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  • The amazing February new home sales report… Supply surges amid evaporating demand, yet prices climb 1 comment
    Mar 26, 2010 6:27 PM | about stocks: PHM, HOV, TOL, KBH
    It's absolutely appalling how little the average American understands about the U.S. economy, especially given the wealth of news and data in the public forum. The problem is that most stories are written for traders and economists, but distributed to a general audience that doesn't really understand them.
    As a voter, you can't cast an intelligent ballot or interact intelligently with your elected representatives if you don't know what's going on with the economy. You need to know "how bad is bad" and "how good is good," but that information isn't always available to you.
    I'm going to try and bridge that gap for the latest New Homes Sales report, which the U.S. Commerce Department released this week for February. It's a perfect example of the gaping disconnect between what economic journalists write for their sources and for financial industry subscribers and the intellectually accessible information that normal readers need so desperately.
    If you're thinking of buying or selling a home, you better read this.
    The February sales numbers are the worst ever recorded in a single month since the U.S. Commerce Dept. started tracking them in 1963. They show up as a 2.2 percent decline from January and are down 13 percent from February of 2009. The decline would be even worse if we were comparing February sales to a normal month, but new home sales have been pretty bad since we entered the deepest U.S. economic contraction since The Great Depression in December of 2007.
    This is like comparing a short kid to another short kid. The disparity between them and the norm appears less pronounced.
    To really understand how bad things are you need a historical norm for new home sales, but the economic reporters covering this thing were so hell-bent on turning copy quickly that they never put a good one together.
    All of the stories I saw told readers that sales were down, but only one emphasized that sales had fallen to a record low. They all mentioned harsh weather as a contributing factor.
    Here's what they didn't tell you:
    They didn't tell you how bad sales really were, because they didn't make any attempt to define normal. I'm not playing here – the situation really is far worse than you know (I'll tell you how and why lower down).
    They also didn't explain clearly that the February sales data was seasonally adjusted to remove the normal annual decrease in home sales that takes place each winter. So, a certain amount of cold weather was already cooked into the numbers.
    Finally, they didn't work the historical data available to them to give the February sales level more size and scope by adjusting them for population growth.
    Here's what happened in a nutshell: 24,000 deals were made in February to sell newly built homes that had never been occupied before. Economists adjusted that figure to remove the normal decrease in sales that takes place each winter. This is called a seasonal adjustment.
    Economists also calculated what the February sales pace would equal if it were sustained a full year. In this case, the 24,000 deals in February represent a "seasonally adjusted annual pace" of 308,000 sales a year.
    Don't be intimidated by this statistical information. It's really no different than saying "Basketball star Dwayne Wade scored 24 points last night against the league's best defensive team. That tally represents an adjusted annual rate of 28 points per game over the course of a full season." In this case the adjustment would reflect the defensive prowess of each team on the Miami Heat schedule as determined by the points being scored against them.
    OK?
    The seasonally adjusted annualized sales pace for new homes sales has two problems. First, you have to know what average annual sales have been since 1963 to put it in the proper historical perspective. Without that average you can't tell how bad is bad. And second, the new home sales data completely neglects U.S. population growth.
    I've reddressed both of these sins of ommission.
    First, there has been an average of 685,000 new homes sales every year in the U.S. since 1963. In other words, 658,000 is the norm and we had less than half of that in February with our annualized pace of 308,000 units.
     Part of the February decline was due to weather, but only to the degree that we had an abnormally harsh February across the entire nation. The seasonal adjustment applied to new home sales by economists accounted for the kind of winter weather that normally inhibits sales.
     I can make things even simpler if you are still confused.
    If we don't seasonally adjust the number of new homes sold in February then only 24,000 homes were sold. Unadjusted means straight sales. One equals one. OK?
    That compares with an unadjusted monthly average of 57,000 new homes sales since record keeping began in January of 1963. The average has dipped to 35,000 units a month, on an unadjusted basis, during the present recession. The monthly average for the three Februaries during that span is 34,000 sales.
    All of which means that 24,000 sales in February of 2010 is really, really bad. Things suck man. They suck bad.
    Weather alone does not explain what happened in February. I don't buy that. Here's one reason why: The Commerce Dept. has measured new home sales in 688 months since January of 1963.
