Tuesday, March 17, 2009

Why Are We Building More Condos!!!?


That was the sound of my hand slapping my forehead in disbelief. Housing stocks jumped on the news that housing starts rose 22%:

"March 17 (Bloomberg) -- Housing starts in the U.S. unexpectedly snapped the longest streak of declines in 18 years in February, adding to signs that the pace of the economy’s decline may be easing.
Work began on 583,000 homes at an annual rate, a 22 percent rise from January, the Commerce Department said in Washington today. The jump was influenced by warmer weather and an 82 percent surge in starts on condominiums, apartments and townhouses that’s unlikely to be sustained, analysts said."

Quick Take:

What in the hell are these builders thinking? We have 11 months of housing inventory guys! There are empty condo buildings all over the frickin place. We don't need anymore capacity. All of these empty condos will end up being apartments so we don't need more apartment building either!

The question I have here is why are the banks allowing these builders to continue to build? They are all bleeding red and already can't sell what they have currently built. Are we so desperate for economic growth right now that we are willing to add capacity in areas of the economy that are in the middle of collapsing?

Hellooo!!!!! Anybody home? We just saw the largest housing bubble in American history burst! I am sure the banks can find better borrowers to lend to.

Note to builders: STOP BUILDING!!! If anything, we should be burning houses down right now instead of making new ones.

Rally On!

So why did stocks soar again today? Because ummm........ because ummmmm.... ahhhh... actually I gotta be honest, I have no frickin clue why stocks rose again today. Here is the explanation(if you can call it that) from Bloomberg:

"March 17 (Bloomberg) -- U.S. stocks advanced, erasing more than half the loss in the Standard & Poor’s 500 Index since President Barack Obama took office, on an unexpected rebound in homebuilding and speculation that the Federal Reserve will outline plans to bolster the economy.
Citigroup Inc. and JPMorgan Chase & Co. rose at least 7.7 percent as the KBW Bank Index extended its gain since March 6 to 46 percent. KB Home, the fourth-largest U.S. homebuilder, rallied 9.3 percent and Home Depot Inc. rose 6.7 percent as housing starts unexpectedly climbed 22 percent in February, the most since 1990. Apple Inc. added 4.4 percent to help lead technology shares higher after updating its iPhone software."

My Take:

The bull is back! Home building is back! Yeah Baby!(sarcasm off).

What in the hell are the bulls smoking? I wanna try some of that!

Seriously, you've got to be kidding me. There is no fundamental reason to like stocks right now. The rise in housing starts is bad because it will just add to bloated inventories. A smart banker once told me if you lend money to builders they will always build because its what they do.

The banks need to cut off the credit lines to the builders and force them to work down inventories and become profitable again.

I just laughed when I watched the market today. The talking heads on CNBC today reminded me of "the running of the bulls" in Spain. All you heard today was stocks are a screaming buy because the recession is going to end by the end of the year. Yeah right: SOLD TO YOU!

This rally reminds me a lot of the Bear Stearns rally: Lots of hope with no fundamentals. Its kinda funny because Bear Stearns happened almost the same exact time last year!

The problem today folks is things are very different now than they were a year ago: The economy is much worse today, and our debt levels gone through the roof to the tune of $11 trillion as a result of these bailouts.

Its amazing what a difference a year makes: Remember all of the outrage a year ago when the Treasury spent $29 billion fixing the Bear Stearns debacle? We wouldn't bat an eye if that happened today. Dollarwise, thats a drop in the bucket compared to today's bailout world. Hell, today we spend $29 billion a quarter now on companies like Freddie and AIG.

When you look at the reality of what we are spending its really disturbing:

Bottom Line:

As you can see, our debt obligations are soaring at a time in which our tax base is crumbling. When I look at this chart, all I can think of is how on earth are we ever going to pay for this?

I don't think anyone on this planet has the answer. The way I see it, this bailout spending is nothing but a giant economic experiment that's gotten completely out of control. Our lack of financial discipline in response to this crisis is going to haunt us down the road. The only way we will ever pay this off is buy slashing entitlements and living a much lower quality of life for several generations.

The government continues to try and spend spend spend its way into prosperity. This has been attempted many times throughout history and guess what? Its NEVER worked.

There is only one thing that's for certain once this spending binge is completed: We will all be debt slaves for the rest of our lives.

Raise cash!


Becky said...

Jeff, I also was floored that we rallied on MORE houses! To me, more housing starts is a contrary indicator! Love your blog! Thanks!

teddy bear said...


if builders would "STOP BUILDING" then the next bubbleheads "surge" would be at least 1000% :D

~600 is not even close to 2003 levels when the last BIG PUMPING began :D

Jeff said...



I always appreciate feedback.

A lot of times the market makes no sense when it goes up.

Bear rallies are always part of great bear markets. Recoveries are very rarely V shaped.

We will retest the lows. Its just a matter of time.

Jeff said...


Great chart!

I have never seen a historical look at housing starts.

Whats interesting with that chart is we have seen starts explode like they did during this bubble.

The difference with this one was the Ponzi lending products that were available that allowed ridiculous price appreciation!

Thanks for sharing.

Minton Mckarkquey said...

Jeff, great points as always - I had exactly the same reaction but with more curse words. The problem is that this is a zero-sum game - the money that's supposedly fixing the problem is coming from our future.

Btw, I'm in London this week and it's interesting to see how the meltdown has affected this city. Eating out has never been cheap here but restaurants are all completely dead now. Crime is also getting very prevalent, and many of the people I know are completely underwater on their mortgages. Of course, the UK government isn't handing out cash... yet. :)

Jeff said...


Thanks for the report from accross the pond.

We are pretty screwed here in the US but Europe seems to be screwed worse so I am not surprised.

Hopefully you are enjoying the benefits of a stronger US dollar over there!

Travel safe!