To: russwinter who wrote (66049) 7/14/2006 4:17:00 AM
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Similarities In Housing Trends To 1980s Crash
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By Janet Morrissey
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Raymond James analyst Rick Murray offered the most dire predictions yet for the home-building industry: He believes home-building stocks could fall another 20% to 40% before hitting bottom, and he warns of a startling number of similarities between the current housing environment and the one that led to a crash in the late 1980s.
Murray slashed his earnings projections for home builders again, where he is now forecasting a 17% decline in 2006 and 45% drop in 2007.
In a report, released Thursday, Murray said historical data and current trends appear to indicate that the home-building sector has not yet troughed.
Murray said a number of factors, such as affordability, excess inventory, orders, and the use of incentives and discounting are similar - or worse - to those seen prior to the 1980s crash.
"Based on the data points we're seeing vis-a-vis historical trends, the potential for that (another 1980s type crash) certainly seems possible, it not probable," said Murray, during a conference call Thursday.
Murray noted that the recession and Savings & Loan debacle, which exacerbated conditions in the 1980s, are not there today. Yet, he said "many of the data points today - somewhat surprisingly - look worse than they did back then."
Murray said homes are less affordable today than they were in the late 1980s cycle. The Raymond James housing affordability index, which takes into account home prices, median household incomes and 30-year fixed-rate mortgages, is currently at 90.2, which is below the 96.1 level in 1986. "This is somewhat surprising given that interest rates today are 300 basis points lower than they were back then," he said. "Clearly the gap between home prices and wages has extended quite a bit."
Also the rate of homeownership has recently started to recede, which is similar to the trend seen in 1980s. The rate is currently 68.8%, down from 69.2% in late 2004. In the early 1980s, the rate fell almost two percentage points to 63.8%, the report said.
Murray said housing inventories have been increasing in recent months, with inventory levels now at around 565,000 units. This is far worse than the 358,000 units that sat in the market in 1986.
Aside from vacant unsold homes, there is also "hidden inventory," which refers to vacant homes that investors purchased that have not been rented.
When vacant investor rental units and unsold houses under construction are included in the vacant inventory, Murray estimates there are currently 6 million vacant housing units - which is higher than in any time in history.
"We believe selling these inventory levels down to more normalized levels will take two to four years - similar in timeframe to the 1987 to 1991 housing correction," said Murray.
Demand has been falling off at a faster clip than it was prior to the 1980s housing crash. The report said builders have been reporting 30% to 50% declines in orders in the second quarter, which is far steeper than the 10% to 15% annual decreases experienced over three years in the late 1980s.
"What is somewhat remarkable about the recent order trends is that they have materialized in spite of meaningful growth in community counts and aggressive (use of) incentives," said Murray.
Slowing trends are taking a toll on home builders' profit margins, but not as much as they did during the 1980s - at least not yet. Murray expects margins to be down 300 to 400 basis points by the fourth quarter. During the late 1980s, margins contracted 1,000 basis points over a five-year period. Much of the margin erosion in the 1980s was related to writedowns on land positions - which builders are only starting to do now.
"We have only begun to experience the tip of the iceberg in terms of valuation impairment writedowns, which we believe are set to pick up steam in the quarters ahead," said Murray.
Murray said he doesn't believe home builders' stock prices reflect the potential downside that's to come. Although stocks are off about 45% from their peak in July 2005, Murray believes they could fall an additional 20% to 40%.
He said builders currently trade at about 1.2 times book value. But historically, home-building stocks often traded down to 0.9 times book value during troughs. In the late '80s, the stocks traded at only 0.6 times book value.
"As we analyze this data, we're growing increasingly cautious on the outlook for the recovery of housing," said Murray.
However, some other market experts believe Murray's comparisons and predictions may be premature.
"The Savings & Loan debacle and the recession were two very important elements that led to the cyclical downturn (of the 1980s), and those are not there today," said Fitch Ratings Managing Director Bob Curran. "The biggest issue going forward is the economy."
If GDP growth falls below 1% growth, flattens out or goes into a recession, "then that would be a real problem for housing," said Curran. Currently, he said nobody is forecasting such an economic downturn.
Elliot Eisenberg, housing policy economist with the National Association of Home Builders, said the economy is key.
"GDP growth is doing pretty well, the unemployment rate is at or near historic lows and the economy is producing jobs," said Eisenberg. "In the late '80s, we were heading into a recession."
UBS analyst Margaret Whelan said it's unfair to compare today's inventory levels to those in the 1980s since population and sales trends have dramatically changed. Since 1970, she said the number of households has increased 50% to 106 million from 70 million. Although there's more housing inventory than ever before, she said the number of homes relative to households is "at an all-time low."
Whelan agrees that orders have been falling at a faster and steeper clip than expected over the past quarter. However, she said they're also facing tougher year-over-year comparisons - which wasn't an issue in the 1980s because sales had not skyrocketed the way they did in the past few years.
Eisenberg added that one or two quarters don't make a trend.
"Let's see how it persists and where it goes," he said.
Curran concurred.
"Could this prove to be a more significant downturn than currently seems to be the case? Sure, it could morph into something more severe," said Curran. But using the results of one quarter to forecast a trend for the year and beyond is "a bit premature at this point."
Eisenberg added that home-building companies are much larger, better capitalized and better run than they were in the 1980s. "They're better prepared" and can react faster to slowdowns than they could in the '80s, he said. "To compare the public companies of today with the public companies of almost 20 years ago is almost comparing a car with a bicycle."
- Janet Morrissey; Dow Jones Newswires; 201-938-2118
(END) Dow Jones Newswires
July 13, 2006 17:12 ET (21:12 GMT) |
