The Sad Truth About Housing Data

US Equities responded favorably to morning news yesterday about pending home sales. The data showed a third consecutive month of gains, actually up 6.7% over the prior month. Some pundits favor the year-over-year comparison, which was up 3.2%. It certainly seems like good news.

Commentators quickly pointed out some problems with the data ---- the sample size is small and sampling error is large. Pending sales do not always translate into actual sales. It is only one month. Etc.

The Sad Truth about Housing Data

Housing is at the epicenter of the financial crisis. Home values affect wealth, personal consumption, and the need for further write downs in "legacy" (formerly known as toxic) assets. We would love to have good data about housing.

Forget it. Nearly all of the housing series are flawed with significant discontinuities or conceptual problems. No matter what the data report, there will be plenty of opportunity for pundits to dispute the results for the next year or so.

Here are some of the problems:

• Pent-up supply, and pent-up demand. Most pundits claim that there are many homes ready to hit the market as soon as things improve a bit. We believe that there are also many latent buyers, waiting for the right combination of loan availability and price. Neither of these assertions has any hard data.
• Foreclosures. The principal media and blog observations show the percentage increase in foreclosures. This is an alarming increase from a small base. Interpreting this series is guesswork. There was a moratorium on foreclosures as the Obama proposals worked through the legislative process. That gave a false sense that foreclosures were lower. Since non-foreclosure sales are generally at higher prices, it made prices seem higher. Now that the moratorium has ended, we are seeing the opposite -- more foreclosures and lower prices. Those looking at the data series will be deceived by both effects.
• Tax credit effects. New buyers have until the end of November to collect a tax credit of $8000. It is reasonable to expect any first-time buyer considering a home purchase to act in the next few months. This may draw forward demand, leading to a reduction in purchasers after the credit expires.
• Financing effects. There is a sense that mortgage rates have bottomed, and moved higher. This may stimulate some to act more quickly. The increase in pending sales was quite dramatic in some regions -- over 30% in the Northeast.

Our Take

Like everyone, we watch housing data closely. We also solicit anecdotal evidence from many sources. We know of first-time buyers, using the credit, who put 5% down via FHA and got the seller to cover closing costs. It is a great opportunity for qualified young buyers. There is some Internet mythology that there are no 5% loans. That is incorrect.

Our major conclusion? Most of the pundits are too confident in their predictions. We see so many who expect prices to move much lower, but there is little supporting data.

We continue to look for good indicators on housing, and welcome comments. Our major observation relates to the calculation of "months of inventory." This measure takes the known inventory and divides by the annualized rate of sales.

At this point, the rate of sales is so low that even modest increases will dramatically reduce the months of inventory.

Comments

[fatcat:]

You don't mention the millions of units being held back from the market by the banks,according to some sources.

If this is true,it would keep supply coming for several quarters,as sales improve....

Jun 03 08:08 AM

[TeresaE:]

Pending does not mean sold.

Many "pre-approved" are finding that the banks don't want to lend to their kind AFTER the contract is signed.

And, finally, how are home sales going to continue to climb as employment continues to tank?

Jun 03 08:41 AM

[Jimmy K:]

in my small neighborhood... there are many vacant homes; no lights, no cars in the driveway; all blinds in the house closed tight. The lawn service shows up every two weeks and cuts the grass. The only thing that gives it away is that there is a lockbox on the front door. Is there a for sale sign? Nope. how long you ask- has this home been empty with the lockbox and the lawn service? 6 months. one house? Nope, now up to 6 houses (100 houses in my hood), all empty for longer than 6 months... NO FOR SALE SIGNS
there is a bigger problem out there; banks are hiding properties...

Jun 03 08:44 AM

[2houndz:]

Maybe this can provide a little perspective from the commercial side to reinforce comments from Jimmy and FatCat. I agree with them completely. Jimmy and I could live in the same neighborhood.

