While the market was riding the roller coaster, we were setting and selling.
First, we had a great set – one of those that makes you want to come back for more. Granted it was 116 degree heat index, but the set went wonderfully. The best part of the day was the customer, who has purchased homes from at least four other modular companies, say this was the best modular home he has ever received. Nice!
Secondly, we got orders. A deposit for two single family homes and a commitment for a duplex. Way nice!
Is there any concern? Absolutely. Banking for our customers is a major hurdle. The lack of understanding of modular structures makes it even more challenging. But not to fear. We are about a week away from having a great video presentation showing homes, construction and – most importantly – customer testimonials. After all, it’s all about the house.
Now about that market….
Friday, August 12, 2011
Sunday, August 7, 2011
Spin Recovery
We’re not talking political spin today; we had enough of that from Washington lately. We’re talking about economic spin.
The analogy is a spin in flight. A plane enters a condition where one wing is ‘flying’ slower than the other, the slow wing loses its ability to generate lift and the plane begins to fall. Physics causes the plane to turn downward and inward, and this further slows the problem wing. It also accelerates the non-problem wing which speeds and tightens the spin. The spin tightens to the point where the plane may no longer have the aerodynamic control and the result is catastrophic. (For inquiring minds, the solution is immediate power back, nose down, full opposite rudder. Don’t forget it! Don’t let the spin go more than three revolutions even in practice! Change your diaper.)
Our housing economic situation has been spinning. The disabled wing -- housing values -- no longer provides support. In fact, values have weakened as the spin tightens. The other wing – mortgage financing -- still has lift but only if it can fly faster; i.e., stiffer credit requirements, greater collateral, tighter bank regulations, etc. Four annual cycles have come and gone, but the fundamentals hold:
• Power back – if we think more stimulus will carry the day, think again. Data consistently show the poor multiplier effect of government expenditures, and more losses in Fannie and Freddie won’t put Humpty Dumpty back together. Pulling back the throttle on federal spending will let natural economic forces take over. All good.
• Nose down – spins eat altitude; successful recovery occurs before all altitude is eaten. Housing values to date, excluding the disaster areas of Phoenix, Las Vegas, Detroit and Florida, have dropped 10-30%. This is scary but recoverable. Also, the rate of value diminution is declining; i.e., the worst appears to be over. Clear Capital, reported today in Bloomberg, said, “The moderation of the projected price changes generally reflects a flattening market.”
• Full opposite rudder – lower housing starts, lower rates of home ownership, private capital nipping at the edges of the securitized mortgage market, investors bottom fishing for rental/ultimate sale (but flipping is not back), bank accommodation (capitulation?) on valuations of REO, etc. All are clawing to stabilize the ship.
The bottom line – hang on; we’re coming out of it.
The analogy is a spin in flight. A plane enters a condition where one wing is ‘flying’ slower than the other, the slow wing loses its ability to generate lift and the plane begins to fall. Physics causes the plane to turn downward and inward, and this further slows the problem wing. It also accelerates the non-problem wing which speeds and tightens the spin. The spin tightens to the point where the plane may no longer have the aerodynamic control and the result is catastrophic. (For inquiring minds, the solution is immediate power back, nose down, full opposite rudder. Don’t forget it! Don’t let the spin go more than three revolutions even in practice! Change your diaper.)
Our housing economic situation has been spinning. The disabled wing -- housing values -- no longer provides support. In fact, values have weakened as the spin tightens. The other wing – mortgage financing -- still has lift but only if it can fly faster; i.e., stiffer credit requirements, greater collateral, tighter bank regulations, etc. Four annual cycles have come and gone, but the fundamentals hold:
• Power back – if we think more stimulus will carry the day, think again. Data consistently show the poor multiplier effect of government expenditures, and more losses in Fannie and Freddie won’t put Humpty Dumpty back together. Pulling back the throttle on federal spending will let natural economic forces take over. All good.
