Housing Bottoming ?
Some of the recent Housing data has been "encouraging:"
• Sales for existing homes rose in November for the second straight month;
• New single-family homes rose 3.4% in November (seasonally adjusted), following a 3.8 percent decline in October;
• Inventory backlog declined to a 6.3-month supply in November (from 6.7-months);
• The 4 week average MBA purchase index has risen 12% since August.
However, it may be a bit premature to declare that housing has bottomed just yet. In addition to so many bottom pickers (the sheer number all but gurantees they will be wrong), the historical data simply doesn't support so early an end to the downturn. I have a monster piece coming out on this very subject soon, contextualizing the rise and fall of housing this economic cycle. But until then, let's consider a few details.
First, this is rather early in the traditional Housing cycle. According to research of out of Goldman Sachs, the past three cyclical declines (since 1960) saw New Home Sales dropping by over 50% on average. This fall off has occurred over a 26-53 month period.
Where are we now in comparison? Consider that the statistical top in housing activity was only 15 months ago (July/August 2005); Housing starts are off by "only 20%" year-over-year. This suggests we could still be very early in the downturn --at least relative to the prior housing cycles. And, we are still near 15-year highs in terms of existing home inventory, and 13 year lows in home affordability. That suggests more price decreases to come.
We've discussed the new home cancellation factor also, running as high as 30-40% amongst some builders. (See: Home Buyers Back Out Of Deals in Record Numbers) Commerce does not report the cancellations, meaning sales are over reported and inventory under reported. This suggests the initial sales and inventory data will be revised.
Even more significant, the new permits, a gauge of future activity, has dropped off a cliff. That will help the inventory situation, but it implies a further dramatic slowing in activity into 2007.
With only 3 cycles as a frame of reference, there is no guarantee that the present housing boom and bust will fit neatly into these same parameters. But given the magnitude of the expansion, it would be surprising to see a mere year and half slowdown. We could very well be early in the Housing downturn in terms of both duration and depth.
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One last thought on a related note: (apologies for the name drop)
I was chatting with the CEO of Coldwell Banker Real Estate in the green room of Kudlow this week. In addition to pointing out this remains the 3rd best year on record, he revealed a lot of common sense with this statement: (I am paraphrasing) "Price your house at a reasonable level and it will sell quickly. Overprice it, or assume its still 2005, and it won't move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it . . .
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Sources:
End of Housing Slump Seems to Be Drawing Near
Signs of Stability Emerge In Mortgages, Home Sales,
Buoying Economic Prospects
CHRISTOPHER CONKEY
WSJ, December 28, 2006; Page A3
http://online.wsj.com/article/SB116722992975360513.html
Home Sales Rose 3.4% Last Month
JEREMY W. PETERS
NYT December 28, 2006
http://www.nytimes.com/2006/12/28/business/28econ.html
Homeowners Cut Prices, Drawing Some Buyers Back
JEREMY W. PETERS
NYT December 29, 2006
http://www.nytimes.com/2006/12/29/business/29econ.html
Mortgage Applications Index Rose 11.4%
Courtney Schlisserman
Bloomberg, Dec. 13 2006
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aV3Q_746Iayc
Friday, December 29, 2006 | 07:33 AM | Permalink
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from sarasota florida
http://www.heraldtribune.com/apps/pbcs.dll/article?AID=/
20061229/BUSINESS/612290386/1060/SNN
Posted by: kuros | Dec 29, 2006 7:40:43 AM
It would be an interesting study that I've never seen, the average price of 3 bedroom detached houses on the market for 90 days plus versus 3 bedroom detached houses no the market for 1 week plus.
There'd be some common cause problems in there, but still, it would be interesting.
Posted by: blaze@blaze.com | Dec 29, 2006 8:03:08 AM
I look forward to your longer piece on this issue. You remain at the forefront of this debate, but there is one aspect that I see neglected by housing skeptics. This time it really is different! That felt good.
The past cycles sited in the GS study did not include the 1997 tax law change that made sales of a personal residence tax free for virtually all sales. That significant tax cut is what sparked this boom, more than low rates or creative financing. That incentive remains in place and should continue to drive demand for housing at a higher level than in past cycles.
Best,
Russ
Posted by: Russ | Dec 29, 2006 8:11:17 AM
Russ, and roosters crowing makes the sun rise.