I know of several situations where the bank went to a developer who was in trouble last year and said "Hey, I know your property isn't cash-flowing, but if you will hang on for a year, I will increase your loan to cover another 12 month's payments". In one case the owner is a friend of mine who was already using his credit card to pay his car lease and home electric bill. When this hits the fan it will not be good.

Also, the company I worked for last year had aspirations of buying cheap property in Florida. We would have these clandesine meetings with the REO (Real Estate Owned) departments of various banks. They would show up at Starbucks at 6 AM with a suitcase full of property info. When I asked if this was the stuff in foreclosure they would say no - they were not really concerned about the stuff already in foreclosure - that was already public knowledge. These suitcases were full of sites they were sitting on and hoping to unload BEFORE going to foreclosure. They were putting off the inevitable by playing games - probably the same game as described above.

At the time, my wife and I were thinking about buying a house. This convinced me to wait. I am still waiting and renting, at least until next spring. That experience scared the bejeezus out of me. We still have no idea what toxic assets are being hidden by these banks.

Jun 03 09:08 AM

[Darius:]

Excellent article. There are so many variables can not be accurately or timely measured. One thing that I think would be interesting would be to look at months supply of units and lots including and excluding certain regions of the country. For example, what if you took large population areas that have the largest problems out of some of the equations. I believe that you might see somewhat modest problems in many areas of the country while other area's problems might be much more severe. Long term, as long as population and household formation growth exceeds new the pace of new housing starts, equilibrium should be reached eventually.

Jun 03 09:17 AM

[Joe Adamaitis:]

Your comments seem in line with what is occurring versus what the talking heads continue to spin: "Housing is bottoming out!"

Truth be known, I see deal after deal, after deal come and go. Ninety nine percent of all transactions (excluding refinances) are short sales of bank owned properties. I can review my pipeline for the last twelve months and tell you unequivocally that nearly ninety five percent of those drop out!

That said, it appears to me that there is a grasping of any data that will help support the feeling of, 'we're out of the weeds' when in fact we're far from it! Should anyone be willing to speak the truth to a national audience seems to be a fleeting challenge.

"Pending Sales" is a great example of the newest data to be used to spin the positive. I would suggest that 'pending sales' be removed from all MLS's until a signed contract comes back from the bank versus allowing it to be listed with just the signature of the seller and buyer! Does anyone have a clue how many of these sit for months or in fact never ever get accepted as banks have their own idea of where the market is going. It makes one ask, just who are these people that manage bank owned REO? Do they have a clue? How do they explain that they had an offer of 100k more than what they eventually negotiated for and foreclosed on?

As well, let's consider the unemployment data and be truthful to the people about how bad this thing is about to get. I for one still believe we need prices to fall further and have watched in horror as sellers cling to their bottom line price and like the titanic watch any chance to sell go straight down the tubes!

Next I consider the incomes which along with 401k's and other investments have fallen dramatically. People north cannot sell to come south and people south can no longer afford those $300k plus homes that just nine years ago sold for $150k. Does anyone have a real idea of just how many homes are out there at $300k plus? How many have been pulled off the MLS hoping a recovery is about to happen or how many of them are in the ‘Foreclosure pipeline’ which again no one seems to have a real handle on?

Just once, with all the technology we possess, I wish we could state the truth across the board. From politicians, economists, and the real estate community we need a truthful analysis not what people want to hear. Instead of trying to prop prices up to cover those losses of sellers, submit to the fact that we need to see prices go lower and then we will hit bottom.

As well, let's consider the last piece of this disaster. In today’s NY Times, an Op-Ed piece from Peter Goodman today hit the nail on the head as he covered the governments program put in place by Obama to help those in trouble. He accurately showed that these programs are not doing the job they were created to.

