Household Formation

August 29, 2008

One of Jim Cramer’s comments caught my eye:

There’s a tremendous amount of household formation, 800,000 every year, Cramer said. Four million babies born each year, divorces, 2.5 million new citizens…

One of the most fundamentals drivers of demand for housing is household formation. When you go from 200 million Americans to 300 million Americans, it creates a lot of new households, each of which has to live somewhere.

In tough economic times, people tend to put off forming households. They live longer at home with parents, or put off marriage. Blanche Evans writes:

Between the birth rate and immigration, legal and illegal, the U.S. should be adding about 1.2 to 1.5 million households annually. In 2007, we added half that number. What does household growth mean to housing?

Household growth is a good indicator of the economy. When money’s tight, people tend to double up. More grown children fail to launch and stay put in their parents’ basements, more renters sign new leases, fewer first-time homebuyers come to the table, which stifles move-up buyers, and the final result is that homebuying stagnates.

The National Association of Realtors argues that there’s a lot of pent-up demand on the sideline:

Since 2005, household formation has jumped back above the historic norm to 1.38 million units per year, with 1.63 of them coming in 2007. However, sales levels have fallen to their lowest levels in nearly 10 years. This recent trend suggests two things. First, a reserve of pent-up demand is being built up. Second, there is some factor precluding these would-be buyers from entering the market. With the economy slowing, employment and income fears may be weighing on potential buyers. Financing has improved at the lower price-range of the market, but jumbo rates are artificially high, and lending standards have tightened. Uncertainty over both issues as well as the foreclosure situation has likely created much consternation. Regardless of the reason, would-be buyers are sitting on the side-lines, but the steady march of an expanding demand base will not allow them to rest there for long. This pent-up demand will begin to strain the relatively tight rental market, forcing up rents until households opt to reconsider their confidence, reevaluate their affordability, and decide to jump back into the market.

Here’s another perspective, from January:

The always-thoughtful Tony Crescenzi of Miller Tabak, in a note this morning, says that the slide in new home inventory “is still more than 1.5 million above normal, but improvements are occurring. The inventory figure is foremost in terms of what is next for prices.”

He further points out: “The amount of new dwellings needed each year is roughly 1.1 million or 1.2 million because of increases in household formation related to population growth. This means that the amount of new construction is running about 400k to 500k below the level of household formation, an amount that will take a significant bite out of the level of excess inventory.


Cramer: Housing Recovery in Next 12 Months

August 27, 2008


A bullish prediction by Jim Cramer this morning focused on the following strengths:

We’re building fewer homes, so inventories have the chance to come down.

The recent housing-rescue bill authorized the Federal Housing Authority to put $300 billion toward getting homeowners out of difficult floating rate loans to the low fixed-rate kind.

Prices have come down enough to lure out the bargain shoppers, about an average of 7% year-over-year. Today’s S&P housing numbers showed declines of over 25% in some areas. That trend could continue.

At last the holdout markets have rolled over – think New York. When that happens, a recovery can happen.

If – and Cramer thinks this is a when – Fannie Mae [FNM 6.27 0.65 (+11.57%) ] and Freddie Mac [FRE 4.55 0.58 (+14.61%) ] are taken over by the government, mortgage rates will come down. They’ve been going up month to month recently.

The bulk of those teaser-rate loans – those that offer low rates for the first two years and then reset to much higher rates – will reset in the third quarter of this year because they peaked in the third quarter of 2006. That means there will be fewer foreclosures as a result because there will be few loans changing to those higher rates.

There’s a tremendous amount of household formation, 800,000 every year, Cramer said. Four million babies born each year, divorces, 2.5 million new citizen – they call create demand.

Immigration had been bringing in 1 million people a year, but that’s been cut back a bit. But both McCain and Obama are pro-naturalization, so that number could return to previous levels after November.

The horror shows that are the California, Florida and Arizona real estate markets are no longer bleeding into other areas. These heavy losses are being cordoned off, Cramer said, and different markets are evening out.

Lastly, even these horrible areas – Bradenton in Florida and the Central Valley in California – are bottoming. The first to fall is usually the first to return, Cramer said. He’s predicting that Miami and the Inland Empire are next.

Once that happens it will be the third quarter of 2009, and Cramer thinks he thesis will be apparent to everyone by then. So here’s the countdown: 309 days until June 30, 2009 – the deadline for a much-needed housing bottom.

