• Markets
• Economy
• Federal Reserve
• Housing
• Energy
• Digital Media

Delving Deeper Into Housing

The spinmeisters approach to Housing is to live in Goofytown --  and if you check out your maps of Spin City, you will find Goofytown is right near the border of Absurdville. A quick look at the Housing data and charts reveals that the details -- you know, the numbers and charts -- simply do not match up with the spoken words from the dissemblers who endeavor to mislead you.

For example:  Yesterday, we saw New Building Permits drop, and we learned Home Buyer Mortgage Applications fell. That is consistent with what we have seen around our area, heard from the various builders, and learned via the warnings coming out of mortgage writers (See WaMu's conference call yesterday for the ugly details).

Then comes the New Home Starts, and its as if a life preserver was thrown to a drowning man. Part of the problem, however, is in the innumeracy in this nation, and in much of the financial press also.

Here is the data point released by the Census Bureau:

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 1,772,000. This is 5.9 percent (±8.9%)*

Single-family housing starts in September were at a rate of 1,426,000; this is 4.3 percent (±8.4%)* above the August figure of 1,367,000.

What is the mathematical significance of this release? ABSOLUTELY ZERO. Any datapoint below the margin of error is statistically insignificant.

As the Census Bureau notes:

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.

Insufficient evidence to conclude the change is different from zero. So September starts up 5.9% with a +/- 8.9% error rate means nothing. Single Family Home starts of 4.3% and a +/- 8.4% margin is meaningless.

However, do note the year over year change from  September 2005 -- down 17.9%, with a margin error of +/- 7.0% actually IS significant. That means the range does NOT include zero, but rather is from -10.9% to -24.9%. This data is consistent with the rest of what we see and hear from builders, mortgage writers and anecdotal evidence.

