Wednesday, April 18, 2012

Architecture Billings Index Positive for 5th Month


Washington, D.C. – April 18, 2012 – "The commercial sector continues to lead the Architecture Billings Index (ABI) which has remained in positive territory for the fifth consecutive month (see chart above). As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI score was 50.4, following a mark of 51.0 in February. This score reflects a slight increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.6, down from mark of 63.4 the previous month."

“We are starting to hear more about improving conditions in the marketplace, with a greater sense of optimism that there will be greater demand for design services,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “But that is not across the board and there are still a number of architecture firms struggling so progress is likely to be measured in inches rather than miles for the next few months.”

25 Comments:

At 4/18/2012 10:26 AM, Blogger Benjamin said...

Happy for the improvement, but very slow.

If you have a deep recession and a real estate bust, recovery is going to be very, very slow unless you can reflate real estate.

Otherwise, bad loans and underwater real estate drag down banking, business and consumers.

See Japan for an example of a nation that had a real estate bust-recession, and then never reflated. Property values in Japan have been declining since 1992.

Not a pretty picture--but one we will face if we choose to pursue very low inflation rates.

 
At 4/18/2012 10:39 AM, Blogger Jon Murphy said...

If you have a deep recession and a real estate bust, recovery is going to be very, very slow unless you can reflate real estate.

True, but how should be go about re-inflating the housing market? Our problems were caused, in part, by an inflated housing market.

Part of the problem we are facing now is the frustratingly slow foreclosure process. We are not going to see a good recovery in housing until all the inventory is used up, and if we keep stopping or delaying the foreclosure process, it will just prolong this trend. I understand the desire to keep/put people in homes, but you can't put an entire economy at risk (again) over this.

Should everyone have a home? Sure. Can everyone afford a home? Hell no. If we keep people in homes they cannot afford rather than letting them default and rent, then the housing recovery will be mild at best. If we let Nature take its course, then construction can resume.

 
At 4/18/2012 10:54 AM, Blogger Benjamin said...

Jon-

There are countries, such as Canada and Australia that had real estate run-ups but no busts. France and Sweden also come to mind, to a lesser extent.

Obviously, there should have been better underwriting standards. However it is also true there had not been a sustained deflation in national home values since the Great Depression. Such home loans were then pooled--further minimizing risk-- and rated AAA. And sold globally to sophisticated institutional investors.

So now they pop, and we blame the Fed? Really? The market wanted to buy RMBS and CMBS, demanded the product, and it was sophisticated buyers who demanded the product. They gobbled it up. Now they blame inner-city darkies for the global bust.

If the Fed "caused the bubble," why were our smartest buyers buying? Should the Fed asphyxiate the economy any time any investment sector gets hot?

Anyway, that is in the past. Now we are here. We have both commercial and residential properties selling at 50-70 cents off highs. We cannot get a robust recovery going until those values get up towards 80-90 cents.

Loans are made in nominal dollars.

A solid round of reflation in real estate is called for--and I suspect buyers will not be so "stupid" this time, and will not buy loans pools that were too aggressively underwritten. The inner city darkies cannot fool them twice!

For that reason, now it is the perfect time to boom-boom-boom.

 
At 4/18/2012 11:02 AM, Blogger Jon Murphy said...

There are countries, such as Canada and Australia that had real estate run-ups but no busts. France and Sweden also come to mind, to a lesser extent.

True, but they didn't have policies in place that aggressively pursued home ownership like we did (CRA, Fannie and Freddie, mortgage interest deductions, 30-year fixed, etc).

Believe it or not, I am not blaming the Fed here. In this particular aspect of the crisis, the Fed is somewhat blameless. I'm looking more at political policies that required sub-prime mortgages, CDSs, a broken foreclosure system, and foolish home buyers.

None of that is relevant here, however.

My question is "how should we go about re-inflating the housing market?" Interest rates are at all time lows, the dollar is quite weak (reducing purchasing power of buyers), unemployment is still high. What should be done to re-inflate?

 
At 4/18/2012 11:07 AM, Blogger Moe said...

Fom what I have observed; auto dealers are spiffing up their showrooms BIGTIME.

 
At 4/18/2012 11:15 AM, Blogger Benjamin said...

Jon-

When you reach the "zero bound" the only option left is sustained QE--and that is what Milton Friedman, John Taylor, and Alan Meltzer all recommended to Japan. If you get more right wing that those guys, you wear jodhpurs and jackboots.

We should also balance the federal budget, through trims in entitlements and deep cuts in the USDA, HUD, Commerce, Labor and Defense. Homeland Security could be done away with entirely and the VA privatized.

Instead, we are doing a Japan--federal deficits and passively tight money.

Look for 25 straight years of decline relative to China.

 
At 4/18/2012 11:27 AM, Blogger Walt G. said...

The home interest tax deduction should be eliminated so people do not use that emotional trigger to overbuy housing thinking it is a great investment. I agree that buying personal housing is financially and emotionally better than renting in many cases, but buying too much house siphons away investment dollars that compounds better in other places.

