Thursday, June 04, 2009

The Best News You Didn’t Read This Morning: Housing is Recovering Faster Than You Think

Energy and basic-materials stocks dragged the market lower as new economic data and rising oil inventories sapped investors' recent optimism about an economic recovery.
—The Wall Street Journal, June 4, 2009

So says today’s Wall Street Journal. And who’s going to argue?

Well, we here at NotMakingThisUp, for starters.

And that’s because whatever the “new economic data” might have been that “sapped investors’ recent optimism” yesterday, it had nothing to do with what’s happening in the real world.

What’s happening in the real world is this: the housing market is recovering, fast.

The following are yesterday morning’s comments from Hovnanian, the once-mighty home builder (280,000 houses delivered, and counting) in which we here at NMTU have no interest except to monitor what is happening in the real world, as opposed to on Wall Street trading desks.

The words are CEO Ari Hovnanian’s, from his introductory remarks. The entire transcript is worth reading, and you can find it at Seeking Alpha (

Now let me get back to the sales trends we’re seeing in the market today. We have seen more then the typical seasonal uptick in sales throughout our second quarter. The seasonal aspect of the pickup in sales is not unusual but its noteworthy that this is the second consecutive quarter that our contracts per community were up year over year….

The contracts per community have shown a positive comparison for six of the past seven months and the comparison has been even stronger during the two most recent months with a 25% and 33% increase in net contracts per community for March and April respectively….

When you look at the MLS data for many markets today you see two positive forces at work. First you see absolute sales numbers have picked up and second you see inventory levels have come down. In some markets you could almost make the case that the month’s supply has corrected too much. Believe it or not, by normal standards there is actually a shortage of homes based on the current sales pace in certain markets including some of the markets that were the most over supplied not long ago.

Now, Mr. Hovnanian was quick to point out that part of the improvement has come from California, where a $10,000 state tax credit, on top of the federal first-time buyer credit of $8,000, has had a distinct impact. And of course, prices are down, which is why the market is clearing.

Finally, he was also quick to point out that rising rates could nip a recovery in the bud.

But interestingly enough, one of the fastest-improving markets was outside the Formerly Golden State, in one of the many markets once in contention for the label “Ground Zero of the Housing Bubble.”

The first reader who correctly identifies the market being described by Mr. Hovnanian wins nothing but recognition on these virtual pages:

At a five months’ supply this market looks a lot better than it did a year and a half ago when it had almost a 25 months’ supply.

It’s been a few years since the word “shortage” appeared in the same sentence as the word “homes,” at least in America.

And that, we think, is the best news you didn’t read this morning.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

That improving market outside the Golden state is Las Vegas!!

Jeff Matthews said...

Nope. Las Vegas is improving, but it's not the one mentioned here. Good guess.


Michael said...


Hariram Maneri said...

That wud be the phoenix market..

Jeff Matthews said...

Michael got it: Phoenix.

In fact, April sales in Phoenix were the highest in not 1, or 2, or even 3 years for Hovnanian.

They were the best April sales in 7 years.

For the record, Hariram Maneri came in a close second to Michael, but would have been disqualified for using Yahoo Message-Board type language...i.e. "wud."


Michael said...

Phoenix solution - allow investors to buy the homes, the banks take a haircut. The homes are then rented back to their former owners.

Hariram Maneri said...

Jeff- Do you have the numbers for the South Florida market ?

Namazu said...

Let's hope the happy new owners can afford the property taxes and air conditioning in the coming years. And let's see how sales and prices fare with mortgages at 7 or 8%. Most people can't or won't calculate total cost of ownership, but American's have been buying monthly payment for years now.

Jeff Matthews said...


Neither TOL or HOV focused on Florida in their calls yesterday. Informed input is welcome!


Anonymous said...


This post kinda reminds me of your post in April of 2008 called "Name that index" where you bizzarely squeezed out a bottom call on housing after some random 1Q08 Toll Brothers CC:

"Nevertheless, our way of looking at the news was simply this: it was the first good news on housing in this country in quite a long time, and it came at a point in the cycle when nobody seemed to expect the housing market to ever recover, possibly not even before the sun is a cold, tiny lump of debris hurtling through space.