When you put it into context, the media focus on a phantom data point – one that the Census Bureau explicitly footnotes as “statistically insignificant” to be beyond absurd.

~~~

Next, let's have look at HMI -- the homebuilders sentiment index.  We noted on Tuesday that after 8 continuous months of freefall, there was a tiny blip upwards. To hear the reports on this, you would have thought we were in some new Housing renaissance.

Nope. Get a load of the thrashing my friend Kevin gave this nonsense: NAHB Housing Index Shows Dramatic, Imperceptible Surge:

-"US housing bottoming out!," screamed one headline (sold to you) 
-"Builder Confidence Stabilizes in October" the NAHB said
-A separate article noted the positive nature of the NAHB Index
-The index was up just one point to 31, but this is a positive considering the index has fallen in 13 of the past 16 weeks.

Kevin's take on the charts reveal the absurdity of the hoopla:

It is simply ridiculous to claim this is anything more than a blip.

And since we are speaking about absurdities, let's take a closer look at how home prices have supposedly remained the same:

"In September about 77% of home builders were offering some sort of sales incentive in response to spiking inventories, compared with 58% a year earlier, says Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders."

That's right, if you ignore the 10s of $1,000 of dollars in giveaways builders have used to incentivize buyers, prices have remained the same. With inventories are at all-time highs, giving away granite counter tops, subzero fridges,  covering all closing costs, free trips, inground pools -- even C class Mercedes  -- makes some sense.

But of course, that's simply a way to lower prices for Mr. Smith, without infuriating his neighbor, Mr. Jones, who payed 20% more a year ago.

The Housing led slow motion slow down continues . . .

UPDATE October 20, 2006 2:10:pm

This chart via Asha Banglore of Northern Trust reveals how absurd the spin has become:

The HMI edged up only one point to 31.0 in October. The index tracking present sales was unchanged at 32.0 in October. Indexes accounting for sales six months ahead (41 from 37) and the traffic of prospective buyers (23 from 22) moved up slightly in October.

>

Source:
Builder Confidence Stabilizes In October
NAHB
October 17, 2006
http://www.nahb.org/news_details.aspx?sectionID=134&newsID=3461

Mortgage applications ease 2.2%
CNN Money, October 18 2006: 9:42 AM EDT
http://money.cnn.com/2006/10/18/real_estate/mortgage_applications/

Housing starts pick up unexpectedly
Chris Isidore
CNNMoney.com October 18 2006: 8:43 AM EDT
http://money.cnn.com/2006/10/18/news/economy/housingstarts/

Home builders up ante to lure buyers
Incentives, discounts are pervasive as market slows and inventories climb
John Spence
MarketWatch, 4:16 PM ET Oct 13, 2006
http://tinyurl.com/ya84x9

Factory Sector Shows Widespread Softness
Asha Bangalore
Northern Trust Global Economic Research, October 17, 2006
http://www.northerntrust.com/

Thursday, October 19, 2006 | 10:15 AM | Permalink | Comments (34) | TrackBack (2)
add to de.li.cious | digg this! | add to technorati | email this post

Comments

If accurate the pickup up in housing starts would be bad news for the housing industry and market in general. The chief economist of the NAHB said as much yesterday - the market is suffering from a supply-driven correction.

The last thing it needs is more supply.

Posted by: anon | Oct 19, 2006 10:22:00 AM

There may not have been a pickup at all, since statistically, the number of starts created last month is within the range of %'s. In the downward phase, you get downward revisions. With RE dropping again in October, they will drop again.

Getting Starts down to 1.000 range is a priority to clearing the overhang.

Barry, relax, you sound like a screaming madman like Roubini lol..........

Posted by: Cherry | Oct 19, 2006 10:28:35 AM

I would argue that any number of housing starts over 1.4 million is actually making the situation more severe:

( 2.8 million population growth + 10% 2nd home market ) / 2.4 people per household + 100k demolitions = 1.4 million houses / year needed

So 1.7 million starts would be making the situation substantially worse.

What we need now are less than 1.4 million starts (assuming the calculation is valid) to draw down the excess inventory that is causing prices to fall and forclosures to increase.

Posted by: anon | Oct 19, 2006 10:50:16 AM

Cherry, A great point. Inventory of unsold homes is the key issue.

Posted by: dave | Oct 19, 2006 10:56:54 AM

“The disconnect between the two numbers surprised David Seiders, chief economist with the National Association of Home Builders, who said builders seemed to be working through a backlog of home permits they held for properties where they had not started construction.”

“Seiders said that a pick-up in building is not necessarily a positive for the market, which has seen the inventory of completed but unsold homes increase to record levels, pushing down prices and forcing builders to offer incentives to sell homes.”

“‘If both permits and starts were up I’d be scared because I think there are still inventory issues that we need to work through,’ he said. ‘I hope the bounce in starts is a temporary phenomenon. I think it’s inevitable that starts will be down in October.’”

Posted by: Mark | Oct 19, 2006 11:02:13 AM

Just a couple clarifications, mortgage applications for purchases did not decline, they rose slightly, refinancings fell. Also, housing start numbers for August were revised UP, not down.

I have been in the bubble=doom camp for a year and a half, so I'm not quibbling with the thesis. Just the kind of manic way it's expressed.

~~~

BR

Bob, where did you get that info from? I see something different (all down at) from the MBA

Ahhh, here it is: Purchase Index increased by 0.4 percent

Posted by: Bob_in_ma | Oct 19, 2006 11:12:17 AM

Agreed. This non stop deception is infuriating.
At the same time, at least for the short term, it does explain why home builders etc are on the rise.

Even more so, why market sentiment is so positive right now. I do worry that the sentiment will change quickly once some event happens that shows folks the nature of the deceptions.

I hope that I can see it coming before the move gets away from me. It could be a great profit possibility

Posted by: advsys | Oct 19, 2006 11:28:58 AM

Could not agree more..Spin, Spin, Spin...I feel like the press is a washhouse with about 20 washing machines going at any time.

Thanks for the information and perspective and I work for a Forture 500 and yes people just do not understand risk is associated with a range as well as a forecast so margin or error is key to understanding possible events.

