A Quick Look at the New Housing Number

As we wrote in the weekly summary

New home sales are Monday and Case Shiller housing index on Tuesday. As with every housing report we'll react in "surprise" that June is better than May which is better than April - which happens every year. We'll continue that charade until seasonality stops kicking in I suppose.

Our high on the day so far was just after 10 AM when the new home sales report came out. Predictably, the headlines are in and "new home sales surged". Much like the financial media, the mainstream media never bothers to really look under the hood - whether it be economic reports or earning reports.

As we've said countless times, housing is seasonal. My worry about all this green shootery related to housing (it "does well" in May-August) is what happens when seasonality turns against it. Which will happen in the fall.

I could do the following exercise for any number of economic reports, but at this point, it's a lost cause, since looking under the surface is more of a mental exercise than anything that pertains to "investing". Hence we haven't been dissecting economic reports as much of late - really why bother? The way to win in the stock market is smile, high 5 your friend and stick to general dramatic themes best explained in 10 seconds or less with generic Kool Aid tags such as "housing good, me happy, buy stock".

The only good thing I saw today was inventories dropped below 9 months. Below 6 months would be good but beggars can't be choosers. Now the irony is... we just celebrated the fact July 17th that homebuilders are INCREASING their new home starts.

Construction of new U.S. homes rose in June to the highest level in seven months as builders rushed to pour foundations...

The Commerce Department said Friday that construction of new homes and apartments jumped 3.6 percent last month

...was better than the 530,000-unit pace economists expected, and was the second straight monthly increase

So just as inventories finally break below 9 months (these are new homes mind you, not existing homes) builders already are scurrying to build more. And yet we rally on both news events. As a bull you can have your cake and eat it too; it's a much more simple existence than being a realist - let me tell you.

Let's check the breathless reporting:

• New U.S. home sales rose by the largest amount in more than eight years last month, in another sign the housing market is finally bouncing back from the worst downturn in decades. (8 years! wow, time to call HGTV and get "Flip That House" out of hiatus)
• The Commerce Department said Monday that sales rose 11 percent in June to a seasonally adjusted annual rate of 384,000, from an upwardly revised May rate of 346,000.

Sounds great! The actual number doesn't matter, mind you - it just has to be "better than expected" versus a group of economists who almost to the man (woman) missed this entire financial disaster.

• ... exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 360,000 units.

I'm feeling faint.... the news is so overwhelmingly good. Even though sales surge every year in the spring, let me shoot this bunny out of a cannon in celebration because....

• Sales have risen for three straight months.

Now keep in mind this is with taxpayer handouts of $8000 to first-time homebuyers, along with unnatural mortgage rates created at the expense of savers in this country via Uncle Ben's actions. More on this later.

So the important question in a seasonal number is the year over year percentage change.

• Sales of new homes were down 21% versus June 2008.

So despite the handouts and almost multi-generational lows in "cheap money" mortgages - including over half the country now in FHA loans (which many times require only 3.5% down) we still dropped 20%. Praise the green shoots.

What was disconcerting if you are a home builder (but not to worry, homebuilder stocks shot up at 10 AM) was the huge drop in month over month prices. Year over year was bad... but the drop between May and June was almost unheard of: 6%. Don't even try to annualize that.

• The median sales price of $206,200, however, was down 12 percent from $234,300 a year earlier and down nearly 6 percent from $219,000 in May.

So this means either builders are selling smaller homes (which some are) or Americans simply cannot afford (they can't) the old prices... despite the taxpayer handouts and multi-generational low rates. This would seem to be a strike at profitability at homebuilders- but we don't really need profits to drive this market up. We just need layoffs and green shoots.

Now the only real good news in the report, and it was mild, was the inventory number (and again, offset by the recent report of a jump in new housing starts):

• There were 281,000 new homes for sale at the end of June, down more than 4 percent from May. At the current sales pace, that represents 8.8 months of supply -- the lowest level since October 2007.

So that's the new home report from a more in depth perspective - we get these sort of economic reports every week and trying to explain what is really going under the surface is a moot point since the trumpets blaring on financial infotaintment TeeVee is all the market seems to really care about. The writers at Reuters and AP and the like should also spend more than 30 seconds regurgitating data points.

