The NAR's Latest Housing Numbers: Cutting Through the Bull

I have to say that I've found the recent headlines around the "rise in home sales" more than just a little bit irritating, the reason for is that it's a very interpretive reporting of the real story around housing. I say interpretive because while the data they're reporting is technical correct, the headlines ignore some rather critical facts.

First off, let's aggregate the key data points from the latest report from the NAR:

Homes sales from a volume perspective rose 5.1% on a month to month basis, but were down by 4.6% on a YoY basis.

The median price of existing homes rose 0.36% on a month to month basis, while falling 15.5% on a YoY basis.

Despite the positive month to month sales numbers, housing inventory still rose by 5.2%.

Adding to the inventory problem is the fact that foreclosures rose by 30% on a YoY basis, this despite the large numbers of mortgages for which foreclosure proceedings have been temporary frozen, in addition to homeowners who are waiting for the government's mortgage rescue plan and/or having their mortgages modified by their mortgages. Since these attempts to prevent foreclosures are likely to fail, it stands to reason that there are a large number of foreclosures that are waiting in the wood work to drive up future inventory levels.

The upshot: we had a month to month improvement in some home sales metrics, an improvement that probably reflects seasonal changes and/or some other temporary change that doesn't disabuse the longer term trend. As a result it's not as valid as the overwhelming negative YoY numbers, especially when you consider the foreclosure and inventory data.

However what we saw last month could be an indicator of what the housing "recovery" could look like: a situation where the volume of home sales is on an upward climb, but prices stay stagnant due to the long-term effects of proper lending standards, more sensible expectations and higher inventory.

The media and the NAR can massage the data all they want, but prices aren't going to level off (or climb upwards) until inventories and foreclosures start decreasing. In my view the metrics that need to be paid the most attention to are: inventories, foreclosures and % of owner vacancies vs. their historical levels.

You can read more on the subject here (FT) and here (NYT).

Sources:

The NY Times: "Unexpected Jump in Home Sales in February" -- Jack Healy, March 23, 2009

The Financial Times: "US home resales show surprise rise in February" -- Alan Rappeport, March 23, 2009

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[hmorgan:]

Mr. Lee,

Interesting interpretation of the data. I'm happy to take the other side of that trade. You may want to look deeper at the inventory data. The inventory rose 5.1% from January to February, however inventory is down 17% from its high of 4.575mm units in July.

Herb W. Morgan
Efficient Market Advisors, LLC

Mar 25 10:25 AM

[Mad Hedge F...:]

Don't hold your breath! I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven’t even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I’ll go find something else to trade.

Mar 25 01:42 PM

[griff allday:]

That's because banks are still sitting on their inventories. Also, from what I have read, there is another shitstorm brewing with the ARMs that will be adjusting this year and next.

Why are people so unwilling to accept that this is one cat that will not fit back in the bag? Time to speculate a different commodity.


On Mar 25 10:25 AM hmorgan wrote:

> Mr. Lee,
>
> Interesting interpretation of the data. I'm happy to take the other
> side of that trade. You may want to look deeper at the inventory
> data. The inventory rose 5.1% from January to February, however inventory
> is down 17% from its high of 4.575mm units in July.
>
> Herb W. Morgan
> Efficient Market Advisors, LLC
>

Mar 27 12:36 AM

[D. McHattie:]

"In my view the metrics that need to be paid the most attention to are: inventories, foreclosures and % of owner vacancies vs. their historical levels."

People buy their homes with their incomes. Yes, we all get mortgages but we pay for the mortgage with our income.

Per the NYT article the author sites, per Robert Shiller, per hundreds of other studies, there is a natural, immutable relationship between home prices and incomes.

Home prices will continue to decline until they have returned to their historic level relative incomes - as John Thomas calculates, we're still about 25% away from that, on average.

Places like NYC that have fallen the least so far have the farthest yet to fall.

Mar 27 08:03 AM

[Suziclue:]

I love the way they spin the nubmers and try to excite the masses. And it's definitely working cuz everyone's talking about buying..etc.. I guess the cows always get slaughtered. If you truely look at housing prices and trends you'd realize we're in for another long drought in sales and prices. See what I'm talking about here:

www.homepricetrend.com

There's no quick fix.. we have to wait it out..which could be another fiive years..

Mar 27 10:59 AM

[PBS:]

The biggest problem in housing is "What if nothing can be done to save foreclosure?". True if nothing can be done to save foreclosure than price will fall. On the other hand if for .01 % case some thing can be done to stop foreclosure the whole scenerio will change.

Now the next real question is is the chance really .01%. All the stake holder in mortgage crisis are holding trillions of $(~8 trillion). If they can influence things to stave of mortgage crisis they will do it.
Next question if there are parties with interest in getting a rebound why they have not acted so far.
So here is final piece of puzzle, They interested parties will act only after they have squished the small player. Once financial sector passes through little more consolidation, recovery will start. This has nothing to do with fundamental and every thing to do with manipulation.
-PBS

Mar 27 12:20 PM

[griff allday:]

There are plenty of tools yet available to stoke the frenzy. I've noticed that here in Texas, there is a nondisclosure law re. home sale histories and Zillow, as of a month or two ago, no longer reflects this data in their profiles. The problem with this is two-fold: it prevents you from getting an average, and if the home is a rental, it prevents you from knowing whether the property was purchased during the bubble as a cash cow, where you could find yourself in the lurch at some point during your lease agreement because the buyer decides to default or flip the property.

Mar 28 03:53 AM