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Something Doesn't Add Up Here


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2007 May 14, 3:25am   20,632 views  207 comments

by SQT15   ➕follow (0)   💰tip   ignore  

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John Burns Real Estate Consulting has put out in their monthly newsletter that housing if falling faster than is being reported.

The housing market has softened much more than is being reported. We have been advising our retainer clients for more than one year about misleading national sales information, both with the Existing Home Sales and New Home Sales data. We are now going public with our concerns because we are concerned that policy makers are relying on national data to conclude that the housing market correction has not been severe.

Here is our support:
Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55% of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22% if you compare sales over the last 12 months to the prior 12 months. On a straight year over year comparison, the decline is much more.
Mortgage Bankers Association (MBA) Data: The MBA Seasonally Adjusted Purchase Application Index, which is a measure of the number of people filling out loan applications to buy a home, is down 18% from its peak in September 2005.1 With presumably more applications being filled out by borrowers who now have to shop around for a loan, how could sales have fallen by less than 18%?
Builder Data: The nation's two largest homebuilders, D.R. Horton and Lennar, are reporting that orders have declined 27% to 37%, year-over-year. 2 3 D.R. Horton and Lennar have dropped prices significantly in many markets to generate sales, while the resale market has not. How could their sales have fallen more than the resale market, even if new home communities tend to be in fringe areas?
Realogy Corporation Data: Realogy, which is the parent company of Century 21, Coldwell Banker, and ERA, participated in roughly 1.9 million brokerage related transactions in 2006 compared to 2.3 million in 2005, representing a year-over-year decline of 18% nationwide.4
2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested.
New Home Data: The Census Bureau calculation of new home data does not calculate sales net of cancellations, and cancellations are running much higher than normal right now, which is why the sales numbers overestimate actual sales.

The preponderance of evidence shows that the housing market in vibrant areas where home building is prevalent has corrected much more than some people believe it has.

In summary, we believe that the Fed should know that the housing market correction has been quite steep and is also not showing signs of bottoming out, as evidenced by all of the above information, as well as significant additional research we have conducted. While the Fed has far more to consider than housing, they should know that the housing market could sure use some lower interest rates to help achieve stability soon.

This is my favorite quote "We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested. "

Um, yeah.

Overall I love this article though. I think we'll see much more of these types of reports as time goes on. I really think that people don't realize the magnitude of the boom and bust cycle we're in. Most people I talk to are much more pessimistic about housing than they were just a year ago but there is still this feeling that the market will be on an upswing in the near future. Articles like this make that seem unlikely.

Here's the link to the full article

SQT

#housing

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47   sfbubblebuyer   2007 May 14, 10:03am  

Ozman,

The reason I say 8 sounds high is it implies core inflation of about 5% (and real inflation of higher!). I'm assuming that high rates would be because of inflation, not just some whim of the the FED. High interest rates might drive down prices of houses, but it implies eating up savings through inflation, meaning more stringent inflation hedging would be required.

What's a respectible level of inflation? What happens to rates if we get deflation (unlikely as they really will print physical money to avoid that.)

48   Peter P   2007 May 14, 10:07am  

What’s a respectible level of inflation?

Inflation is by definition hedonized to 2.0%. What do you mean by respectable? :)

49   sfbubblebuyer   2007 May 14, 10:07am  

Also, we're seeing 6.25 right now. That's what I'd been quoted on a 20% down 30 year Fixed with half a point. 6.325 for no points.

50   requiem   2007 May 14, 10:20am  

2% sounds fine, but how is it being measured? ISTR seeing mention of different rates in the UK, broken down by age group.

off-topic: mortgage points? I understand the what, but not the why; is it just a way to tie the interest rate to the downpayment size without forcing people to do math?

51   skibum   2007 May 14, 10:21am  

Also, we’re seeing 6.25 right now. That’s what I’d been quoted on a 20% down 30 year Fixed with half a point. 6.325 for no points.

SFBB,
You're talking about mortgage rates (FRM in fact), while ozman is talking about Fed rates. There seems to have been a miscommunication...

52   Paul189   2007 May 14, 10:21am  

@ Peter P,

Everyone is looking for the unwinding of the yen carry trade but I'm not clear on what causes that other than an appreciation in the yen/usd rate. Why would that happen when the bank of Japan doesn't want it to happen? All of these central banks have printing presses so I can not figure out why they can not manipulate currencies indefinately.

