Some of the recent housing data has been "encouraging:"
• Sales for existing homes rose in November for the second straight month;
• New single-family homes rose 3.4% in November (seasonally adjusted), following a 3.8 percent decline in October;
• Inventory backlog declined to a 6.3-month supply in November (from 6.7-months);
• The 4 week average MBA purchase index has risen 12% since August.
However, it may be a bit premature to declare that housing has bottomed just yet. In addition to so many bottom pickers (the sheer number all but guarantees they will be wrong), the historical data simply doesn't support so early an end to the downturn. I have a monster piece coming out on this very subject soon, contextualizing the rise and fall of housing this economic cycle. But until then, let's consider a few details.
First, this is rather early in the traditional housing cycle. According to research of out of Goldman Sachs, the past three cyclical declines (since 1960) saw New Home Sales dropping by over 50% on average. This fall off has occurred over a 26-53 month period.
Where are we now in comparison? Consider that the statistical top in housing activity was only 15 months ago (July/August 2005); Housing starts are off by "only 20%" year-over-year. This suggests we could still be very early in the downturn --at least relative to the prior housing cycles. And, we are still near 15-year highs in terms of existing home inventory, and 13 year lows in home affordability. That suggests more price decreases to come.
We've discussed the new home cancellation factor also, running as high as 30-40% amongst some builders. (See: Home Buyers Back Out Of Deals in Record Numbers) Commerce does not report the cancellations, meaning sales are over reported and inventory under reported. This suggests the initial sales and inventory data will be revised.
Even more significant, the new permits, a gauge of future activity, has dropped off a cliff. That will help the inventory situation, but it implies a further dramatic slowing in activity into 2007.
With only 3 cycles as a frame of reference, there is no guarantee that the present housing boom and bust will fit neatly into these same parameters. But given the magnitude of the expansion, it would be surprising to see a mere year and half slowdown. We could very well be early in the Housing downturn in terms of both duration and depth.
One last thought on a related note: (apologies for the name drop)
I was chatting with the CEO of Coldwell Banker Real Estate (NYSE:H) in the green room of Kudlow this week. In addition to pointing out this remains the 3rd best year on record, he revealed a lot of common sense with this statement: (I am paraphrasing) "Price your house at a reasonable level and it will sell quickly. Overprice it, or assume its still 2005, and it won't move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it . . .
End of Housing Slump Seems to Be Drawing Near
Signs of Stability Emerge In Mortgages, Home Sales,
Buoying Economic Prospects
WSJ, December 28, 2006; Page A3
Home Sales Rose 3.4% Last Month
JEREMY W. PETERS
NYT December 28, 2006
Homeowners Cut Prices, Drawing Some Buyers Back
JEREMY W. PETERS
NYT December 29, 2006
Mortgage Applications Index Rose 11.4%
Bloomberg, Dec. 13 2006