Posted by: Jrs | Oct 19, 2006 11:35:57 AM

One thing that's a key point of contetion: How much "spillover" impact will the housing mess have? I was, frankly, expecting more than we've seen to date. It seems to me that the very latest economic data is simply not as bearish as I expected. I mean, shoot, look at the initial jobless claims today -- back below 300,000! While job creation hasn't been anything to write home about, job cuts don't appear to be anywhere on the order of catastrophic either. And as I've been talking about here for a while, the bond market appears to have pulled back prices from the economic brink. Is that a signal of some firming, too? Just throwing it into the rink for consideration.

On the other hand, WM wasn't the only dog to dump on the mortgage market. LEND is self-immolating today as well due to a warning about higher loan losses, tighter subprime market conditions, and more.

http://interestrateroundup.blogspot.com/

Posted by: Mike_in_Fl | Oct 19, 2006 11:38:40 AM

I get perturbed 'cause I have CNBC on all day.

Someone sez something idiotic , and then I mute it for the next 4 hours.

But the mental therapy for the stress caused by the bullshit comes out above ...

Posted by: Barry Ritholtz | Oct 19, 2006 11:58:00 AM

Employment usually is lagging. The 2001 recession was presaged by upticks in year-over-year claims growth, but that was at the tail end of an employment boom. The recovery since has been the weakest for employment on record; I do not expect claims to be the canary in the coal mine this time around.

Posted by: wcw | Oct 19, 2006 11:59:02 AM

http://www.latimes.com/classified/realestate/la-fi-foreclose19oct19,0,4110776.story?coll=la-home-headlines

More Homeowners Going Into Default
A housing market slowdown combined with rising payments on adjustable-rate loans is leading to a sharp hike in notices from lenders.
By David Streitfeld and Martin Zimmerman, Times Staff Writers
October 19, 2006

Posted by: Bob A | Oct 19, 2006 12:18:25 PM

Thank you for the morning chuckle.

Posted by: lola | Oct 19, 2006 12:25:29 PM

I believe the that an increase in starts and a decrease in permits is totally consistent. Houses that are being built now have been in process for a long time. It pays for the builders to complete these homes. However, a decrease in permits shows that they are trying to cut back on future building.

Posted by: GerryL | Oct 19, 2006 12:35:02 PM

I get perturbed 'cause I have CNBC on all day.

Someone sez something idiotic , and then I mute it for the next 4 hours.

But the mental therapy for the stress caused by the bullshit comes out above ...

As a trader, however, you have to think that this kind of disinformation is creating market inefficiencies. So from that perspective it's a "positive". The question then is one of timing the "snap back" to reality.

Who doesn't think there's another healthy shorting opportunity with the homebuilders coming down the pipes?

Posted by: anon | Oct 19, 2006 12:38:05 PM

The front end of housing development construction has some similarities to commercial construction. A lot of time and effort are involved before the first shovel full of dirt is turned. At this point future plans are being put on hold, but many projects in the pipeline are continuing forward. It is a fairly typical inventory expectation problem.

In addition builders in areas where business has slowed will begin to "invade" geographic areas that are not as badly hit (remember most builders are relatively small and with a limited geographic reach). In some cases they can do this quickly because they will piggy back on the front end work of others who have pulled out. At this point areas that were looking like they were going to pull through with a "soft landing" will also turn down.

The slow down will keep going through next year. The cancellation by the big HBs of their land options makes this rather obvious. Given the long lead times needed to get housing developments started you would not expect a real recovery until at least Spring of 2008 (with a soft landing).

Posted by: russell120 | Oct 19, 2006 12:48:05 PM

Increase in house starts makes perfect sense. If you are builder and see prices falling, you want to have your homes built faster and ready for sale before your competitors.

The sooner the housing inventory is built out, the sooner the builders can start lay offs. Once you've got a significant inventory, all you need is a skeleton sales staff on the payroll.

Posted by: MAS | Oct 19, 2006 1:14:31 PM

I like the enlargement of the detail and think it shows great promise. The next time your physician asks you about erectile dysfunction for instance, you'll know how to respond. There was an uptick. There was.
This was no ordinary blip. But does the other party have the patience to see it your way? She doesn't.

