Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
THE ONLY REAL SURPRISE in the latest disastrous batch of data on housing is that anybody is surprised.
With the $8,000 tax credit originally set to expire, housing starts plunged nearly 11% in October, to a seasonally adjusted annual rate of 529.000 units. That put new home construction back to the dismal levels of last spring before a temporary blip lifted housing activity during the warm-weather months.
Even though the home-buying subsidy was extended through next March and expanded beyond first-time buyers, there's little evidence that these giveaways are working. Applications for mortgages for home purchases, for instance, fell to a 12-year low last week even with a 30-year mortgage going for well under 5%.
For reasons best understood themselves, analysts had forecast an uptick in housing starts to the 600,000 annual rate in October from September's 592,000 pace. While the lowest fixed mortgage rates and reduced home prices have kept housing from collapsing further, the 10.2% unemployment is working against home buying. Meantime, foreclosures, which are running at 300,000 a month are adding to the inventory of homes available for sale.
In other words, prospective buyers have an array of houses available to them in most regions at knock-down prices. But there's no reason for them to hurry while apartment rents are tumbling. Builders, meanwhile, would be loath to build new houses on spec, even if their banker would provide the financing.
All of which points to an extended period of depressed housing activity after the excess supply from the boom built on absurdly easy credit is worked off. This is an example of what economists of the Austrian school call "malinvestments," which are the inevitable result of a credit inflation. The boom results in an inevitable bust, during which past excesses have to be corrected, however painfully.
That's not in keeping with 20th century let alone 21st century political realities, which mean government actions to counter the downturn. Don't waste time debating the merits; the matter is settled. For practical investors, the question is the effectiveness of the government's efforts.
Even with the Federal Reserve's program to buy over $1 trillion of mortgage-backed securities and the myriad other schemes to bolster housing, including the tax credits for homebuyers, the government isn't getting much bang for all those bucks.
As noted here previously, the $8,000 tax credit for first-time homebuyers may have actually cost the government $43,000 for each extra house sold ("Homebuyers' Handout -- Worse Than Cash for Clunkers," Oct. 21.) That's because most of the recipients of Uncle Sam's largesse would have bought a house anyway. Now that the credit been extended to next March and applied to home buyers who were previously homeowners (with some restrictions), who knows how much extra incremental house sale will cost the Treasury.
Yet another federal housing-support program also is looking like a boondoggle. The Federal Housing Administration, which backs home loans with down payments of as little as 3.5%, has become the new subprime lender, some contend..
That charge comes from Robert Toll, chief executive of luxury home builder Toll Brothers (ticker: TOL.) As the Developments blog at wsj.com reports, Toll called the FHA a "definite train wreck" at a builder's conference Wednesday, a week after the agency reported its insurance reserve ratio had fallen to just 0.53%.
The FHA has become one of the sources of low-down-payment home loans, but that's led to soaring defaults. "What the government is doing is beyond belief in that once upon a time... FHA did very small percentage of business in the country," the Developments blog quoted Toll as saying. But he noted that the agency's market share has boomed in recent years "and the reason is, yesterday's subprime is today's FHA." The FHA avers and contends its borrowers' credit scores have increased to 690 from 625 two years ago and has improved its risk control.
But, as the latest Fed survey of senior bank loan officers released last week showed, private credit conditions continue to tighten, including for residential mortgages. And given the overhang of unsold homes -- plus a shadow inventory from homeowners who have been holding back from putting their house for sale until the market improves -- no wonder homebuilders are glum.
The National Association of Home Builders/Wells Fargo index of builder confidence hovered at a low 17 for the second straight month in November. A reading below 50 denotes conditions respondents deem as poor. The gauge averaged 16 last year.
"What the government is doing is beyond belief in that once upon a time... FHA did very small percentage of business in the country," Toll said.
But he noted that the agency's market share has boomed in recent years "and the reason is, yesterday's subprime is today's FHA."
Even with housing affordability the highest in years from low mortgage rates and reduced home prices, there's little reason to expect a revival in homebuilding as long as the inventory of unsold houses and foreclosures remain high, credit is tight and unemployment is in double digits.
Perhaps that's why the shares of the big public homebuilders, as represented by the SPDR S&P Homebuilders exchange-traded fund (XHB), topped out two months ago and have been moving sideways to lower since. That says more than economists' misguided forecasts of rising housing starts.
Comments: randall.forsyth@barrons.com
This copy is for your personal, non-commerical use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Sterne Agee says a value-driven environment would favor some retailers.
Sterne Agee says a value-driven environment would favor some retailers.
Jefferies raised views on the software giant on a smooth Windows 7 launch.
Hilliard Lyons likes KBW Bank and KBW Regional Bank.
Credit Suisse is also wary of higher credit losses and capital raises.
Contrarians who think the greenback can't keep falling forever can play this Dollar Bullish ETF. Video: It's Time to Get Dollar Bullish
Pradeep Sindhu sold 150,000 shares of the network-operating systems firm.
A weaker-than-expected fourth-quarter outlook is pressuring shares of the discount retailer. However, investors should consider buying on this dip.
Howard Weil initiated coverage at Outperform.
Wall Street doesn't go negative often, but when it does, it's often right. (At SmartMoney.com)
Exxon is the biggest player in the oil patch -- and the best. Yet its stock is the second-worst performer in the Dow this year. Investors, grab this bargain while you can. Video: Exxon – Leader in the Oil Sector
The great disconnect between Wall Street and Main Street is sure to end in tears. Update on commercial real estate.
AN INTERVIEW WITH BRIAN MCMAHON: Solid stocks for dividend seekers.
Investors cast a skeptical eye on the re-awakening IPO market.
Stocks rally more than 2% in a second week of gains.
Retailers could enjoy a much stronger Christmas than Wall Street expects. Five stocks to put in your shopping cart.
Earnings could grow at least 10% in coming quarters, driving stocks higher.
Sam Zell and other legendary investors offer their picks -- and pans.
OptionMonster man vets government's Goldman deal.
Read Full Article »