With all that said, I will ask the same question I've been asking for 8-9 months: What happens to the green shoots when taxpayer handouts end (if they ever do?) and Bernanke is forced to stop manipulating rates downward? If this is the type of "strength" we have with every arm of government pushing Americans into housing ....what happens if we (brace yourself) face a horrific world of 6.25% mortgage rates. [Jun 3, 2009: A Country that Cannot Function without Easy Money]

Don't ask that question... just buy stocks. The bunnies are flying through the air. And the $15,000 tax credit for all future home owners (not just 1st time) is coming this winter. Our American money trees are as endless as are our grandchildren's piggy banks. We don't care how many generations of the future we have to sacrifice - we will reflate this housing market, together as patriots.

Mmmm ...Kool Aid.

Comments

[j-dub:]

I feel your pain, Mark.
I have been slaughtered and I rode the bull hard until the second week of June and then logically and immediately turned bearish. The farce will continue until it can't and no one knows when that is. 15k credit will come and house sales will surge again and the MSM will barely mention the credit when boasting about the sales increase. It's a crisis of confidence (sure it is) and the government will do anything at almost any cost.

The mirage is created and if every news outlet sees it, is it still a mirage?

The stock market is going up so you can conclude the economy is improving and since the economy is improving then it is logical to buy stocks=circular logic at its height!!!!!

Jul 27 06:18 PM

[Prudent Man...:]

Worst June sales in decades. Unoccupied homes for sale all over the nation. The media and the markets think that is fine. But, most of this same media and most voters think BHO has a clue as to what he is doing and Chris Dodd and Barney Frank keep getting re-elected.

I didn't survive fifty years as a professional investor by being irrational. Anyone who chases the market I hope they are doing it with their own money as they certainly don't have any of mine.

Jul 27 06:35 PM

[Roger Knights:]

"Mmmm ...Kool Aid."

Say, the Kool Aid manufacturer (whoever it is) has been getting a lot of free advertising. Maybe its stock is a buy. (Hormel, the maker of Spam, which has similarly benefited from free advertising, has been doing well.)

Jul 27 06:44 PM

[enigmaman:]

Great piece, excellent sarcastic humor, you cant fight the tape, as annoying as it is logic has no place in this market, Nero fiddles as Rome burns, and we keep fanning the flames.
You know it like please " Dont piss on me and tell me it raining" but they are and it is (not rain)

" Neither glasses nor light will help those that refuse to see" the question is do we refuse to see by not participating or do they see clearly as they ride this wave to its crest. I wnat to pull my hair out.

Jul 27 07:04 PM

[OilFinder:]

An anecdote on this story . . .

Where I live (north Seattle suburbs), there is a large housing development near me which, about a month ago, just "took off." It had been sitting idle for about a year, with weeds growing on the unbuilt lots and the partially-built sides of wood on some houses showing signs of weathering. Now, all of a sudden there is a flurry of activity, with houses going up like you wouldn't believe, and at least half of them with "sold" signs on them.

Yesterday I went there and asked the salesman what had happened. He told me the previous builder had the entire development foreclosed to the bank, who then re-sold it to another developer at a bargain price. This enabled the new developer to offer the houses at an average of $100K less. No wonder people are buying.

There are numerous other developments around me. Some seem to be showing recent signs of activity, others are still languishing. My observation is that the higher-end ones (judging by the lot sizes and locations) are the ones still languishing, while the mid-priced ones are the ones showing new signs of life. The specific development I spoke of above is one of those mid-priced ones.

If this anecdotal example is typical, it might explain why housing starts have started going up again while prices are still going down. And, perhaps, the increase in starts is largely concentrated at the mid-range. Perhaps there is a slightly-less-than 90 day supply of inventory, but maybe it's less than 60 or 70 days for mid-range inventory, but 120 days (or something) for high-end inventory.

Just some thoughts.

Jul 27 09:35 PM

[taxed2much:]

I guess as long as washington keeps stealing our money by printing it and just giving it to the banks, the banks will take it and hold it and not lend it out nor will they foreclose. that way they stay afloat on paper and don't have to worry about those hard assets in property foreclosure loss. Keep pretending the elephant is not in the room and maybe no one will see it. When they do see it tell them they are hallucinating and print more money to distract them. When that money loses all its value through inflation, run for office and make promises to all for whatever you think will get the vote. People are stupid these days and will take the bait again and again. It is impossible to avoid being fooled with everyone playing a game to fool you about anything and everything. Therefore take heart that you are not stupid at all, just the target of every huckster who wants to gain your trust for whatever reason. The hand is quicker than the eye. Look it's not an elephant, it's a figment of your imagination cause you're really just waking up from a dream. All is well, here, have a glass of kool aid to quench your thirst.

