As we await builder earnings and New Home Sales data this week (you should all have a great handle on what to expect; if not let’s do a quick call), I thought it was a good time to put out some “New-Era Housing-U” material. It’s amazing how age-old, old-school housing economics, metrics, and cliché’s still reverberate loudly through most all research and thought processes today.
The note and data below are on the misguided belief that builders/New Home Sales still matter more than Existing Sales to the macro economy.
Since the “surge”,
1) we have lost resi mortgage banking;
2) there is strong evidence that C&I lending (non-real estate) took a nasty hit;
3) the consumer has retrenched at least in certain spending segments;
4) and now a powerful “quiet economic driver” — “distressed” real estate — has plunged 33% YoY & 56% from the peak…turned into a headwind. And since 2009 house resales, which include “distressed”, have mattered far more to the macro economy than builder activity.
The note and data presented below show how, contrary to popular age-old belief, builders/New Home Sales have contributed far less to the macro economy than Existing Sales (resales). But now, because of the plunge in “distressed” at the same time “New Sales” have reset sharply lower on the “surge”, both segments are in the dump; a headwind that will be felt.
- Existing Home Sales — “resales” — have never mattered more to housing, jobs, and the macro economy. And New Home Sales have never mattered less. Contrary to misguided “economist”, media, and blogger belief.
- August New House + Distressed Rehab Total Investment & Materials/Labor Components at Post Housing Bubble Low…down 21% YoY & 46% from peak.
- The “second housing recovery” in four years is now over on the “surge”; the first ended on the sunset of the Homebuyer Tax Credit. A stiff macro economic headwind will accompany this “hangover” period as well.
- This housing market — and the macro economy — needs MORE distressed supply…now!
Since 2009 Existing Sales — with it’s large “distressed” sub-segment — has contributed far more than builder activity/New Home Sales to the macro economy
You hear this old-school cliché‘ all the time; “New Home building and sales are more important to housing, jobs, and the macro economy than Existing…Existing mean very little”.
This could not be more misguided in the new-era housing market. This statement has been around so long that is has simply turned into something to say in order to sound like you know something about housing…kinda like “we need over million housing starts a year just to keep up with household formation”. It’s hogwash; it takes into account nothing that happened in 2007/08 or since.
Yes, 10, 30, 50 years ago New Home building/sales was a key driver to jobs and the economy. Economics textbooks teach the “multiplier” effect of such, and alike. But back then (prior to the crash), New Home Sales made up 20% to 25% of total US house sales. Now they are under 7%. Heck, the “broker commissions” component of the Existing Sales segment by itself is a whopper 50% of the entire Builder segment’s aggregate home sales retail value each month. That’s enormous! How can people ignore this???
Moreover, most resales back then were done from owner occupant to owner occupant and involved only moderate “clean up ” before listing a property for resale. As such, a very small percentage of all yesteryear resales were “distressed”…not the 30%, 50%, even 70% of resales like in recent years. This is key because because the post-crisis surge in the “distressed” from 2009-12 segment created the need for the very labor and materials that builders use on new houses. But in greater abundance.
Bottom line: Existing Sales were never more important to “housing”, jobs and the macro economy as they were from 2009 through 2012. That’s because Existing Sales are over 10 TIMES greater in number than builder sales. And from 2009 to 2012 a record percentage of resales were “distressed” ( the “majority of sales in many regions that not coincidentally experienced the largest “faux-appreciation” over the past 2-years) and in need of the very same materials and labor as builders use on new houses. The “Distressed” segment created a massive, “quiet economic tailwind” — animal spirits, rehabs, flips, rentals, materials, commissions, labor, house sale double-counting, faux-appreciation — that nobody recognized because they didn’t know where to look…this paradigm shift wasn’t included in economic text books.
In short, without “distressed“; the animal spirits that encompassed this segment since Twist went into effect; and all of the upside — real, artificial, and temporary — that it injected into the sector, “housing” would look completely different that it does today…there never would have been such a large Fed-induced short squeeze. On the flip-side…”without” distressed housing would be set to fall over the next year to 18 months from a much lower level than which it sits today, which based on how far it will fall, would have been a much kinder of outcome.
The big problem with the post-surge housing market and it’s benefits to the macro economy is that that New Home Sales demand has “reset” 20% to 25% lower on the “surge” and the bank/gov’t have essentially outlawed foreclosures/short sales, which create “distressed” supply. In fact, “distressed” is at a “post-crisis” low in recent months.
In sum, the housing related Existing and New Home building tailwinds — Existing, which blew harder and longer than New — have now turned into headwinds on the “surge”. This will be felt far and wide across the economy. There is no way around that.
Item 1) New vs Existing Sales Monthly Economic Contribution Worksheet…Existing Sales provide 70% more total benefit than New Sales’
Heck, New Home Sales are so historically small relative to total US house sales that the “broker commissions” component of Existing Sales alone is 50% of the total monthly value of ALL monthly New Home Sales.
Item 2) New vs Existing Sales “Direct Construction Contribution”…Materials/Labor, down 33% YoY and 56% from post-crash peak
Bottom Line: “Distressed” was a quiet economic driver for years and now that has turned into a tailwind at the same time New Sales have dumped…a double-stiff economic headwind.
3) New plus Existing “Direct” Aggregate Economic Contribution at Post-Crisis Lows; Down 21% YoY & 46% from peak.
Bottom line: The unintended consequences of 7 million loan modifications and foreclosure abatement laws is a lower housing sector economic contribution.
This Housing Market Needs more “Distressed” Supply
If suddenly, foreclosures and short sales were to surge again I could get really constructive this housing market. That’s because de-leveraging is what is needed in order to create a “durable” housing market recovery. Moreover, all these new-era, buy-to-rent, “landlord” investors would have people to rent all their vacant houses too. In short, the wave of SFR houses coming to rent on a street near you — that will promote high vacancy rates and falling rents — is yet another stimulus-related unintended consequence that will present a huge problem and that I don’t know yet how to model.