the massive bubble in housing, which drew great drafts of sustenance from the absurdly cheap money and easy credit favored by the agency Mr. Bernanke now heads, was manna from heaven, or at least Washington. For it took up the menacing slack created by the stock-market crash in the opening years of this century and, more than anything else, kept the economy from going over the edge.

Understandably reluctant to make the natives too uneasy — not only have their houses served as their castles but also as a ready source of cash and no-sweat borrowing, all the while providing the incalculable comfort of an astronomically appreciating asset — he was careful to observe that "the downturn in the housing market so far appears to be orderly."

Which may have come as something of a surprise to any number of folks who earn their daily bread putting up houses. The latest survey by the National Association of Home Builders showed that activity had dropped for the sixth month in a row: The NAHB index, which measures the pulse of the industry, hit a low for nearly 15 years in July and is down by nearly 50% from its peak reached a scant 13 months ago.

Mr. Bernanke’s muted optimism to the effect that the decline in housing will be graced by a soft landing doesn’t quite square with the view of Don Tomnitz, CEO of the No. 1 home builder, D.R. Horton (that D. in the corporate title is a nomenclatural tribute to the founder, who bears the same first name as the current CEO; obviously, if you have your eye on the top slot of the company, better change your name to Don). In the course of a long conference call with analysts that followed the release of disappointing earnings, Mr. Tomnitz, to his credit, made no bones about the despairing state of his industry.

More specifically, he termed the housing market weak and opined it could get weaker. Nor was he overwhelmingly sanguine about the outlook for next year. (We’re grateful to our bearish buddy, Doug Kass, of Seabreeze Partners, for inspiring us to peruse the transcript of the call.) As Mr. Tomnitz ruefully reflected, "every time we’ve gone into a downturn in the home-building industry, they’ve always been longer and deeper than we’ve imagined, so we’re preparing for the worst…."

We must say, incidentally, that Mr.Tomnitz has provided us with a truly rare experience: a conference call that wasn’t all blah-blah bullish, but actually was straightforward and — dare we say it? — informative. (The analysts, in case you were wondering, pretty much asked the same aimless questions they always do.)

If by characterizing the retreat in housing as "orderly," Mr. Bernanke means that the downturn hasn’t yet reached the point of homeowners taking to the streets to vent their anger at plummeting home prices and inexorably mounting costs of owning a house, we won’t quarrel. But with the interest on trillions of dollars worth of adjustable rate mortgages vulnerable to "reset," as the euphemism for sharp hikes goes, and affordability of buying a house becoming ever more vexing, all we can say to him is… "Wait."  (emphasis added)

There’s more on this coming later today, and over the next few days — but suffice it to say the Housing slow down is a key element of both our slow motion slow down thesis and our very bearish market expectations.


Eyes Wide Shut
Barron’s MONDAY, JULY 24, 2006   

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