The only lasting reason for sustainable yen appreciation as far as I can figure is that the interest rate differential narrows substantially.

Please correct me where I'm wrong on any of these points because I've been scratching my head on this for years.

Paul

53   skibum   2007 May 14, 10:25am  

Inflation is by definition hedonized to 2.0%. What do you mean by respectable?

Exactly. What inflation rate do you mean anyway? The Fed seems to like core CPI, which excludes energy and food, considered volatile in price. Let's not even get into the recent elimination of the publication of M3...

54   Paul189   2007 May 14, 10:26am  

"Interest rate is not the main problem. Loose lending is. In short, any financing product that requires the assumption of housing appreciation is a culprit."

I agree, you can have higher interest rates which makes the fed appear tight but if money supply is increasing substatially, that is still an easy money policy.

55   Peter P   2007 May 14, 10:27am  

Everyone is looking for the unwinding of the yen carry trade but I’m not clear on what causes that other than an appreciation in the yen/usd rate.

What about the appreciation in the JPY/GBP rate? Don't you think the Yen-Sterling carry trade had been very lucrative, much more so than than Yen-Dollar pair?

56   Peter P   2007 May 14, 10:30am  

I agree, you can have higher interest rates which makes the fed appear tight but if money supply is increasing substatially, that is still an easy money policy.

Exactly, a 10% mortgage with a 3% interest-only introductory rate over the next 10 years will not help the correction much.

57   Malcolm   2007 May 14, 10:32am  

We could have a whole blog on inflation. It is actually a myth. It takes the same amount of gold to buy a house as it did 100 or even a thousand years ago. Inflation is a tool of debtors/powerful to oppress the masses. By debtors I don't mean JBRs, I mean the big boys.

It's my theory, and I welcome it to be challenged.

58   Paul189   2007 May 14, 10:34am  

"What about the appreciation in the JPY/GBP rate? Don’t you think the Yen-Sterling carry trade had been very lucrative, much more so than than Yen-Dollar pair?"

I'm sure it's very lucrative but my question still stands; what it is the catalyst for a signifigant sustainable end to these carry trades?

59   Ozman   2007 May 14, 10:38am  

ou’re talking about mortgage rates (FRM in fact), while ozman is talking about Fed rates.

Thanks Skibum for the clarification.

60   Paul189   2007 May 14, 10:39am  

SP,

If Chinese slow purchases of treasuries won't Japan step in as the buyer of last resort just like in 2003?

Paul

61   Ozman   2007 May 14, 10:40am  

What’s a respectible level of inflation?

A level that will force people to invest their savings and not park it a Bank account :)

62   Malcolm   2007 May 14, 10:42am  

Gee let's lower interest rates some more, and adjust inflation upwards. Ozman, you're on the right path IMO. Let's also tax gold as a captial gain. (Bastards)

63   Malcolm   2007 May 14, 10:42am  

I might be a little biased :)

64   Ozman   2007 May 14, 10:56am  

Paul said:
what it is the catalyst for a signifigant sustainable end to these carry trades?

- A Black Swan in the financial markets (maybe several HF's crashing)
- US Government default
- Oil price denomination changed to Euro
- Another war

65   Peter P   2007 May 14, 11:08am  

What was the catalyst for the Russian debt crisis back in 1999?

Reflexivity can create its own catalyst and/or tipping point.

66   Paul189   2007 May 14, 11:09am  

- A Black Swan in the financial markets (maybe several HF’s crashing)

Investors turn to USD in times of crises

- US Government default

Won't happen, the USA has the printing press

- Oil price denomination changed to Euro

How does this impact the carry trades?

- Another war

Investors turn to USD in times of crises

67   Peter P   2007 May 14, 11:11am  

It seems that we have one 10+ sigma event every ten years or so (e.g. 1987, 1998). It is about time. :)

Maybe black swans ain't that special after all.