Thousands of people who call daily are being turned away. The fact that the program (Home Affordability) could not even get the two agencies (Fannie and Freddie) to come up with a standardized program is ludicrous. Those with Freddie loans don't stand a chance as they cannot finance in all the closing costs and those with Fannie Mae loans sometimes find themselves being kicked out of the program due to a system glitch. Bottom-line, the refinance portion of this mess is not helping stabilize this housing market. It's throwing it into more turmoil and added to the issues above will not be the savoir everyone thought.

Yes, I know, I sound like a broken record. However, the truth is that we're a long ways away from the bottom and this euphoric message of recovery will again be another disappointment when the truth eventually takes hold. I suppose an argument can be made that as long as we keep the dialogue positive, it’s better than being negative. However, I prefer to lay it out there exactly the way it is. I hate seeing that buyer who’s been hoodwinked into putting twenty percent of their hard earned dollars down so that they can obtain the best rate, only to see it erode within the next six months as prices continue to fall. So for all you analysts who grasp at any data to support a recovery, try to keep it in the back of your mind as to how many people you will hurt should you be wrong. A recovery requires significant effort to stem the tide, and to date it appears we continue to throw billions away on ideas that have not turned anything around. A sad but truthful situation that continues to unfold in front of the world's eyes and yet no one, not even Barney Frank, Chris Dodd, Obama Timmy tax man can see the issues. It's more important to them to layer the industry with more and more regualtions that in the end is costing each and every person in this country.

Jun 03 09:38 AM

[American in...:]

It's not an excellent article. The author did not provide any specific criticisms of the Case-Shiller price series, which is what most people look at it to guage housing price movements. More whining than specific arguments in this article.


On Jun 03 09:17 AM Darius wrote:

> Excellent article. There are so many variables can not be accurately
> or timely measured. One thing that I think would be interesting
> would be to look at months supply of units and lots including and
> excluding certain regions of the country. For example, what if you
> took large population areas that have the largest problems out of
> some of the equations. I believe that you might see somewhat modest
> problems in many areas of the country while other area's problems
> might be much more severe. Long term, as long as population and
> household formation growth exceeds new the pace of new housing starts,
> equilibrium should be reached eventually.

Jun 03 10:09 AM

[Accuriz:]

Jeff your commentary hits the mark on several fronts. I have one question relating to exisiting inventory and sales. Does your data take into account the normal or benchmark level of annual sales from an historical prespective vs. the high mark of the last several years. Our data indicates that a stable market will have annual sales in the 4.5 to 5 million range. With an estimated 3 to 5 million vacant housing units(depending on which data you accept) in the supply chain, it appears that the absorption cycle would be longer than the 12 to 18 months cycle we have been reading about.

Darius also states a very valid point. If one isolates the four to five areas in the country with substantial inventory and foreclosure issues, what does the rest of the country look like? We cannot forget that right now, banks simply are not going to lend on projects for new development until the market shows some stability and positive corrective actions.

We simply do not see a case for increased building or investment activity until the 3rd or 4th Quarter of 2010 and that is contingent on the commercial real estate market holding ground.

Jun 03 10:19 AM

[Joe Adamaitis:]

You may also want to factor that usual suspect in all this....interest rates.

Last week as we tried to unload our debt, rates shot up and have continued to move upwards. The spreads on the 10 yr and 2 yr signal a rally accoridng to the bulls while the same signals death to the housing market. We can look at and twist the data any which way we want, but as many saw last week, it was as if a light switch was turned off for new applications and deals.

As rates rise those bottom feeders scooping up the lowend junk, (which is really what all the pending sales are) will begin to re-evaluate the cost. Investors will not be able to make these deals work and we will see the end of any housing rally. Jobs, income, interest rates, affordability, and anything else you can think of are all components of housing which is why I feel no one can call this one way or another. You need at the very least, low rates, affordable homes and borrowers who now fit that large peg into the banks tiny round hole. It's a balancing act unlike no other I know which makes watching this whole thing so interesting.

