Archives for posts with tag: economy

The Housing Pendulum Swings Again!

February 3, 2015 //
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One of my favorite bosses, Tony, always said that most things in the world swing back and forth like a pendulum. In society and in business, we see this all the time. This is easy to see in commodities like corn or soybeans. We go from a shortage and high prices one year to everyone planting these same crops with a market glut and low prices resulting the next year. We love the free and easy flow of information on the Internet till we want to restrict it because it can invade our privacy or use our information for someone else’s commercial gain. Prices, regulations, even emotions, often swing like a pendulum.

With the start of a New Year and our economy generally improving, I wanted to talk about the Housing Pendulum which usually swings on a decade long cycle. I know you are thinking, wait a minute, we are barely out of our worst housing, construction downturn since the Great Depression! We can’t be getting into trouble again with Housing! Let’s look at a couple things going on right now.

Housing Prices. We were just in Naples, FL. for a visit. Remember in the early 2000s when resort and second home places like Florida, Las Vegas, and Arizona had prices jump 10-20% a year. And then they fell 50% or more a couple years later. In our downtown Naples area, the same condos went from under $1 million to $1.6 million. Then they fell to under $1 million after the 2007 Housing Bubble and stayed there for a few years. Now these condos that sold two years ago for $1.1 million and last year for $1.3 million are going for $1.5 million. And there is a growing shortage of inventory to buy. The City of Naples just issued the most tear down permits in its history as the old, small, outdated cottages are being replaced with new, trendier ones twice as big that fill up every inch of the lot or of two or three lots. The pricing on the new ones begin around $2 million. Is this just true of fancy resorts and second home places, you may be thinking?

My wife and I just listed and sold our downtown Chicago condo in ONE DAY and for the FULL price! Go figure. This is still less likely outside of retirement resorts but it is happening for the first time again.

Government Assistance to Housing.  A recent Wall Street Journal article talked about how the two government agencies that buy mortgages, Freddie Mac and Fannie Mae, just issued new, relaxed mortgage standards. They will now allow as little as a 3% downpayment on a mortgage especially from low income people who have trouble coming up with a larger downpayment. These are the same two agencies that were partially blamed for the last housing crisis, for helping to bundle and sell high risk mortgages. And the same two agencies, that some in Congress and government suggested, should be disbanded. It is wonderful to want to help people struggling to buy a house and especially a first house. But the last time around, this group that struggled to buy a house with little of their own money, were the ones that defaulted or walked away from their mortgages. And it will happen again. And our government is helping.

So to some it may seem too early to worry about the Housing market tanking again. But to this old, long time building material guy, it seems like the Housing Pendulum is starting its swing. The last time it almost bankrupted Wall Street and our overall economy. Consider yourself warned!

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The Housing Problem

June 1, 2014 //
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The stock market is hitting new heights so far in 2014. Unemployment is not great, but at 6.3% it is the lowest since 2008 . The economy should be doing well. But Housing and the vast amount of building products and household goods it pulls along are not doing so well. The news media is just starting to talk about all this, but they are not sure what is wrong with Housing.

At first, some thought it was the terrible weather throughout much of the nation this past several months. But now its warmer, (watch out Al Gore for that climate change) and Housing, especially new Housing, is still slow. Some people say that interest rates on mortgages are up and that that is the issue. Although mortgage rates are up from the bottom they are still quite low by historic standards at just over 4% for a 30 year loan. One article about Warren Buffet’s real estate brokerage firm, mentioned that the lack of first time buyers, who usually make up over 40% of buyers but is now under 30%, is the issue. Bingo!

Having been around construction and building materials for way too long, that is the real problem. But to me it is not a Housing problem. It is a major issue with the economy problem. And I will try to explain why.

In endless conversations with my friends in Florida or Chicago, one theme keeps coming up. These are people who are either at the peak or end of their working careers and who brought their first home, like me, in their early 20’s. The reoccurring theme is that my/this generation is still substantially supporting their children and/or grandchildren. I do not mean a cell phone bill or even medical insurance. I mean monthly or quarterly or annual large chucks of cash to keep their children afloat. If friends have three or more children, one or two are still on their “payroll”. It is very rare that one of my friends is not helping at least one child survive. So even if these parents help with a nice down payment on a first time house, how are these young people going to afford it? The average price of a new house today is back to the pre housing crisis level of close to $300,000! Even with a big downpayment, how can young people who are struggling as it is, buy and maintain a house?

Young people now graduate college or with advanced degrees with $50,000 or more of student loans that they must start paying on immediately. This is about the same amount most of my group owed on their first home mortgage!

What value does this generation get for their college and advanced degrees? Often not enough salary to pay back their student loans and live, let alone try to buy that first house.

And if these young people are having trouble buying a first home, how will they ever be able to buy up all the retirement and second homes that are owned by my generation in Florida, Arizona or Vegas?

It is a major problem, but it is not a Housing problem. I believe it is a major long term problem for our economy that our so-called leaders in Washington are ignoring like everything else that is unpleasant. So, hopefully, the media will correctly identify the real Housing problem, and soon, so that it starts getting the attention that it so desperately needs.

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Signs of our Financial Times

July 6, 2013 //
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Two separate, but somehow linked recent events reminded me of how our current, improving financial times are merely part of a never ending cycle. The mortgage crisis led to tight or non-existent bank credit to atone for our too free, lending years. Now the stock market, and even housing, seem to signal a return to a better economy just ahead. Which brings me to:

“Debt Makes Comeback in Buyouts” Wall St. Journal 6/13/13

You may have not noticed or paid much attention to this one. A software developer, no one ever heard of,  is being taken private by Bain Capital and another firm. The purchase price is almost $7 billion consisting of $1.25 billion of cash and the remainder in debt. This is less than 20% cash and far less than the 40% cash that lenders required only a year ago. In fact, to find this low level of cash in a deal like this, you would have to go back to 2007-8 before the financial crisis. Now Bain Capital and other large private equity funds often get treated much better than the average corporation or individual, but this is still a major swing in lending standards in a short time. I hope that deal works better than my sister Sally’s favorite example of H-P buying the UK software firm, Autonomy, for some $15 billion and then writing off most of their purchase price as a loss!

“Regulators Review Lending Standards” Wall St. Journal 6/13/13

This separate article stated that Banks have finally loosened their lending standards, as the economy is slowly improving. More than half the banks surveyed said they have eased the loan covenants or loan tests that borrowers must comply with, such as the ratio of interest costs to earnings. Again, in a recovering economy, you expect this to occur. But besides easier loan tests, banks have increased the terms of loan agreements while lending to many companies at all-time-low rates. The combination of these factors, if there is another economic slowdown, not even a recession, could be very problematic. And you thought we solved all the banks’ problems the last time?

I mentioned a cycle at the beginning. An old boss of mine, Tony, used to say that cycles swing back and forth like a pendulum. Bank lending goes in a cycle just like the economy and just like everything else. And even though only large private equity firms or large corporations are currently benefitting from this easier credit trend, you can bet it will soon be credit card issuers and even mortgage lenders before too long. And then somewhere down the road, there will be another financial crisis and everyone will demand that our government solve their problem. Again. Good luck with that!

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