US Housing Market strong for Softwood

The US housing market has gone from disaster to doldrums.  Although some areas have bounced back quickly (New York and San Francisco most notably), the overall market appears to be stagnant.  But is it?  To know the real story, take a look at the industry that supplies the hungry US market.

 

Major Canadian softwood manufacturers, whose precarious profitability depends upon accurate forecasting, are predicting US housing starts of 835-900,000 in 2013, up from an estimated 746,000 in 2012.  By comparison, housing starts hit a low of 558,000 in 2008.

 

Already, the composite price of Random Lengths framing lumber (the most common wood used in homebuilding) has risen 27% in 2012, both from increased demand and the expectation of more.

 

The US housing recession is not over.  Yet, with immigration and family development continuing faster than housing starts, a full recovery is only a matter of time.

 

Doubting the US housing recovery is a popular pastime at present - but it is not wise to bet against such obvious statistics.

 

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"The best thing about the future is that it comes one day at a time."

 

Abraham Lincoln

 

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Why are US Home Sales so Bad?

This week, many US news agencies reported that home sales are down, prices are weakening, and it's all deeply confusing. Since interest rates are falling, shouldn't home sales be rising? Isn't that what Economics 101 teaches us?

Pundits give many possible reasons for this strangely low level of sales: lack of available credit, bad seasonal weather, weak consumer confidence, weak jobs outlook, tough mortgage lending standards, and more. I believe all of these excuses are nonsense.

Banks are willing to lend, and have the cash to do so. Consumers have the highest credit ratings they have had in years. And, bad weather doesn't account for nationwide weakness.

The reason US home sales are low is because people with excellent credit and good jobs simply have no reason to buy. This explanation is far too simple for economists to embrace, yet it is true. Take, for instance, the conversation I heard on Friday:
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Banker: "I haven't seen you in a while. Did you buy that property in Phoenix you were looking at?"

Client: "No, not yet. Prices are great down there! But, they're not going up. I heard on the news they might still be dropping. I don't think there's any rush. I think I'll just sit tight."

Banker: "I agree."

Client: "The prices sure are great, though."
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I hear conversations like this every day.

Thousands of investors are waiting to "jump in," but there is simply no incentive to buy right now.

At some point, of course, prices will take off like a rocket ship - that is, slowly at first, gaining momentum steadily (once people realize prices are rising again) until going at full speed. However, no one knows when that point will be. It could be years.

Strangely, and counter-intuitively, I believe that in order to spur home purchases, the Fed should do exactly the opposite of what it is doing. That is, it should steadily increase interest rates. Last year, when the Bank of Canada announced that it would be raising rates, there was a frenzy of buying activity (which has since slowed, since they are now lowering rates). Contrary to every economics paper every written, I think the reality of rising rates would kick-start a home buying recovery.

In any case, my advice (as I have pointed out previously), is that if you want to buy real estate and are able to do so, do it now. Interest rates are extremely low, prices are extremely low, and with a large number of homes on the market you can choose whichever property your heart desires. Buying at a time like this will never be a bad investment.

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"Space is big. You just won't believe how vastly, hugely, mind-bogglingly big it is. I mean, you may think it's a long way down the road to the drug store, but that's just peanuts compared to space."

Douglas Adams

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See also:

If Mortgage Rates Keep Falling, Why Are Home Sales So Bad?

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Let’s just say what we really think about Barack Obama

An Open Letter from Donnie Drumpf to the American People


Dear Citizens of America,

In recent days, the media have played into my doubts about Barack Obama’s citizenship, his academic abilities, and more. But now I am thinking, “Why all this pussy-footing around? Why not just come out and say what we are all thinking?”

Barack Obama is a negro! Am I the only one who has noticed this? I referenced an anthropology textbook (just to be sure) and it is undeniable: he has big lips, a wide nose, and dark skin. He looks like a heterosexual version of Michael Jackson before he became white. Weren’t these people slaves just a while ago? How did we allow this to happen?

Obama has relatives in Africa, spent part of his life in Malaysia, and yet still speaks English more eloquently than I do. Do you know how annoying that is? Black people aren’t supposed to be good at English. They are supposed to say, “yassah, nossah,” and “You’s disrespectin’ me, Holmes.” Of course, there are other members of the blacks who sound like white people. I forgave Denzel Washington and Laurence Fishburne because they make good movies. But now a President? This is too much.

