Housing Starts Plunge – Apartment Building Bubble Is Popping

Every new apartment building in Denver is now offering one month free as a move-in incentive; some buildings will give you two months free if you push them. There are at least 12 new big buildings in central Denver in various stages of construction. – Investment Research Dynamics

Housing starts plunged 11% in May LINK.  Ironically, this comes a day after the National Home Building Associating reported huge jump in homebuilder “sentiment.”  Let’s remember, “hope” is not a valid investment strategy.

This housing starts number is about as bearish as it can get for the new construction market.  It is also consistent with my detailed research which shows that homebuilder companies have accumulated an all-time high level of inventory, despite a unit sales run-rate which is about 60% below the previous all-time high in inventory back in 2005:

HousingSentimentAs you can see from this graph to the left which shows homebuilder “sentiment,” industry “hope” has perilously disconnected from the reality of sales. Today’s housing starts report is consistent with the actual transaction data. Since when has a business – other than tele-evangelists – ever been able to convert “hope” into cash flow?

The Orwellian financial media is going to focus on the “housing permits” number.  But, to begin with, the filing of building permit is not a valid economic metric.  It costs next to nothing to file a permit and the act of filing for a permit merely gives a builder the right to build.  Second, and more important, the large jump in permits was for mult-family units:

startsandpermitsDespite signs of a glut forming in apartment buildings in most cities, builders filed “permits” to build even more buildings. I know from my own due diligence that every new building in Denver will offer a new tenant up to two months free as a move-in incentive. I am getting reader reports of similar
apartment gluts in many other cities.

Six years of ZIRP and $3.6 trillion of printed money has stimulated an unprecedented degree and catastrophic amount of capital misallocation.  Massive bubbles have formed in every major asset category:   bonds, stocks, real estate and collectibles.

The bubble that has reformed in the housing market is going to result in a more painful collapse than the original housing bubble.  More on this later, but data available from the National Association of Realtors and RealtyTrac shows that 40% of the sales volume this year has been driven by individual investor/flippers.  We are at the point in the cycle at which many of them will be left “holding the bag.”   To compound the problem, many of these “retail” home traders are now using mortgages to fund their  game of hot potato.

I can’t speak on this for every major city, but I know for a fact that in metro-Denver there has been a recent “flood” in home listings.  Even more indicative, I am now receiving “new price” alerts via REColorado several times a day, mostly in the over $800,000 price range. The glut that has formed in both rental apartments and higher end homes for sale in Denver is nothing short of stunning.

The Fed is out of the type of bullets that can be used to support the massive Housing Bubble 2.0 that it has premeditatively blown.  Interest rates are already at zero, although starting to rise uncontrollably on the longer end.  Mortgage rates have blown out close 100 basis points from the recent bottom.  Easy credit has flooded the mortgage banking system in many different forms.

To be sure, the Fed can print a lot more money – and most likely will.  But at this point in the game it will be the equivalent of pushing on the proverbial string.  Only this time the hole through which the Fed will be trying to push the string will be closed.

7 thoughts on “Housing Starts Plunge – Apartment Building Bubble Is Popping

  1. Fishy as normal beat down in PM’s today to flush out weak silver hands to lower catastrophic open interest in AG. Maybe Yellen the Dwarf will raise interest rates after all Wednesday? I doubt it, but I am ready for this epic-coming shit show to start! Thanks for all you do Dave!!!

  2. First off Dave – HAAAAAWKS!!! Chicago actually has a smile on its face today and it has NOTHING to do with politics or the dystopian economy.

    But this – makes more sense relative to what you are writing of late….
    Keep up the good work.

    By Daniel Indiviglio

    WASHINGTON, June 16 (Reuters Breakingviews) – Standard Pacific and Ryland have unveiled a purported merger of equals that actually approximates one. Investors even pushed both stocks up over 5 pct on Monday. The new group needs help from housing markets – but if it’s approved, the deal looks like a solid foundation.

    Full view will be published shortly.

    CONTEXT NEWS

    – U.S. homebuilders Standard Pacific and Ryland on June 15 said they had agreed to combine in what they described as a merger of equals. The combined entity will have a market capitalization of about $5.2 billion and 74,000 home sites. It would become the nation’s fourth largest homebuilder by sales.

    – Standard Pacific shareholders will own 59 percent if the new company and Ryland shareholders will own 41 percent. The transaction will provide about $50 million to $70 million in annual synergies, the companies said. Ryland Chief Executive Larry Nicholson will become president and chief executive of the new firm, while Standard Pacific CEO Scott Stowell will become executive chairman.

    – The companies expect to close the transaction in fall 2015. Standard Pacific’s largest shareholder, asset manager MatlinPatterson, has agreed to vote its 49 percent interest in support of the deal.

    – Standard Pacific-Ryland presentation: http://bit.ly/1cWLUd4

    – Reuters: Homebuilders Standard Pacific, Ryland Group to merge

    RELATED COLUMN

    Home run

    (The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

    – For previous columns by the author, Reuters customers can click on (On Twitter https://twitter.com/indiviglio. Editing by Richard Beales and Martin Langfield)

    1. The reason why? Simple. Merg or die!

      The second major housing crisis to hit the sector in the past 8 years is about to unfold. By merging they form a stronger entity to weather the fast approaching storm. Remaining single standing companies means they will perish.

        1. LOL!

          Dave did you hear that AMZN is under investigation in Europe for missuse of their dominant market position and could be fined with 10 % of their revenue.

          I hope that Bezos soon will suffer from the same type of disease that you described.

          1. Wait! What?? Amazon has revenues? When the hell did that start? Oh, wait, you said revenues, not profit. Whew, that was a close call.

            Thanks, Dave, for keeping us working stiffs in the know. Packers and Broncos in the Super Bowl.

            Matt

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.