Jun 03 10:38 AM

[PASTOR TOM:]

ON ONE OF OUR PROPERTIES IN FORT LAUDERDALE, FLORIDA BANK OF AMERICA HAD SCHEDULED A SHERIFF SALE FOR YESTERDAY, JUNE 2, AND MY ATTORNEY ADVISED ME TODAY THAT THE BANK SENT A FAX TO CANCEL THE SHERIFF SALE.

THIS HAS HAPPENED IN TWO OTHER PROPERTY FORECLOSURES OF OURS.

YES, THE BANKS HAVE A LARGE INVENTORY OF POTENTIAL FORECLOSURES, BUT THEY ARE RELUCTANT TO ACTUALLY FORECLOSE AND TAKE POSSESSION.

Jun 03 11:06 AM

[Old Trader:]

Banks are VERY reluctant "landlords"....that's a measure of last resort for them


On Jun 03 11:06 AM PASTOR TOM wrote:

> ON ONE OF OUR PROPERTIES IN FORT LAUDERDALE, FLORIDA BANK OF AMERICA
> HAD SCHEDULED A SHERIFF SALE FOR YESTERDAY, JUNE 2, AND MY ATTORNEY
> ADVISED ME TODAY THAT THE BANK SENT A FAX TO CANCEL THE SHERIFF SALE.
>
>
> THIS HAS HAPPENED IN TWO OTHER PROPERTY FORECLOSURES OF OURS.
>
> YES, THE BANKS HAVE A LARGE INVENTORY OF POTENTIAL FORECLOSURES,
> BUT THEY ARE RELUCTANT TO ACTUALLY FORECLOSE AND TAKE POSSESSION.

Jun 03 11:27 AM

[Mad Hedge F...:]

Tell it to the lumber market. Those fortunate few who took my advice to go long lumber futures (www.madhedgefundtrader...) can now go out and build a bonfire to celebrate. Since then, the homebuilder’s favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories. After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

Jun 03 11:36 AM

[pitchingpen...:]

No seems to be talking about the shadow inventory of homes that are still vulnerable to "rational default". Very difficult personal decisions are being made out there. As jobs/businesses continue to be lost, and 401K/savings are being depleted, I believe there is a large bolus of 300K plus properties that will enter the delinquent/modification attempt/foreclosure pipeline. Since modification programs are again proving to be too little too late, they really just amount to a delay in foreclosure velocity.

Jun 03 01:26 PM

[Fighting Yoda:]

1. Pending sale is not a consummated sale- bank has not agreed on the price or the loan. Lot of these ultimately never materialize.
2. There is bottom fishing and pending demand - people cannot postpone a need any further. Bottom fishing is legitimate as prices have fallen so much.
3. 8K credit - with average monthly price drops of 2.37% per month (Case-Shiller 20 city index) for the last 6 months. You would lose the 8K credit on a 400K home in less than a month.
4. Jobs- Home prices cannot stabilize till jobs stabilize - another 500K+ last month - long long way to go.
5. Inventory- The inventory is still too very high, despite lot of it being held back. And lot of it yet to come with many more foreclosures in pipeline.

Green shoots are just deadly weed being watered by the market, another immediate crisis brewing.

Jun 03 01:47 PM

[4545:]

Everyday we hear a different housing story from different sources. i just need to have the property values up. I don't care about "what really is going on"

Jun 03 02:45 PM

[TATyszka:]

Are you saying that a bull market in homebuilding has led to a rise in lumber prices? Or is this just another case of speculators betting on an imminent turnaround driving the market?


