FACT VS Fiction #3 From Casey Research

FICTION: The housing market is improving.
FACT: Would you like to buy a bridge in Brooklyn?

The following ran in Bloomberg:

April 16 (Bloomberg) -- Builders broke ground on more U.S. homes in March than anticipated and took out permits at the fastest pace in more than a year, a sign of growing confidence that sales will stabilize.
Housing starts climbed to an annual rate of 626,000 last month, up 1.6 percent from February's revised 616,000 pace that was higher than initially estimated, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, climbed to the highest level since October 2008.
Builders took advantage of milder weather following the February blizzards as they rushed to have properties available for buyers seeking to qualify for a government tax credit that expires at the end of June. The jump in permits signals demand will hold up even as foreclosures climb and the jobless rate hovers near a 26-year high.

On the other side of the ledger, the following ran in the Financial Times:

Whitehall Street International, Goldman Sachs' international real estate investment fund, has lost almost all of its $1.8bn of equity following soured property investments in the US, Germany and Japan, according to the Fund's estimates.
By the end of 2009, the fund was down to its last $30m, a paper loss of about 98 cents on the dollar, an annual report sent to investors last month said. The report said that Goldman was Whitehall's largest investor, with a commitment of $436m. Last year, Goldman took a loss of $1.76bn from all its real estate principal investments.

If the world's most successful investment house can lose essentially all its equity in a real estate fund, you know we're not in Kansas anymore.

This other dose of realism ran on Fox Business:

Commercial real estate is showing few signs of leveling out nationwide and several regions continue to get hammered by declining values. In this week's Beige Book, the Federal Reserve reported that "commercial real estate activity was slow across the nation," noting that only Richmond, Va., and Dallas have seen positive signs of late.
"In Boston, leasing activity consists largely of renewals, with many renewing tenants leasing less space. Manhattan Class A office rents were down 20% to 25% year over year. Contacts in Philadelphia, Richmond, Kansas City and Dallas expressed concern that lease concessions from landlords were putting downward pressure on rents. Commercial construction continued to be weak in most districts," the Fed reported.
In an effort to stem the tide of bank failures, several ideas to overhaul bank regulation have been put forward as part of the overall financial system reform, including one that would require banks to hold more capital and another that would create an "uber-regulator" by merging the Comptroller of the Currency and the Office of Thrift Supervision.

I can tell you that around here, the commercial space that was empty a year ago is still empty today. And I'm talking even about the prime locations.

So, how to explain the upbeat housing articles in Bloomberg, when the facts on the ground seem to indicate the exact opposite? Other than the steady evidence that Bloomberg has taken on a cheerleader role for the Democratic machine its boss is a solid cog in, builders may be looking to build simply because that is what they do.
What they'll actually be doing is assuring their future bankruptcies. The following excerpt from an email last night from Jim B., a fellow Casey subscriber and correspondent, sheds light... (emphasis mine).

Down here in Austin, there's a housing construction recovery in bloom. I spoke to one of the contractors today. He was very happy to have his ten workers back to work after over a year of no work at all. One minor problem: the home construction company wasn't paying him.
I'm guessing the companies are using their subcontractors as lenders and will repay the "loans" if/when the houses are sold. Their credit must still be in the toilet, so it can't get any worse. This looks ominous.
I buy distressed property, mostly foreclosures. The usual number of houses in foreclosure in Travis County in the mid-'90s was around 325 per month. Of those, about 30 had enough equity to make a deal work. The number of foreclosures about six months ago was about 825, and the number of good deals was still about 30. So, about 500 houses per month above the normal rate are being dumped into the Austin real estate market. Just how new construction will overcome this competition is a drama I'm waiting to see.
I agree with Andy Miller. Perhaps the guys that speculate that there are an infinite number of universes are right. Maybe our universe just bifurcated into a rational one and the one we're in.
Like you, I sometimes wonder if the dominant logic of my thought group is missing an important new something that fixes all the non-sequiturs. So far I just don't see it.
Cheers,
Jim

At some point, real estate will again be a great investment - but for now, holding fire on new purchases seems the right thing to do. As for buying housing industry stocks or bonds - not hardly.