Posted by: calmo | Oct 19, 2006 1:16:27 PM

Increase in house starts makes perfect sense. If you are builder and see prices falling, you want to have your homes built faster and ready for sale before your competitors.

Red Queen Effect. Homebuilders are accelerating into a brick wall.

Posted by: anon | Oct 19, 2006 1:21:52 PM

Weldon claims (data from RealtyTrac) there are 25,000 more condos under construction in FL than THE TOTAL # SOLD in the past 9 years. And FL foreclosures in AUG+SEP=29,000 - again more than those currently under construction or sold the past 9 yrs... FL foreclosures up 43% yoy, MI and CO also cratering, commercial bank lending thru the roof, additional supply only adding to record inventories, etc. When does this spill over? Beats me, just wait for the trend to bend I guess.

Posted by: mojave | Oct 19, 2006 1:27:54 PM

There are many explanation of this rise in home starts:

1. It could be statistical error, as Barry said

2. Dramatic fall in demand for land. In order to get rid of land you need to build something on it. Moreover, rather than lose on land right now you better lose on house next year. This loss will be hidden from investors for a while

3. The most important one. Banks maintain your credit based on how many houses under construction you have. If you scale down you need to pay back the loans or bankrupt. If you start new homes bank will let you keep the credit line like it was.

You see?

Posted by: bob | Oct 19, 2006 1:40:27 PM

BR - I agree with you on your basic thought - that the start/permit numbers have been bullishly overhyped. OTOH, It's been a while since I did stats, but I'm not so sure about your suggestion that the margin of error renders the numbers meaningless.

Assuming errors are normally distributed (nice looking bell curve), the published figures represent the most probable true figures. Eg., SF starts up 4.3% is more likely to be correct than 0%. 0% is possible, but less likely. If errors aren't normally distributed, your statement might make more sense. If the errors are distributed bimodally for example, the 4.3% may be much less likely than numbers further away from the mean but still within the standard error range.

Posted by: Estragon | Oct 19, 2006 1:54:54 PM

Silicon Valley bulls always claim "They're not making any more land," & "cities are restictive on permits," to "prove" their over-priced PoS is a good investment."

We track permits at: http://www.viewfromsiliconvalley.com/id66.html

At the most-recent sales rate, new permits issued would amount to 4.3 months' supply.

Sine the alleged "bottom" in Sep'02, new permits amount to 16.6 months' supply.

So when it they're going to stop building new houses around here?

To keep up with Silicon Valley news, visit:
www.viewfromsiliconvalley.com

Thanks!

Posted by: vfsv | Oct 19, 2006 2:00:12 PM

Bob, Good points...I see a slow motion train wreck. What folks have to realize is that the bottoming of the housing market will take a few years to play out....the national average profile will be slow and steady...unlike the way an equity market bottoms with lots of sharp peaks and troughs. Now that's not to say that the entire nationwide housing market will bottom and recover at the same time. Each region will proceed at its own pace. And within each region, different types of real estate and locales will also proceed at their own pace. But for the next couple of years or so we're looking, on average, at a slow motion train wreck.

Posted by: glenn_in_MA | Oct 19, 2006 2:09:23 PM

from the LA Times article
"Just Wednesday morning, Zhang dealt with a Lancaster resident who had taken out a $310,000 adjustable-rate mortgage with a starter interest rate of 5.4% and a monthly payment of $1,050.

In July, the interest rate climbed to 8.5% and the monthly payment jumped to $2,306. A year-end adjustment will send the monthly payment to $2,744."

Now let's see... the difference in monthly payments is about enough to buy a new plasma TV evey month, plus make the payment on a new Lexus, or two or three Fords, plus put away enough to be able to take a nice vacation to just about anywhere in the world next summer.... but they're not going to be doing that are they?

But are the going to keep paying that $2744/month for a place they could rent for $1500/month? Would you?

Posted by: Bob A | Oct 19, 2006 2:40:25 PM

December 2008

Sun	Mon	Tue	Wed	Thu	Fri	Sat
	1	2	3	4	5	6
7	8	9	10	11	12	13
14	15	16	17	18	19	20
21	22	23	24	25	26	27
28	29	30	31