    In all that time there have only been 22 months in which fewer than 30,000 homes were sold on an unadjusted basis. We've recorded eight of them in the 27 months since this recession began. We haven't reached 27,000 monthly sales since October.
    So, we're off by a helluva lot. And it gets worse. Here's why: None of the seasonally adjusted rates reflect population growth.
    Once upon a time in 1963, a population of 189 million Americans purchased 560,000 new homes. That's means one new home was sold for every 337 people. During the lifespan of the new homes sales report, we've averaged one new home sale for every 468 Americans.
    Our population is now considerably larger than it was in 1963 – nearly double at 309 million. If the seasonally adjusted February sales pace of 308,000 were sustained this whole year that would equal one home sale for every 1,003 Americans.
    In other words, you are three times less likely to meet a fellow American buying a new home right now than you were in 1963. And half as likely as you normally would be.
     Want a little more historical perspective? OK…
    We were in the middle of a deep recession in 1981, due partly to extremely high interest rates. Inflation pushed the effective federal funds rate to a record 19.1 percent in January of 1981, compared with nearly zero today. Banks have to charge more than that rate to have any chance of generating a profit.
    Still, the average number of Americans per new home sale throughout 1981 was 655. It was a dire time of sky-high interest rates, but new home sales were still way better than they are now.
    To reiterate, we were at one home sales for every 1,003 Americans in February. That's amazingly bad. More so given how low borrowing costs are.
    Some economists are trying to blame the decline entirely on the harsh winter weather in February. Sorry, but that doesn't wash. The February new home sales report is seasonally adjusted. So, it already takes into account the normal decline in sales that occurs every winter. Yes, this was a harsher than normal winter, but the housing market is the only part of the world that entered a new Ice Age.
    We've been through harsh winters before without setting this kind of record.
    The supply of homes at the current sales rate also increased in February. It rose to 9.2 months worth from 8.9 months in January. That means it would take 9.2 months to run out of new homes if we stopped adding more units to the market right now.
    I'm too tired to run those numbers to tell you what the historical norm should be, but three to five months was pretty common in past years. In short, the market is glutted with inventory. Supply has outstripped demand.
    In a free market, prices go down when supply outstrips demand as it has during this recession, but that's not happening. Prices actually rose in February as we were putting together the worst monthly new home sales in U.S. history. The median sales prices rose to $220,500 in February from $207,900 in January.
    That big gain in prices is the best indication that we don't have a free market in new home sales, or in any industry that can afford to hire hordes of lobbyists to influence lawmakers in our pay-to-play government. If we really had a free market in health care for example, somebody would be targeting the 40 million uninsured Americans just as Burger King has targeted all the people who want to pay $1 for a double cheeseburger.
    Rising new home prices are one illustration of the degree to which the legal concept of "fiduciary duty" has undermined free markets in the U.S. This legal provision requires executives at publicly traded companies to maximize profits.
    As a result we've got housing industry executives and lobbyists successfully persuading our government to introduce price supports for new home purchases. These incentives were extended in November, yet sales have averaged 23,000 homes a month since that extension.
    Buyers think these financial incentives are for them – but they're not. Without these price supports, buyers would be getting better deals and paying less. The only thing the price supports do is support higher home prices and higher housing industry profits than would otherwise be the case.
    In short, the purchase incentives represent a gaming of the free market. My best guess is that the industry pushed them through because it's desperate to save itself until hiring picks up. The only other recourse is lower prices.
    That would be a real boon to the average American who is paying the taxes that bankroll these subsidies. Until then, all the housing industry is doing is putting off today's pain until tomorrow. They're also creating a disincentive for smart buyers to sign on the dotted line. 
    I think a lot of prospective buyers suspect there may be another tremendous decline in home prices on the horizon. If you pay $300,000 for a home today that drops to $250,000 during this decline you're throwing away $50,000 of hard-earned money.
     How many years would it take you to make that money after taxes? Can you afford to count on the veracity of the housing industry and the government it influences? I can't.
    I'm not buying anything until home prices begin to track with demand again. I don't know about you, but I can't afford a lobbyist and I can't afford to keep bailing out the industries that can...

    If you enjoyed this post, please check pout my blog at
    http://www.victorepstein.com/apps/blog/


    Disclosure: I have no housing sector investments.
    Themes: housing, economics Stocks: PHM, HOV, TOL, KBH
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