NAHB LogoThe last time the average of the NAHB Single Family Indices went over 95% as a scaled measure of home builder pessimism was November 1990. The current cycle reached the same level of despair in September of this year. The mean for the historical data going back to 1985 is 39.56%. Contrary to the media meme about the unprecedented speed of the decline of the current housing slump, the sentiment for current cycle has been -to this point - only 10% more doom and gloom than the last major slump. It took 20 months in the 1990 slump for the pessimism to go from below the then historical mean to over 95%. In this cycle it has taken 18 months. This may well be the end of days, but the people who make a living deciding when to pound nails seem to be taking the usual amount of time to go from thinking "the sky's the limit" to asking "brother, can you spare a refi." It has been enough to make us loser investors in the financials want to go ALL IN, and so we have - all the while hoping and praying that the ticking sounds we hear are the tips of the old men's canes on the cobblestones.





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1 Comment so far

  1. Craig Bowles on November 20, 2007 11:21 am

    One thing about the 1990 slump is that 1988 and 1989 wasn’t so strong either. Looking at prices, the slump in real prices normally takes more than a year or two to bounce back. So, we could see a low in prices and still not go anywhere for a couple more years. Haver Analytics shows since the beginning of 2005, homes available for sale have doubled from around 225,000 existing homes to 450,000. A site folks may want to check out is It computes CPI using the 1980 and 1990 calculations which puts inflation at 11% and 7.5%, respectively. Historically, we’ve seen single digit P/E’s when inflation is that high. Recently though, the Call/Put ratio reached 1.00 which is where the previous short-term bottoms were made. Longer-term, we’ve got an inverted economy with the lagging index the strongest and the leading index the weakest. Lagging indicators such as debt levels, labor cost, and duration of unemployment take time to work off. Stocks normally do best when the lagging index moves negative. When the lagging index is strongest of all, this is an economic setup for bonds and has been for quite a while. The leading inflation index shows slightly postive growth rates but should move negative again in November and is doing a slow rollover when you look at 2-year smoothed growth rates. Industrial material commodity prices are doing the same slow roll and normally coincide with corporate profits. The Fed is too tight relative to the combination of coincident and CPI growth rates. Stock investors need the Fed Funds to be 80 basis points below. The stock market 2-year smoothed growth rate has broken the moving average for the first time of this expansion in 2007. It just looks like everything has been in slow motion for a couple of years but the rollover is taking place just the same. The thing with houses is that there are so many big ones. If heating and cooling costs are like the 1970s, who wants a big house? We could have a shortage of small homes and oversupply of large. Same with cars. Then you think of all the second homes with demographics rolling over in 2008. More people retiring than entering the workforce may make folks not need a vacation home. The Long Cycle is an 18 1/3 real estate cycle that dates back into the 1800s. We’re late in the 9 year period of expected weakness and the cycle turns favorable in 2008, so that’s a positive. Favorable and weak is relative though and housing normally is a very good indicator of the economy. Housing didn’t decline in the last recession and late 1950s probably due to demographics but it’s hard to see housing doing well with the economic setup requesting a recession. The Fed is fighting something that Austrian school economists said was necessary given an active Fed. We used to have a 2-1 ratio of expansion and recession but it’s been something like 6-1 since 1950. During weak periods, the ratio was 1-1. The Fed probably helped extend the ratio but it would be pretty rough to get the ratio back to a 2-1 average if that is what is natural for capitalism.


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