 
At 4/18/2012 11:29 AM, Blogger Jon Murphy said...

When you reach the "zero bound" the only option left is sustained QE

I'm not sure a sustained regime of QE would work. QE necessarily raises prices (additional money in the economy weakens the value of the dollar causing prices to rise). If housing prices are at record lows right now and no one is buying, why would artificially inflating prices entice people to buy?

Furthermore, as prices rise, pressure would mount on the Fed to raise interest rates. At some point, they would have to. Since bank mortgage rates are indirectly tied to the Federal Funds Rate, mortgage rates would rise. Again, if people aren't borrowing at record low interest rates, what would entice them to borrow at higher ones?

Finally, none of this does anything to address the huge backlog of foreclosures in process. Until those homes hit the market, we'll only see further sluggishness.

One more question, when the Fed ends QE, and it will, what happens then?

I understand where you are coming from, but the problem here is that higher prices necessarily reduce the purchasing power of consumers. If wages do not rise in tandem, then having less money will not lure people back into the housing market.

 
At 4/18/2012 11:37 AM, Blogger Benjamin said...

Jon-

The Fed should publicly and transparently indicate it will end QE at some time, such as after six straight quarter of nominal GDP growth above 7 percent.

I suspect inflation will indeed entice many to buy real estate.

BTW, it is nice to have an exchange here on Carpe Diem with someone who has different viewpoints, and can express them without resorting to lowbrow insults and bombastic banalities. I enjoy reading your viewpoints.

I wonder if today Dr. Perry is filtering out some commentators?

 
At 4/18/2012 11:58 AM, Blogger Methinks said...

I agree that buying personal housing is financially and emotionally better than renting in many cases...

Emotions are too individual to evaluate objectively by a third party, so that part may be true. However, it is almost NEVER a financial win to own your family home. The numbers just don't work out and this is one the biggest myths going.

 
At 4/18/2012 12:15 PM, Blogger Walt G. said...

Methinks,

I think the own/rent home decision has two parts: 1) is it cheaper to own than rent, and 2) is a personal house a good investment especially if it is your only investment. My answer to the first question is maybe/it depends and the second question is definitely not.

 
At 4/18/2012 12:37 PM, Blogger Buddy R Pacifico said...

"The American Institute of Architects (AIA) reported the March ABI score was 50.4, following a mark of 51.0 in February. This score reflects a slight increase in demand for design services (any score above 50 indicates an increase in billings)."

If any score above 50 indicates an increase in billings then 50.4 is good, but tepid.

I will posit that arch billings will moderately rise over the next year, if only to give new looks to older buildings. There could be a pent-up demand building for freshness, especially in retail.

McDonald's stores are now having their second makeover in ten years. The faster turnover in looks and feel, seems to reflect the demand from consumers for refresshing of fresh.

 
At 4/18/2012 12:54 PM, Blogger Methinks said...

This comment has been removed by the author.

 
At 4/18/2012 12:56 PM, Blogger Methinks said...

Walt,

In a reasonably efficient market, rentals will not be more expensive than ownership.

However, in the zero-down rent-to-own market that persisted in the early part of the previous decade, the cost of buying was actually lower than than renting.

In that scenario, the option to walk away from the mortgage was given away for virtually free by the lender (in the end, it was largely paid for by the taxpayer, not the person who owned the option). A free option plus not having to account for the opportunity cost of the downpayment or the time preference premium pretty much swings the decision in favour of "buy" (with other people's money) instead of rent.

#2 I agree with. I finally bought a house only because I couldn't rent it or something similar and I wanted to make significant changes to it. But, I value the option to move VERY highly. For that reason, I waited until the value of the houses I would consider buying became a fraction of my total net worth.

 
At 4/18/2012 1:19 PM, Blogger Walt G. said...

Methinks,

I bought half the house of what I could afford in 1987 and was able to build a portfolio every month about equal to what I put in my house. I essentially rent now with about 20% equity and autopay a 3.625% mortgage payment easily every month from portfolio earnings. My REITs alone are up 10% this year, and my house is still worth exactly what I paid for it 25 years ago. I count my house in my net worth as a liability instead of an asset because cash flows out for it instead of in from it.

I know where some former $300,000 houses can be bought for half that from GM workers who can't retire until they sell them. Too many eggs in one basket in what was thought a "can't lose" deal. Even with a recovery, those houses probably will not sell for $300,000 again in their lifetime.

 
At 4/18/2012 1:39 PM, Blogger Jon Murphy said...

Thank you, Benjamin. That is very nice of you to say.

I try to not let myself devolve into insults and the like, although I sometimes will write/speak before I think. A discussion like that goes nowhere and is a waste of everyone's time.

I believe that, only through rational discussion, can we achieve a greater understanding of one another. This discussion is a perfect example: While I do not agree with your opinion, I see it is based on theory and has the good work of Friedman et al backing it up. Through this discussion, I have earned a greater understanding of your POV and, thus, a greater respect for you. Whether we agree or not is inconsequential.

 
At 4/18/2012 1:43 PM, Blogger Methinks said...