And that name: Barack Obama. What kind of name is that? “George Washington” is a good American name. “Abraham Lincoln” sounds a bit Jewish, but is still pretty good. “Barack Obama” sounds like the kind of person we look for in caves in Afghanistan.

We’ve tried labeling Obama as the anti-Christ, linking him to communists and racists, challenging his citizenship, and of course the general and sweeping comment that he doesn’t seem American. The whole time, he keeps smiling and saying, “We need to focus on the issues.” He talks about the economy, energy planning and health care - completely ignoring our requests for college transcripts. What is it going to take to get rid of this guy!?

Barack Obama is better educated than I am, obviously smarter, holds the highest position in the world, and even has a better beach body. What’s not to hate?

By the way, did I mention that I have the highest rated show on the Gonzo network? It’s a great show, with a great fan base. We have a great name. People would be impressed if they knew how much money I have. I’m important. Right?

Sincerely,

Donnie J. Drumpf®

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"Don't hate me because I'm beautiful."

Kelly LeBrock, 1980s shampoo commercial

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US Home Prices Drop Again

But is that bad?

In a story on CNBC, Home Prices fall for 8th straight month, David Blitzer, chairman of the Index Committee at S&P Indices, is quoted as saying, "There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing." When I read the same statement, I thought it was good news. Why the difference?

Everyone uses mental models in their daily life - whether they are aware of it or not. A mental model is a way of thinking, usually learned from the culture one grows up in, but often changed by education. A clear example is that in the West, most people believe that the mind/soul and body are separate. University educated individuals tend to use the scientific method to discover things, rather than logic or meditation.

Fictional character Sherlock Holmes famously uses “deductive reasoning” to solve crimes. Deductive reasoning is eliminating anything that must be false in order to find the last remaining item, which must be the truth. It is said that Sherlock Holme's author, Sir Arthur Conan Doyle, learned this technique from his university medical professor, who used it to diagnose patients.

Warren Buffett’s business partner, Charlie Munger, commonly uses “inversion.” Inversion is looking at every problem from the opposite direction from the normal one: for example, instead of asking, “How can we improve customer service?” Munger might ask, “How can we have terrible customer service?” The opposite of that answer is the way to have great customer service.

In Iraq, US soldiers and politicians often become annoyed because the Iraqis do not think of the relationship between cause-and-effect the same way we do. That is, they view the relationship between cause and effect as weak. If Iraqis take a day off to play cricket instead of building a new water pipeline, they don’t necessarily see the connection to having no clean water later that month. This difference in thinking is so frustrating for American troops that there is a whole series of military intelligence "lessons learned" documents devoted to it.

Now to examine David Blitzer’s comment: "There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing." Under normal circumstances, this statement would be perfectly logical. In a normal economic cycle, all these things indicate a weakening economy. David is inferring that low sales, low construction, and falling prices are bad – the traditional economist’s view. But is it truly bad? Or is David using a “fossilized mental model” – one that is not relevant for the situation?

The US had a housing bubble: that means there were unrealistic prices, oversupply, and sales to people who were not qualified. The remedy for a housing recovery is therefore lower prices, no new construction (until excess inventory is gone), and low new home sales (since foreclosures will be sold first). In other words, today's statistical weakness is exactly what the housing market needs to recover. At this point, strength in any of these numbers would be negative.

The banks can only release foreclosures onto the market at the same rate as the market is ready to absorb them. Since the banks control the flow of this inventory, new home sales and price stats are meaningless: any increase in market strength will be met by the release of foreclosures to match.

Prices are low enough that when the housing market does return, it will do so with a roar. Just like the bubble on the upside, the longer US housing numbers stay weak the more sudden and dramatic the recovery will seem.

Several months ago, I wrote that it was a good time to buy US real estate. Since then, in most cities home prices have fallen by about 3%. I do not apologize for this imperfection.

No one knows exactly when the market will recover, yet one thing is certain – buying quality real estate at a time of low interest rates and low prices will never prove to be a bad investment. Don’t try to catch the exact bottom.

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"Don't try to buy at the bottom and sell at the top. This can't be done - except by liars."

Bernard Baruch

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