Seasonal Effects in Housing Cloud Market Status

The latest NAR (National Association of Realtors) data show existing home sales declined in August, after four months of increases (here). Just as the rise in home sales April to July could be partially attributed to seasonal effects, the decline in August, and continuing through the fall, if it happens, can be partially attributed to the same effect. This has been discussed previously (here).

The following graph was produced at the end of July for new home sales.



We can use the just released NAR data to take a close up look at how the area in question in the previous graph is developing. I have used the not seasonally adjusted data, because the U.S. Census Bureau data being compared is not seasonally adjusted. Be aware that new home sales show a stronger seasonality effect than do existing home sales. (See the note near the end of article about seasonally adjusted data.)



It may take three additional months (or more) to fully assess the seasonality effect. Some factors affecting whether or not seasonality will significantly affect sales volume data include:

1. Reports that the inventory of low priced homes is declining and there are actually low inventories in some areas. Since this is the area with the highest sales volumes (here), these volumes are likely to decline, reinforcing seasonality effects.

2. Of course, if home prices were to fall some more, the inventory of low priced homes would increase. The high overhang of potential foreclosures could push prices lower. This could add homes to the low priced inventory and increase sales.

3. Renewal of the first time home buyer's tax credit could support demand. If the proposed doubling of the tax credit (to $15,000) is implemented, demand could be further enhanced. However, there is a limit to the first time home buyers market and, to some extent, these tax credits are selling forward and will diminish future demand.

4. Net new household formation is a little above 100,000 per month. Only a fraction of these will be home buyers. This may have the potential to influence only 5-10% of existing home sales at current levels.

Note: The differences between the year to year and the month to month changes from NAR are statistically significant. The two data sets are compared in the following table.


Although these differences are significant in a statistical sense, they are not significant on an absolute scale. August sales declined modestly, as they would be expected seasonally, and there is a slight up tick from August, 2008 to August, 2009. There is nothing in this data to prove that the sales volume low at the beginning of 2009 was the bottom. We may not have a reasonable measurement of this until we get through the next seasonal minimum in the coming winter.

One possible outcome, which no one (except a home buyer) wants to see, is that we have higher sales volumes this winter as a result of home prices pushed lower by a continuing high number of foreclosures.

Comments

[spievak:]

It would be helpful to see this data segregated by home price. My sense is that any actual increase in sales is likely occurring at the very low end of the market (the sub-$200K range) where the tax credit actually has an impact. Do you have any data on that?

Sep 25 10:36 AM

[John Lounsbury:]

spievak - - -

I have heard CNBC reports that inventories in the price range below $250,000 are low. This morning I heard the inventory might be as low as two months. I am looking for more authoritative data, but what I am hearing is why I put my first three numbered comments in the article.

On Sep 25 10:36 AM spievak wrote:

> It would be helpful to see this data segregated by home price. My
> sense is that any actual increase in sales is likely occurring at
> the very low end of the market (the sub-$200K range) where the tax
> credit actually has an impact. Do you have any data on that?

Sep 25 10:44 AM

[TeresaE:]

CNBC? Really? That is where you get actual info from? You do realize they are run by a Federal Reserve board member right?

Anyway. There are thousands, if not hundreds of thousands, of homes sitting empty that the banks are not showing in their foreclosures. Granted, it seems that the higher the loan value the more likely the bank to not foreclose, helps their BS "financial" reports and reserves to lie. Wonder how long they can keep up the lies? Apparently the housing bottom and green shoots crowds think forever.

Housing, especially without liar loans, depends on REAL employment. Not independent contractors (which many are finding out are the only jobs out there), not government food stamps, not small business owners, but real live, payroll taxed employees.

WDC is doing everything in their power to make sure that number continues to shrink. Doesn't stand to reason that bottom, or recovery, is nigh.

We have to keep in mind that the First Great Depression was called "over" in '30. The true destruction on Wall Street (and Main St) didn't occur until the '30s. Only the world war "reversed" those losses.

And we had industry then, no can that card be pulled.

Our wages are plummeting, our credit is yanked and we continue to speak of bottoms.

My fear is that we haven't seen anything yet and the real bottom (and depression) won't be called until the Ponzi/check-kiting schemes of the banks, Fed, Treasury & Congress are ended by a foreign country.

The only way I would buy a home right now would be in an undeveloped township (low property taxes) paying 100% cash for it, with the ability to beg, borrow or steal to make the property tax payments. Anything else would be as big of a crapshoot as "investing" in Wall St right now.

Sep 25 01:11 PM

[Jeff Nielson:]

Hi John.

In my own writing on this subject, I point out the dangers of relying upon short-term supply/demand fundamentals - due to how the conduct of U.S. banks is grossly distorting this picture.

Specifically, U.S. foreclosures/repossess... for this year alone are on track to meet/exceed 5 million units, while the rate at which the banks are listing and SELLING these properties is working out to about 2 million units this year.

How can you have any confidence in such a contrived market, where many of the reported "statistics" are highly-suspicious, if not simply fraudulent?