Posted by: Teddy | Dec 29, 2006 8:24:51 AM
I expect there will always be people who sell their home up north, pocket the large tax free gain, and buy an expensive condo in Florida.
Difficulty during the next couple of years may be in the "sell their home up north" part of the equation.
Posted by: Rob | Dec 29, 2006 9:22:39 AM
The only thing different about this time is the low low interest rates and a Fed that is so scared of a shakeout in the housing market that it is likely to drop rates at the drop of a hat. That is the difference between early nineties, mid nineties and now. Real interest rates. Happy new year everyone and may 2007 bring better luck.
Posted by: Anonymous | Dec 29, 2006 9:22:59 AM
Today's NYT has a "duh" article on prices going down drawing some customers. One key thing is the record inventory (7.3 months) and one that no one seems to mention but I'm living is the ratio of rent to buy. I'm renting a house for 50% of what it would take to by in conventional loan terms. Another one that I rarely see is that in my area (D.C.) there are NO houses in the MLS priced at median income. http://www.nytimes.com/2006/12/29/business/29econ.html?_r=1&ref=business&oref=slogin
Posted by: Dave | Dec 29, 2006 9:35:41 AM
I don't pay much attention to the talking heads. They are always wrong. Always. It almost makes me sick to turn on CNBC anymore. Bringing on the CEO of CB or NAR or Homebuilders or whatever is so ridiculous. These people don't want the truth. They are floating down that famous river. Denial.
1Q 2008 has been my time series projection for a housing bottom. I had a fair amount of confidence at the time I posted it. I am really not feeling good about that date. It all depends on a few macro issues.
Here's a dirty little secret. In the early 70s when we had a housing cycle similar to today but less bubbly, homebuilders lost, on average, 40% of their book value in the post boom mess.
Today's value is tomorrow's junk.
Posted by: BDG123 | Dec 29, 2006 9:36:25 AM
The slide will be long and slow, except in the very worst bubble areas. As the boom has been the greatest in US history, symmetrically so will be the bust.
Consider the Japanese experience. BTW, mortgage rates in Japan are now about 2.73%.
Posted by: jm | Dec 29, 2006 9:51:36 AM
Yes, we can say that the 1997 tax law change means that "it's different this time!"
It is 'different' this time because the housing bubble is much bigger than it would have been under 'normal' circumstances; i.e., with pre-1997 tax laws. Rather than prolong the bubble, the lure of 'easy' tax-free gains only insures that financial hardship will be experienced by many thousands more financial 'gurus' than in a normal real estate cycle.
Posted by: bk | Dec 29, 2006 10:02:29 AM
I am somebody that moved last year and sold my house in Florida. I moved to Northern California and decided to rent for awhile. So far it has worked fairly well because I sold my house near the top. I am watching very closely and trying to decide when to buy a house in Northern California. Houses are selling here pretty quickly if they are priced right (significantly lower than in 2005). However, if they arent priced right they sit on the market for many months. I have also seen numerous houses taken off the market or changed from for sale to for lease. I must admit that I am very confused what to do. I think this spring when many of these homes will come back on the market will tell whether this was a bottom or just a temporary lull in an ongoing bear market.
Posted by: GerryL | Dec 29, 2006 10:24:53 AM
I think BK may be on to something, the law of unintended consequences and all that. The tax law change probably did add fuel to the fire in a quickly rising market. But it's hard to see how it offers any price support in the stagnant-to-falling market were in now.
Barry is wrong about initial sales and inventory data will being revised due to cancellations. Cancellations are never incorporated back into the data. But they will obviously influence future sales.
There are three factors clouding the picture on inventories, canceled-sale inventory held by builders, properties bought by investors who hoped for quick resales but are waiting for an improved market and foreclosures, still small in number but growing rapidly.
I think it's these shadow inventories that will tell the story.
~~~
BR
To clarify the revisions: The Census Bureau counts a house as sold when the contract is signed. If a buyer cancels the contract, however, Census does not readjust the numbers. As a result, sales are overstated and inventories understated for the month the house is initially sold.
When the house eventually does get sold, sales are understated and inventories overstated.
Posted by: Bob_in_ma | Dec 29, 2006 10:28:58 AM
Once the tax change is made - '97's cap gain reset - all housing prices reflect it. If you sell to 'capture' it, so are the folks you're buying from. Same with the mortgage interest deduction, it's priced in.