68   HARM   2007 May 14, 11:13am  

Ozman,

Good start, but you missed:
- major oil supply disruption (see "another war")
- Smoot-Hawley protectionist legislation against the Yen/Yuan
- avian super-flu or ebola variant that mutates into human-transmissable form
- asteroid/comet strike

69   Peter P   2007 May 14, 11:13am  

Investors turn to USD in times of crises

In a black swan event, anything can happen. Perhaps a 10-sigma euphoric event (e.g. world peace) will bring down the market. :)

70   Peter P   2007 May 14, 11:15am  

RE: asteroid/comet strike

I thought NASA will simply fly a pair of space shuttle, land them on the heavenly object, and blow it up right before it passes some critical point.

71   Ozman   2007 May 14, 11:16am  

Malcolm said:
We could have a whole blog on inflation. It is actually a myth. It takes the same amount of gold to buy a house as it did 100 or even a thousand years ago. Inflation is a tool of debtors/powerful to oppress the masses. By debtors I don’t mean JBRs, I mean the big boys.

It’s my theory, and I welcome it to be challenged.

I agree with your theory.
However, low Inflation probably has a good purpose in society. It is an incentive to take risk and invest in new businesses which create new jobs etc..
Inflation nourishes meritocratic societies and probably helps in the transfer of wealth to lucky/successful Entrepreneurs.

72   HARM   2007 May 14, 11:17am  

Peter P,

How naive of you. You really think the government would risk sending Bruce Willis on a mission that dangerous?? Ben Affleck... maybe, but Bruce? No way.

73   Ozman   2007 May 14, 11:23am  

Paul said
Investors turn to USD in times of crises

History is no guide of future reaction. It is dangerous to assume this.

74   Peter P   2007 May 14, 11:25am  

History is no guide of future reaction. It is dangerous to assume this.

Yep, that is the most important lesson from History itself.

But again, I am a naive little boy. :)

75   Peter P   2007 May 14, 11:27am  

1998 - Russian debt crisis -- LTCM debacle -- Greenie bailout

76   Ozman   2007 May 14, 11:29am  

87 I get. What 10-Sigma are you referring to that happened in ‘98?

WHen did LCT happen ?

77   Ozman   2007 May 14, 11:35am  

Sorry, I meant LTCM, anyways Peter clarified it :)

78   EBGuy   2007 May 14, 11:53am  

I am most fearful of the Russian Debt Crisis of 2007.
I found the link above to be a good summary of the wonderful world of Casey. They even got quotes from the FBI (as well as Rob "Silent Spring" Dawg.. errr... Cote).

79   e   2007 May 14, 11:54am  

Is it time to buy?

This house is renting for $1800

http://sfbay.craigslist.org/sby/apa/330734097.html

But houses for it (it’s at 535 Fenton St, San Jose) are clearing for about $580k.

Let’s assume that this is $500k.

Using this calculator, if you assume that the downpay is only 10% and that the appreciation is 4% (same as appreciation over the long term), then according to the details tab it would be equivalent to $1098 in rent.

The calculator is at: housemath.us [protecting from moderation]

Could it be? This is cheaper to own than to rent? Is this The Sign?

80   sfbubblebuyer   2007 May 14, 12:02pm  

D'oh! My bad on the mort vs. fed rate.

I think if the Fed was going to lower the rate to try and save housing's butt, it would have done so by now. I think the only reason they aren't raising the rate is to try and keep the crash as slow as possible.

81   newattorney   2007 May 14, 12:49pm  

A friend of mine just sold his Burlingame home for $200K over asking price. ($1.4M) sold for $1.6M. WTF? the house is a 30 year plus 2200 sq. ft. rancher. I give up.

82   Malcolm   2007 May 14, 12:50pm  

Why rule out a potential depression GC?

83   sfbubblebuyer   2007 May 14, 1:54pm  

Hey, new name for TOS!

84   sfbubblebuyer   2007 May 14, 1:55pm  

And... a friend of mine bought a house in the Willow Glen area of SJ for 25k under asking... (734k, asking 759)

The difference is... my friend is not imaginary.

85   skibum   2007 May 14, 1:56pm  

Burlingame is PRIME!

86   newattorney   2007 May 14, 2:09pm  

skibum Says:

May 14th, 2007 at 8:56 pm
Burlingame is PRIME!

So, does that mean that Burlingame is different? I am sort of new here, so please help me understand what exactly is happening with prices in the BA.
Are prices still going up? Sorry to sound dense, but I am not getting it. I was just in FL last week, and prices are really starting to plumment. I don't think we will see the same sort of declines in the BA, but you never know.

Thanks!
New Attorney

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