How can anyone put their money into this sector, knowing that MILLIONS of homes could suddenly appear on the market TOMORROW?

Sep 25 01:32 PM

[Zmartmoney:]

Bear in mind that many potential sellers are staying out of the market right now, due to the fallback in prices. Couple that with the seasonal downturn (expected) and you have a pretty slow market. Imagine if the banks weren't hiding all those repo's - we'd see a continuing decline from all the inventory, and sellers would just forget about it completely, and live where they are. This is going to be a long, slow trip back. Spring is the next seasonal bump - we'll just have to wait until then to see where we really are.

Sep 25 02:05 PM

[manya05:]

Look at your first graph. It clearly shows seasonal declines LESS than the seasonal upswing for all years up to 2005 (for a mild average increase y-o-y). Since 2006, the seasonal decline is MORE than the seasonal increase, consistently, and quite pronounced. In fact, if my eyes are still good, the seasonal decrease as a multiple of the seasonal increase is going up! So, unless you have a crystal ball, I do not see how you can predict a seasonal decline equal to the seasonal increase. Am I missing something?

Systems with this much inertia do not stop swinging and go flat on a dime, so I say the best you can hope for is a slow-down on the rate of overall decrease, but that baby is still going down for quite a while.

Sep 25 02:16 PM

[a fat panda:]

John, Increasing the tax credit will do just what the original tax credit did : push demand forward. This isn't increasing demand. You are simply seeing sales moved from 2010 into 2009.

I see that you saw some of your data on CNBC. I am leery of lumping houses together across price and region to make any conclusions. Here is what I am seeing in my zipcode. Houses For Sale Vs Under Contract. Under 250K it is 3 to 1. Under 450K it is 6 to 1. Under 800K it is 8 to 1. Between 800 and up the ratio is 42 to 1.

If you are comforted by the 8 to 1 in the 450-800K pocket, the majority of these homes are new, many of which are not listed on MLS. It gets better. There are partially built neighborhoods where the property is committed to building another luxury home that no one wants. This pocket also has a lot of rentals of homes which were previously for sale but could not clear the market.

Sep 25 02:18 PM

[a fat panda:]

I want to follow-up the stats on where the inventory is located because you say that we are forming new households at 100,000 per month. The problem is that these newly formed households will have an impact on the low-end. The newly formed households will have to push people up the scale to have an impact on the housing inventory where I live. I don't see that happening. And you aren't factoring in household destruction. That is boomers whose kids are going to college. These people are by and large are downscaling to pay for college.

In sum, I think you are draw conclusions on data that is not homogenous. Mixing house inventory from the low end with inventory from the high end, isn't going to give you a meaningful conclusion.

Sep 25 02:24 PM

[John Lounsbury:]

spievak - - -

Since writing this article based on yesterday's news, a new artcile, based on news releases today, has been posted on my Instablog, awaiting editorial review as an article. seekingalpha.com/insta...
Your question is addressed there.


On Sep 25 10:36 AM spievak wrote:

> It would be helpful to see this data segregated by home price. My
> sense is that any actual increase in sales is likely occurring at
> the very low end of the market (the sub-$200K range) where the tax
> credit actually has an impact. Do you have any data on that?

Sep 25 07:12 PM

[John Lounsbury:]

fat panda - - -

The 100,000 figure is net new household formation.

I tell a personal story relating to the local nature of real estate markets in my latest post seekingalpha.com/insta...

I hope the editors pick this up as an article tomorrow.


On Sep 25 02:24 PM a fat panda wrote:

> I want to follow-up the stats on where the inventory is located because
> you say that we are forming new households at 100,000 per month.
> The problem is that these newly formed households will have an impact
> on the low-end. The newly formed households will have to push people
> up the scale to have an impact on the housing inventory where I live.
> I don't see that happening. And you aren't factoring in household
> destruction. That is boomers whose kids are going to college. These
> people are by and large are downscaling to pay for college.
>
> In sum, I think you are draw conclusions on data that is not homogenous.
> Mixing house inventory from the low end with inventory from the high
> end, isn't going to give you a meaningful conclusion.

Sep 25 07:15 PM

[John Lounsbury:]

Jeff - - -

The foreclosure overhang is something I want to try to quantify. I will get caught up on what you have done in this area and maybe I can just quote your work.

Thanks for commenting.

Sep 25 07:17 PM

[John Lounsbury:]

Manya - - -

My bad graphing. I should have put a fuzzy shaped target for the possible seasonal decline, just as I did for an area that would clearly define a strong rebound. If the seasonal decline goes below the level established last winter, we will be in deep doo doo. (Or I should say, deeper doo doo.)


On Sep 25 02:16 PM manya05 wrote:

> Look at your first graph. It clearly shows seasonal declines LESS
> than the seasonal upswing for all years up to 2005 (for a mild average
> increase y-o-y). Since 2006, the seasonal decline is MORE than the
> seasonal increase, consistently, and quite pronounced. In fact, if
> my eyes are still good, the seasonal decrease as a multiple of the
> seasonal increase is going up! So, unless you have a crystal ball,
> I do not see how you can predict a seasonal decline equal to the
> seasonal increase. Am I missing something?
>
> Systems with this much inertia do not stop swinging and go flat on
> a dime, so I say the best you can hope for is a slow-down on the
> rate of overall decrease, but that baby is still going down for quite
> a while.