No one can predict the bottom, though someone will; then they'll be the next real estate genius... until their next bad call. Diversify. Rebalance. Though, rebalancing out of your dwelling is tricky. Maybe one day we'll see an ETF of puts on Shiller's home index..
Posted by: VennData | Dec 29, 2006 10:32:58 AM
Just look at the foreclosure numbers - they're exploding.
Now compare this to previous housing downturns. You see that foreclosures increase at the beginning of a downturn, level off toward the end, and start decreasing after a bottom is reached.
We're not even close.
Plus home prices continue to fall, which devastates the US consumer's balance sheet.
Posted by: super-anon | Dec 29, 2006 10:52:50 AM
Phoenix: Permits for new homes fell 55% in Nov. from '05
http://www.azcentral.com/business/articles/1228biz-talker1229.html
Posted by: Michael Newton | Dec 29, 2006 10:54:21 AM
The trackback from my post here:
http://theroxylandr.wordpress.com/2006/12/29/the-bottoming-of-the-housing-slowdown/
Posted by: theroxylandr | Dec 29, 2006 10:57:41 AM
The stock market bottomed in July & housing is bottoming now.
The bears will always be bears.
-The Dow Dominator
Posted by: The Dow Dominator | Dec 29, 2006 10:58:06 AM
The 97 tax change was largely insignificant because most people move up during their lives and only as they approach retirement do they move down. Almost no one paid the tax before or after. Limitations in property tax increases in many jurisdictions amount to much larger benefits than the 97 law.
Posted by: Lord | Dec 29, 2006 10:58:24 AM
maybe, just maybe interest rates will influence home buyers. Interest rates were moving down since the summer but have very recently begun moving up.
Interest rates need to go a lot lower, in my opinion to get housing to stabilize. But considering all the leverage used to get in (at the top, of course) I think the marginal players need to be rinsed out prior to any meaningful rebound. Marginal players represent supply and from what I understand there are a lot of marginal players in the game.
Posted by: dave | Dec 29, 2006 11:00:14 AM
Interesting how the ----
1997 Real Estate tax cut
1997 Electric Utility De-Regulation Act
1996 Telecom De-Regulation Act
brought us huge bubbles and busts in each one of these industries through the last few years ---- and how we get left with the clean-up
Posted by: jj | Dec 29, 2006 11:01:23 AM
Also, it's worth noting that the 30 year bond is up almost 25 basis points in the past 3 weeks.
What do you think this is going to do to mortgage applications, and in turn, home sales going forward?
Posted by: super-anon | Dec 29, 2006 11:05:10 AM
Since 2003, the "market price" in the residential market has been driven by widespread "extreme balloon lending": Interest-Only, Negative Amortization, etc. ( where the "teaser" payment takes up 30% - 50% of borrower's take-home pay. Obvious ramifications on 'payment reset' to an amortizing amount. )
Using the "traditional" housing metrics to gauge where this will end up is probably unwise.
It's laughable to be dicussing 30-year-fixed rates, or employment statistcs, in this context.
Posted by: Chuck | Dec 29, 2006 11:15:50 AM
Lets clarify this once and for all (and I apologize for my inartful usage of the word "revision"):
The Census Bureau counts a house as sold when the contract is actually signed.
If a buyer cancels the contract, however, Census does not readjust the numbers. As a result, when there are lots of cancellations, sales may be overstated and inventories understated for that month.
When the cancelled house is eventually sold, sales are then understated and inventories overstated.
Capiche?
Posted by: Barry Ritholtz | Dec 29, 2006 11:33:43 AM
Barry - I thought existing home sales and new home sales were captured differently:
New home sales captured when the contract is signed (hence cancellations are a potentially huge factor)
Existing home sales captured when the sale closes, so they represent an actual sale
Am I right about this??
Posted by: semper fubar | Dec 29, 2006 11:41:37 AM
"The 97 tax change was largely insignificant because most people move up during their lives and only as they approach retirement do they move down. Almost no one paid the tax before or after."
Incorrect. Prior to the '97 change, tax was avoided on gain only to the extent that the cost of a purchased replacement home exceeded the net sales price of the home sold. Therefore, "move down" buyers always paid the tax.
Posted by: winjr | Dec 29, 2006 12:00:06 PM