On Jun 03 11:36 AM Mad Hedge Fund Trader wrote:

> Tell it to the lumber market. Those fortunate few who took my advice
> to go long lumber futures (www.madhedgefundtrader...)
> can now go out and build a bonfire to celebrate. Since then, the
> homebuilder’s favorite commodity has rocketed by 35% to $200. The
> biggest producers, Weyerhaeuser (seekingalpha.com/symbo...),
> Rayonier (seekingalpha.com/symbo...), or Louisiana Pacific
> (seekingalpha.com/symbo...) have also done well. The last
> gap up was prompted by more mustard seeds that the housing market
> may have hit bottom. The enormous subsidies offered to first time
> buyers is also helping eat into inventories. After seeing similar
> Chinese inspired moves in copper, crude, and coal, this is further
> proof of the beginning of a much broader, long term bull market in
> commodities.

Jun 03 02:46 PM

[TATyszka:]

Never mind, Mr. MHFT, I see your reference to "mustard seeds." So the lumber rally is also a fool's rally.


On Jun 03 02:46 PM TATyszka wrote:

> Are you saying that a bull market in homebuilding has led to a rise
> in lumber prices? Or is this just another case of speculators betting
> on an imminent turnaround driving the market?

Jun 03 02:48 PM

[Joe Adamaitis:]

While I understand your pain, you must grasp the severity of this issue. It is not a myth, it is not an illusion. You are not being informed as a consumer and therefore you will feel the pain in the end if you do not price accordingly. As I said earlier, I have witnessed first hand what can happent to sellers who are looking for that person who mysteriously has not done their homework and will take them off the hook.

As the car industry always said there's an ass for every seat, in this environment there is not a buyer for every home. Good luck my friend.


On Jun 03 02:45 PM User 425112 wrote:

> Everyday we hear a different housing story from different sources.
> i just need to have the property values up. I don't care about "what
> really is going on"

Jun 03 06:49 PM

[mlonz:]

A couple of New and Old issues.

-Due to consumer friendly legislation passed by states, the foreclosure process has been made more difficult for banks. Title issues are rampant, and banks are being forced to re-foreclose many properties causing at least a several month delay of the same property starting again and coming back on the market.
-The market is certainly full of speculators and they started to buy aggressively over the spring. What people don't seem to realize is that at least half of these properties are in flip mode and will be right back on the market within a year at higher prices. So if someone buys 4 cheap REO's, fixes them up, and 3 of them go right back on the market in 6-12 months, is the inventory really coming down?


I also believe that another motivation for the banks holding property off the market is in anticipation of the PPIP. I think they hoped to slightly mark up the market in spring, and hope to use these prices to wholesale a good portion of their property over the summer/fall via PPIP.

While I'm here I will also say that it is my opinion that the most vulnerable part of the market going forward are the wealthy desireable suburbs close to major metropolis'. The Westchesters and Bethesda's of the country. Prices in these areas seem to only be down 8-12% from the peak, at least in metro-boston where I am. The really depressed urban areas have already had close to a 60% move down, and I think most of the depreciation has already taken place. These upper end single family homes are far more sensitive to small moves higher in interest rates which are coming, continued pressure on manager level salaries in corporate america, and the vagaries of the JUMBO loan market.

Jun 04 12:08 AM

[Moon Kil Woong:]

Great comments by all of you. People living in their homes can only shake their head and cry as banks and morgage brokers dance around spinning their pipe dreams of a resurgent morgage market bull. People should buy a home as a place to live in, not as a gambit to make millions. Yet still, when you talk to brokers, they give you the same charade song and dance saying, "This is a great deal. Your property value can easily double in a few years if the market turns around."

Yes, people refinanced before rates rose, yes some got baited by the government to buy a house for a paltry $8,000 financed by the taxpayer. Yes, builders are getting new loans to build more homes and are not completing them to keep them off the market when there is no demand. Yes, there is hidden inventory. Yes, the whole property market is still full of bad banks and scam artists. Why? Because the US government is spending your monmey keeping all the bad players from going bankrupt and merging all the bad banks with bad mortgage dealers into other banks so that the bad mortgage dealers are still hanging around the street looking to bag another big one which happens to be you and me.

Is this really where you want your tax dollars going?

Jun 04 12:14 AM