Sep 25 07:20 PM

[Steven Hansen:]

John, i see this drop as significant and fundamental.

if we were recovering, pent up demand would start driving the market. Even with first time buyers incentives - the market volume dropped.

IF we were recovering, the volumes should have improved no matter if you used seasonal data or eyeball NSA data.

i do agree that using seasonal adjustment factors during this economic event will give you answers which are not comparable MoM which you have pointed out.

But this is not a mathematical issue. it is an issue of the way a market acts if it were recovering after a severe downturn.

Sep 25 07:26 PM

[Moon Kil Woong:]

The market was happy to call the seasonal upswing as rosier than it is. I would not be suprised to see the market react to seasonal post summer declines as more negative than it looks.

A bigger worry is what happens after the silly tax credit runs out and if real home prices are still failling (the government is distorting the market). With more and more jumbo and higher end homes forclosing these days, although the average price looks like a bottoming formation, they may not be comparing apples to apples. More like apples to watermellons.

Of course, the worst would be if Fannie Mae, Freddie Mac, and FHA realize they can't sustain government pressure to issue home loans at such low rates and keep eating losses. This may simply come from the Federal Reserve saying they won't buy more home loans after this year or by people throwing a fit over the government bailing one of these agencies out again. After all didn't Obama say it was the end of bailing out financial institutions with government $.

Sep 25 10:33 PM

[johnnybigsp...:]

The FED's plan: $8K tax credit now + inflation later = life goes on as per usual

Now: cushion the fall by stealing future demand by offering as much as it takes in tax credits to prop up home prices

Mid term: print lots of money, buy their own debt, spend money, make it 100% clear to everyone that they will do anything to prop the economy up....anything to avoid a deflationary spiral

Longer term: inflation (dollar devaluation?) causes home prices to inflate, debt becomes worth less

Wait a minute... don't we need WAGE inflation for this plan to work?

Not sure how that is going to happen? Has anyone read an hypotheses on this?


On Sep 25 02:18 PM a fat panda wrote:

> John, Increasing the tax credit will do just what the original tax
> credit did : push demand forward. This isn't increasing demand. You
> are simply seeing sales moved from 2010 into 2009.
>
> I see that you saw some of your data on CNBC. I am leery of lumping
> houses together across price and region to make any conclusions.
> Here is what I am seeing in my zipcode. Houses For Sale Vs Under
> Contract. Under 250K it is 3 to 1. Under 450K it is 6 to 1. Under
> 800K it is 8 to 1. Between 800 and up the ratio is 42 to 1.
>
> If you are comforted by the 8 to 1 in the 450-800K pocket, the majority
> of these homes are new, many of which are not listed on MLS. It gets
> better. There are partially built neighborhoods where the property
> is committed to building another luxury home that no one wants. This
> pocket also has a lot of rentals of homes which were previously for
> sale but could not clear the market.

Sep 26 12:13 AM

[Marc Rasmussen:]

Here in Sarasota, Florida we have plenty of inventory under $250,000. It is a very active segment of the market. There is a large supply of properties above $1 million but more and more of those buyers are starting to look. Many of them are second home owners.

Sep 26 06:40 AM

[BRUCE E. W.:]

It seems that there are so many contingent factors that are both poised and counterpoised that any given set of primary indicators are about on par with the ocean tides being high or low. Cross currents and iptides, meanwhile, seem to have all the flow in motion. One thing that I never see estimated is the question of how high real estate was overvalued on the market since sales were perculating on pure speculative anticipation, and agency based resales were being traded like stocks with a spread among real estate agents that I know.. We might stop to realize now that this was all artificially pumped and this is the dumped side of that with a lot of poeple caught holding an overpriced home they can't afford to keep and they can't manage to sell. I would venture to say that there may be more than one bottom out there in this multivaariant market of tiers. In that regard, the salaried structure of price range allocation may be a difficult comparison because the expectations and prospects were so distinctively different.

Jeffrey Walkenhorst has an excellent value based assessment of commercial and private wealth interests in the real estate markets that is more based upon asset value and strategic position. It is more ground based (in the field) than chart friendly, but it seems to depict an accurate sense of real climate in this seasonally "clouded" market arena. Here's the links:

seekingalpha.com/artic...

seekingalpha.com/artic...

Sep 27 12:25 PM

[Troyhector:]

I think before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…
"Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months.

Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013.
Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading.”

www.housingnewslive.co...

Sep 28 02:16 PM

[John Lounsbury:]

Troyhector - - -

Thanks for the insightful comment. You didn't mention it, but the 25% of prime loans that are underwater constitute a substantial majority of the number of homes that are underwater because prime mortgages far outnumber all other categories combined.

It is actually from the prime mortgage group that most of the "strategic defaults" (people mailing in the keys and walking away) come from.

Sep 28 04:30 PM