I encourage the conservative strategy of viewing one's home as an expense. It's much more difficult to get into trouble that way - particularly if you aren't accustomed to doing NPV analysis all the time, which most folks aren't.

Too many get into trouble buying into the myth that renting is "flushing money down the toilet" (it is ONLY if you don't value having a roof over your head) or that their is alpha in home ownership.

My parents bought a house in 1981 in a very nice neighbourhood near the Research Triangle Park - just before that area began to grow at an accelerated rate. Today, even with the improvements my parents made to the property, we calculated that the property has appreciated about 4-5% annually.

In "hot" real estate markets, the average annual price appreciation has traditionally been around 8%. Over the same time period (as the 8% calculation), the equity market has delivered average returns of 12% annually. I think you need to make some adjustments for liquidity and taxes to get apples to apples, but it's pretty clear that even hot real estate markets are hardly an optimal investment - unless personal preferences tilt one in favour of ownership. But for purely financial considerations, buying is rarely the better alternative.

 
At 4/18/2012 2:02 PM, Blogger Jon Murphy said...

Too many get into trouble buying into the myth that renting is "flushing money down the toilet" (it is ONLY if you don't value having a roof over your head) or that their is alpha in home ownership.

You make a good point, Methinks.

There are some people for whom owning a home makes sense, and others, not so much.

Take myself for an example. I am 23 years old and single. Do I need a house? I don't think so. I'm perfectly happy renting a nice apartment in a good neighborhood.

There are also many advantages to renting over owning. If something breaks in my apartment, say the plumbing, I can call the landlord to have it fixed and it doesn't cost me anything extra. Since I am not mechanically inclined, if that were to happen in my house, I'd have to hire a plumber/my father.

Also, my utilities (except electricity) are covered in my rent. No variable cost there.

Finally, and this is huge, I don't have to pay property tax. Here in New Hampshire, it's pretty much the only tax we have so it is quite large.

Would I like a house someday? Of course. Maybe after I get married and pay down some student debt. But right now, owning is not in my best interest.

 
At 4/18/2012 2:15 PM, Blogger Methinks said...

Jon,

Undoubtedly you are well equipped to run the numbers and decide for yourself. However, I suggest tweaking your thinking about the follwoing:

If something breaks in my apartment, say the plumbing, I can call the landlord to have it fixed and it doesn't cost me anything extra.

Also, my utilities (except electricity) are covered in my rent. No variable cost there.


As I recall, you hold an undergraduate degree in economics, so you are well aware that those costs are factored into your rent. And you're also probably aware that this fixed cost also includes a premium.

As for property tax, you are mistaken. That cost too is factored into your rent.

In other words, renting allows you to hold on to your put - your "move easily" option - and removes some expense variability, allowing for easier budgeting. But, you're still paying for all of those things.

 
At 4/18/2012 2:23 PM, Blogger Jon Murphy said...

But, you're still paying for all of those things

Right, but the cost is spread out (socialized, if you will :-P ) among myself and the other tenants. So, while I am still paying for it, it's not quite the same cost as if I were paying for it directly.

 
At 4/18/2012 2:24 PM, Blogger Walt G. said...

Jon Murphy,

Wouldn't the property tax be in your monthly rent? I know there is an imputed amount used by landlords, but I don't own rental property. I budget main categories of food, transportation, and shelter on a spread sheet.

You have excellent postings--especially for such a young man. Keep up the good work!

 
At 4/18/2012 2:34 PM, Blogger Methinks said...

Jon,

That's not quite true. The tax, for example is proportional to your unit. Theoretically, if you owned the same unit instead of rented, that's the tax that you would have been assessed on your property.

If your unit requires a lot more repairs than other units, then there's a case to be made that your repairs are being subsidized. But, if your unit requires fewer repairs than everyone else's (and you don't consider being overrun by repairmen a cost - which I do), then you pay the subsidy. Likely you are all paying a premium to remove the hassle of having to find and pay your own repairmen.

In other words, Jon. It basically comes down to how much you personally value that moving option and that maintenance convenience option. There's no financial arbitrage.

 
At 4/18/2012 2:41 PM, Blogger Benjamin said...

Jon-

My sentiments exactly. If someone disagrees with me, fine. No one learns anything in an echo chamber.

I reserve my bombast for ridiculing our two political parties, which i consider more than fair game.

 
At 4/18/2012 3:00 PM, Blogger Jon Murphy said...

In other words, Jon. It basically comes down to how much you personally value that moving option and that maintenance convenience option. There's no financial arbitrage.

I understand. Thanks, Methinks.

 
At 4/19/2012 11:07 AM, Blogger juandos said...

No Housing Recovery Until 2020 In 5 Simple Charts

Every day (for the past 3 years) we hear countless fairy tales why housing has bottomed and will improve any minute now. Just consider the latest kneeslapper from that endlessly amusing Larry Yun of the NAR, uttered just today: "pent-up demand could burst forth from the improving economy." Uh, right. Here's the truth - it won't and here is why, in 5 charts from Bank of America, so simple even an economist will get it...

 

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