Jul 28 05:23 AM

[TeresaE:]

Nicely done Mark.

No wonder I come back to your pen often.

Jul 28 11:30 AM

[Troyhector:]

I think new residential construction is probably signaling that the housing market seems to have finally found a bottom. Inflation appears to be in control, but the news on retail sales and industrial production is not as good.

"Industrial Production
Industrial production decreased 0.4% in June after falling 1.2% in May. Utilities posted their first gain (0.8%) since January, but the other components declined. Mining fell 0.5%, manufacturing decreased 0.6%, and motor vehicle production dropped 2.6% for the month. Capacity utilization declined in June to 68.0% from 68.2%. Capacity utilization of manufacturing firms fell to 64.6% from 64.9%. With continued weakness across the economy, we expect industrial production to remain weak this quarter, especially as further production cuts are made at auto manufacturers.

Retail Sales
Retail sales rose 0.6% in June after increasing 0.5% in May. Most categories posted small increases. Sales at gasoline stations (+5.0%) and auto dealerships (+2.6%), posted the largest gains. Without the auto dealer sales, retail sales were up only 0.3%. Core retail sales, excluding autos and gasoline, declined 0.2%. On a year-to-year basis, top-line retail sales decreased 9.0%, while core sales are down 2.9%. Weak sales were reported at food service and drinking places (-0.9%), the building sector (-0.9%), and miscellaneous store retailers (-0.8%), among others. Following unexpected weakness in cores sales in June's report, we expect consumption to remain positive but weak over the remainder of the year."

Read More: www.housingnewslive.co...

Jul 28 02:07 PM

[snakyjake:]

I've been noticing more sold/pending sales in my area of the Seattle area too. Maybe the prices have finally come down to a range in which people in this area can afford.


On Jul 27 09:35 PM OilFinder wrote:

> An anecdote on this story . . .
>
> Where I live (north Seattle suburbs), there is a large housing development
> near me which, about a month ago, just "took off." It had been sitting
> idle for about a year, with weeds growing on the unbuilt lots and
> the partially-built sides of wood on some houses showing signs of
> weathering. Now, all of a sudden there is a flurry of activity, with
> houses going up like you wouldn't believe, and at least half of them
> with "sold" signs on them.
>
> Yesterday I went there and asked the salesman what had happened.
> He told me the previous builder had the entire development foreclosed
> to the bank, who then re-sold it to another developer at a bargain
> price. This enabled the new developer to offer the houses at an average
> of $100K less. No wonder people are buying.
>
> There are numerous other developments around me. Some seem to be
> showing recent signs of activity, others are still languishing. My
> observation is that the higher-end ones (judging by the lot sizes
> and locations) are the ones still languishing, while the mid-priced
> ones are the ones showing new signs of life. The specific development
> I spoke of above is one of those mid-priced ones.
>
> If this anecdotal example is typical, it might explain why housing
> starts have started going up again while prices are still going down.
> And, perhaps, the increase in starts is largely concentrated at the
> mid-range. Perhaps there is a slightly-less-than 90 day supply of
> inventory, but maybe it's less than 60 or 70 days for mid-range inventory,
> but 120 days (or something) for high-end inventory.
>
> Just some thoughts.

Jul 28 05:44 PM

[fwi:]

This was a great article--it perfectly describes the problem of investing in a market that does not examine the facts, and despite claims of supreme prescience, showed us last summer that it does not possess perfect knowledge. So , what to do? Buy anyway, and hopefully get out just in time? Stay out, and comfort oneself with having "market purity"? I have never been so miserable doing something I love. This market is the intelligent investor's nightmare.

Jul 29 09:09 AM

[thechaser:]

you have luck finding WYNN to short; I had to beg borrow and steal to get a few hundred shares; same thing for DIA, which based on my exper. is a sure bet that the end of next week brings out "the sky is falling" chorus instead of the "June home sales SOARINGGGG"

Jul 29 09:30 PM

[thechaser:]

hey fwi, check out my post on David Fry's Tuesday Outlook for a direct answer to your end of paragraph rhetorical question

Jul 29 09:32 PM