• Nose down – spins eat altitude; successful recovery occurs before all altitude is eaten. Housing values to date, excluding the disaster areas of Phoenix, Las Vegas, Detroit and Florida, have dropped 10-30%. This is scary but recoverable. Also, the rate of value diminution is declining; i.e., the worst appears to be over. Clear Capital, reported today in Bloomberg, said, “The moderation of the projected price changes generally reflects a flattening market.”
• Full opposite rudder – lower housing starts, lower rates of home ownership, private capital nipping at the edges of the securitized mortgage market, investors bottom fishing for rental/ultimate sale (but flipping is not back), bank accommodation (capitulation?) on valuations of REO, etc. All are clawing to stabilize the ship.
The bottom line – hang on; we’re coming out of it.
___________________________________________________
P.S.– it could be tougher. Check out ‘pitch up’ in the aerodynamic sense. Nothing like tumbling end over end through the air.
P.S.– it could be tougher. Check out ‘pitch up’ in the aerodynamic sense. Nothing like tumbling end over end through the air.
Monday, August 1, 2011
The Good News of the US Debt Standoff
In case you didn’t notice, the yield; i.e., implicit interest rate, on US Treasury Bills – 10 and 30 year maturity -- dropped yesterday to the lowest rate since November 30, 2010. The closing rates were 2.80% and 4.12%, respectively.
What does this mean? First, no one really expects the US to default on its debt. Granted some short term notes ticked up to reflect that payments may be delayed, but the world still believes the US will pay 10 and 30 year notes when due. On the other side of the Pond, Greece 10 year debt was 14.81% Thursday – implying a loss of about 40%. Translation – holders of Greece debt expect a haircut.
Secondly, it implies slow economic growth and a flight to safety. Why put money at risk if the economy is going to slow? At least put it somewhere; i.e., US Treasuries, where the principal is safe. This is somewhat of concern, but is more driven by near term expectations.
But take a longer view. Although growth may slow in the near term, the low rates for US debt indicate continued faith in the strength of the US… and this faith can only come from the belief the US is getting its house in order. If investors felt the machinations on Capitol Hill are just another partisan spat on the way to business as usual, they would be running for the exits. As is, they are hanging in and signaling belief the US is going through a sea change event for the better:
• Lower deficits,
• Reduced government spending as a percentage of GDP, and
• Reduced payments to individuals as a percentage of government payments.
It appears adult supervision has reached Washington. We are waiting to see, but it could be a great thing for the economy overall. Since the overall economic lethargy appears to be holding back housing formations, an uptick to release this pent-up demand would be a huge boost. Would it require increased liquidity in the private sector? Yes, but that is another issue.
Let’s just hope the market’s expectations become reality.
What does this mean? First, no one really expects the US to default on its debt. Granted some short term notes ticked up to reflect that payments may be delayed, but the world still believes the US will pay 10 and 30 year notes when due. On the other side of the Pond, Greece 10 year debt was 14.81% Thursday – implying a loss of about 40%. Translation – holders of Greece debt expect a haircut.
Secondly, it implies slow economic growth and a flight to safety. Why put money at risk if the economy is going to slow? At least put it somewhere; i.e., US Treasuries, where the principal is safe. This is somewhat of concern, but is more driven by near term expectations.
But take a longer view. Although growth may slow in the near term, the low rates for US debt indicate continued faith in the strength of the US… and this faith can only come from the belief the US is getting its house in order. If investors felt the machinations on Capitol Hill are just another partisan spat on the way to business as usual, they would be running for the exits. As is, they are hanging in and signaling belief the US is going through a sea change event for the better:
• Lower deficits,
• Reduced government spending as a percentage of GDP, and
• Reduced payments to individuals as a percentage of government payments.
It appears adult supervision has reached Washington. We are waiting to see, but it could be a great thing for the economy overall. Since the overall economic lethargy appears to be holding back housing formations, an uptick to release this pent-up demand would be a huge boost. Would it require increased liquidity in the private sector? Yes, but that is another issue.
Let’s just hope the market’s expectations become reality.
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