Given the hostile reaction subsequently posted in the comments beneath the post (sample: “Yes, That IS from TollBrothers. What a joke…”[sic]) we deemed it the first sign of life in the U.S. housing market and officially reversed our August 2005 call ('Anybody who buys a home they don’t need is a moron') while acknowledging that when a second sign might come is anybody’s guess."

wow, what a prescient rebound call, Jeff!

...and then amazingly, you defended the ABX! touting how the ABX index 31% rally was "serious stuff."

As for a general hint as to the index in question, let's just say that we here at NotMakingThisUp think the second sign of life in the U.S. housing market has been spotted.

Broken clocks, Jeff. Broken clocks.

p.s. you normally chalk any negative talk about you or your posts as being patrick byrne and co. but its not jeff. its just a regular old reader, sick of talking heads like you making maniacal calls and then not having to deal with any public fallout when you're wrong. have some accountability, man.

Anonymous said...

The financial press has been regularly reporting about the "shadow book of foreclosures". What are your thoughts? Can the current reported inventory numbers be relied upon? If not, how can we tell if things are getting better?

Anonymous said...

Save for the data, which I agree is pertinent, and certainly not to be dismissed, please check Mr. Hovnanian's comments over the last, oh, say eight quarters before assigning too much credibility to his words. Research here shows there is so much pent-up supply ready to come on the market at slightly higher prices. Save for a burst of activity for folks seeking to get in for fear of rates continuing up, we respectfully don't see 'shortage' as an appropriate adjective.

Trader said...

Given that:

1) Months supply of new homes is over 10 months

2) Prices are still falling at 19% YoY (in spite of the second derivative being zero)

3) 2009 Q1 Mortgage delinquencies are 9.1% (up from 7.9% Q4) as the subprime problem turns into a prime problems (especially on ARMs). This means people can't stay in the homes they're in let alone buy new ones.

What planet were HOV talking about?

Jeff Matthews said...

Anonymous: done.


Hal Hoeft said...

It seems that this describes market mechanisms working. Lower prices create demand and constrain some supply (i.e. those who are not forced to sell).

The bad news?

HOV seems willing to sell at this level while damaging their margins. Their goal remains generating cash flow. The question is does this uptic in sales represent growth in the market or just a gain in market share as there are now fewer participants.

Good news would have been we were able to raise prices.

Kieran said...

I think it's appropriate to see a bottom in home sales. But I'm holding off for the next wave of Option Arm recasts before I buy XHB, IYR, or their ilk. Too much riskiness out there for my blood.

Also, I think you could do a paired trade with housing stocks and the TLT/TBT. Either the TLT stops falling or the market stops rising. Because if the ten-year breaks five you can kiss the green shoots in housing goodbye.

Disclosure (short TBT)

wcw said...

Well, let's not all pile on at once. There is, in fact, a market segment where prices are now reasonable again and where for-sale inventories are tight: the bottom. That includes crappy new tract homes in AZ, as well as the $200k starter-in-the-suburbs a junior colleague just bought out of foreclosure on a top-tick bubble transaction around $600k. Really. I am not making that up. Word on the street is that this segment of the market has something like 2-4 months inventory right now. It's legitimately hot at current prices. Then again, this segment is cash-flow positive with very nice cap rates at current prices.

Then there is the top of the market -- and by top, I mean upper third by units. Markets are not democracies, so the upper third is where all the assets are. The upper third is dead. There are no moveup buyers in an REO sale, and prices just haven't adjusted down enough. Cap rates are still negative in the city. Let me repeat that: if you buy a home in the city and do not move in, your cap rate is negative. Word on the street is that upper-tier inventory is in the 18-month range.

On balance, check the quick chart I did (click through to from the flow of funds: 08Q4 housing assets were still well about 120% of GDP. From the 1950s to the 1970s that ranged from 80-100%, and even at the height of the last residential peak in 1989, it never touched 120%. Unless you think something qualitative changed in housing stock as an asset around 2001, you should not expect housing as a whole to recover yet. Prices need to come down still.

Full disclosure: we rent. But boy do I envy the government subsidy you owners get.