Las Vegas Case Shiller Index Shows Smallest Decrease in 10 Months

August 26, 2008

Today’s Las Vegas Case Shiller index numbers show a drop of just 1.6%, a dramatic improvement over last month’s 2.9%, and the smallest decline since last summer.  The pace of price declines has trended slower since January, 2008, and this month’s numbers continue in the right direction.

The improvement is even more impressive given the conventional wisdom that foreclosures are still driving prices sharply lower.


-Frothing Mark

Golden Nugget Starts $121m Expansion

August 26, 2008

If you’re wondering why the Golden Nugget has decided to expand in today’s market conditions, you’re not alone.  Raise your hand if you think that Downtown gaming revenues are down sharply for the year, and down even more significantly in June, the most recent month for which numbers have been released.

If you could look around, you’d see a lot of hands raised, but the reality is that Downtown’s gaming win was actually up an impressive 10% in June.   Year-over-year revenue is virtually flat, which is a phenomenal result given 2007’s record numbers and the supposed weakness this year.

The team at the Nugget knows that if Downtown can stay flat in a down market, prospects will look very good when things begin to turn around.

Work is underway for a third hotel tower at the Golden Nugget in Downtown Las Vegas. The $121-million project will add a 25-story tower with street-level retail and gaming below a pool deck, three levels of parking and 524 guest rooms.  Completion is slated for December 2009.

Financing is already in place through a $500m credit facility the Nugget secured last year.

Read the full story here

-Frothing Mark

LVRJ: Las Vegas Growth Still Robust

August 25, 2008

Jennifer Robison discusses Las Vegas’ continued growth in today’s RJ:

Today, with job growth flat … the Silver State should experience tougher times attracting fresh blood.

But local experts say Nevada continues to lead much of the country in growth…

One key element of growth that’s more easily measured than sometimes lagging state statistics is public school enrollment.  The number of students in Las Vegas schools continues to grow.

Robison further notes:

  • State Demographer Jeff Hardcastle reported 95,287 new Nevadans between July 1, 2006, and June 30, 2007, the latest period for which he has data. That’s on par with the 100,000 or so new residents the state typically added annually in the late 1990s and early 2000s.
  • The U.S. Census Bureau in December named Nevada the nation’s No. 1 state for growth in the year ending July 1, 2007.
    • Nevada’s growth rate of 2.9 percent placed the state in the top spot for expansion for the 20th time in 21 years.
  • After several months of lagging behind year-over-year results, July’s turn-ins actually matched surrenders from July 2007, with totals in both months coming in at just over 6,100 licenses.

According to Brian Gordon, a principal in local economic research firm Applied Analysis:

“People are certainly still coming here….We’re expected to continue to hold the top spot going forward based on fundamentals in our market.”

Gordon says that new residents persist in coming partly because things are worse where they live now.

Nevada continues to enjoy a lower cost of living than California, so the Silver State holds appeal to people relocating from there.

People also move for noneconomic benefits such as warmer weather, recreational and entertainment opportunities or proximity to family, said Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas.

According to Gordon:

70,000 to 80,000 new neighbors bring fresh sales prospects for retailers, restaurants and builders. That could lead to more tax revenue, especially as the housing market stabilizes and consumer confidence improves.

-Frothing Mark

Inventory Drops Below 7 Months! Boo Yah!

August 22, 2008

It’s not really new news, ’cause I pointed it out on Wednesday, but it’s worth featuring in its own special Frothing Developer Instagraphic:


How do you get this number? Take the 3,173 units sold in July and divide into the 22,091 units. The result is 6.96. That may not be much less than 7, but hell, we’re optimists.

2 of the Fastest Growing Companies in America are Las Vegas-based

August 21, 2008

Let’s not lose site of the fact that Las Vegas is home to business growth. Inc. Magazine has just ranked Frothing Developer’s own  Group Gemstone  in the top five on its annual ranking of the 5,000 fastest-growing private companies in the country.

Las Vegas holds the unique honor of being the only city with two companies ranked in the top 10 on this year’s Inc. 5000. Joining Gemstone at #6 on the list is Just Like Sugar, a Las Vegas based manufacturer of sugar substitutes. Complete results of the Inc. 5000, including company profiles and a list of the fastest-growing companies that can be sorted by industry and region can be found at

-Frothing Mark