Jeff Matthews said...

WCW: Don't worry about the "piling on" happened when we published 'The Last, Best Hope For Prosperity' in June 2005, about the Time Magazine cover story on 'Why we're going gaga over real estate' and called it "as good a 'cover story' kind of market-mania, surely-we-are-approaching-a-top indicator as I have ever seen."

It's hard for Wall Street types, whose entire business model evaporated last year and who can't sell their houses at anything close to cost, that prices have reached market-clearing levels in markets out in the hinterlands.

Thanks for the data points. Well said, and keep 'em coming--whether they support what we try not to make up here at NMTU, or not.


Anonymous said...

Jeff: A couple of comments after reading the HOV conference call transcript on Seeking Alpha:

1) I think Mr. Hovnanian's focus on stabilizing the company's cash flow is the right move in this challenging economic environment. His move to repurchase debt was prescient which should, in theory, add to future cash flow from operations (i.e., lower interest expenses)

2) I also find it interesting that they are reducing their supply of land based on market conditions in given distressed areas. Again the company's focus on the cash costs of building a home vs recovering those costs and more via delivery (i.e., selling homes at a fair and reasonable sales price) is a pretty good indication that HOV is on the right track with this particular focus.

C) What struck me were Larry Sorsby's comments, particularly regarding impairments. If key cities continue their decline in employment activity, could this possibly be a significant cause for elevated levels of foreclosure activity, thus increasing the probability of continuing impairments on HOV's existing lots slated for development?

Just wondering out loud, and I could be wrong in my line of thinking.

P.S. - I'm still not sold on this recovery in housing just yet. I saw a fascinating set of charts courtesy of Whitney Tilson of T2 Partners which your readers can view here (hat tip: Mike "Mish" Shedlock @ Sitka Pacific Advisors). If the data on the total dollar amount of resets on Alt-A loans over the next five years is accurate, then this year's so-called "housing recovery" would become the mother of all head fakes.

Anonymous said...

jeff - you're an idiot

TeddyBearNeil said...

Head Fake is what I think it is. I don't dispute the data about inventory getting low in some markets, that is purely because of the moratoria on Foreclosures that was in effect for the past 6 months.

My take on Phoenix is that the investors have pretty much cleared out the homes that could be rented out with a positive cash flow. They won't be buying up anyting unless they get a positive cash flow with the remaining homes. There won't be any more "multiple offers" for the homes that don't make the positive cash flow cut!!

The Foreclosure Printing presses have re-started with a vengeance and add to that rising mortgage rates and rising unemployment and you have all the ingredients for a massive relapse in housing!

Anonymous said...

Interest rates have risen and people dont have jobs or are scared for good reason they will lose their jobs. Not a good combination for a housing recovery. Numbers seasonally are better but wait until Sept and lets see where we are at.

Anonymous said...

The housing market has a long way to go nationally. The magic circle of real estate buyers has been broken once again (first time to stepdown retirement.) When this happens the starter homes need to come down to the price affordable to the first time home buyer.
Foreclosures will increase over the next two quarters and with the supply increasing and the prices dropping, qualified buyers, based on the credit markets, will be a slow recovery looking into 2011. I have been where the rubber meets the road in Mortgage lending and Real Estate for over 20 years. Never in my 50 years have I seen a market quite like this. Wall Street is to blame and until they can secure and strengthen mortgage backed securitys, get interest rates down to affordablility level the correction is not going to happen.
Job losses are a reality, without double income families who can really afford to purchase on one income. Fair market value perception in given markets and interest rates will be the two most important factors in the real estate recovery.
This time market indicators mean nothing and have had no positive effect, only actual factors on real available tangibles are pushing the market forward.

Anonymous said...

Jeff Mathews is an idiot!

Anonymous said...

Hahahaha... Good joke mate! do you work for Bernanke by any chance?

Stanton said... tracks MLS listings/inventory and price. Its just another data point but would seem to suggest some markets are bottoming. Check the price stability in the CA markets of late while Las Vegas continues to decline. Phoenix has been stable with a dropoff in listings... I don't know how much is due to seasonality but Jeff may be right on this one.