The REAL Real Estate Market

by: Markos Kaminis

Tuesday's report by the National Association of Realtors was so bad that the pace of sales fell outside the range of 70+ economists forecasts, needless to say missing the consensus estimate. We have been talking about the REAL real estate market for sometime now, and finally, we see consensus opinion finding its way to our view of thinking about real estate, the economy and the stock market.

Tuesday's report by the National Association of Realtors (NAR), a biased organization mind you, could not contain the damage. The result was so bad that it fell outside the range of economists estimates, needless to say missing the consensus forecast. The data was so miserable, it sent the broader indexes to gap lower openings, and held them down through the day.

July's pace of Existing Home Sales ran at an annual pace of 3.83 million, down 27.2% from June's revised measure of 5.26 million. Ensuring you took note of what you just read, the NAR recorded a steep monthly slip of over 1 million sales to the current rate of activity. On a relative basis, that's a bad comparison, but it does not even completely tell the horror story. This latest rate of housing sales is the worst since comparable records began in 1999. This rate includes both single-family homes and multi-family structures though. The rate of sales for single-family homes alone fell to 3.37 million, the lowest since May of 1995! Need I say that's bad?

Bloomberg's consensus of 74 economists projected an annual pace of sales of 4.65 million. That's lower, but not anywhere near as low as the actual result this month. In fact, not one economist of those surveyed foresaw the 3.83 million rate, continuing a recent trend of wake up calls among the economist community. It was just last week none of them foresaw jobless claims spiking to above 500K again. The economists' range here covered from 3.96 million to 5.2 million.

Much of the same scribble we used to define the housing hit last month remained valid again this month. You might recall our report, which stated:

A housing sector, and economy, that have been held up by government stilts for some time have now been left to stand on their own. We're sorry to report, she's falling flat onto her face in the mud where a foundation was supposed to be. As the First-Time Homebuyers Tax Credit expired, was renewed and expanded, and expired once more, its ability to spur housing activity wore thin. Don't get me wrong though, the government's efforts served a useful purpose and kept the economy from disappearing altogether. It's just too soon for this unemployment burdened baby to make a significant growth spurt.

Ditto this month...

By the way, I was wondering if this last quote sounded familiar to you? Yesterday, I turned CNBC on for the first time in months and heard some of the crew chirping about the same things we said a month ago. You could have heard it from us when it might have saved you some money; hey, CNBC, you might try including some Greek on your menu.

Here's what you'll see on CNBC in the months ahead. Flash forward: "Home prices fell! Recession looms again!"


Prices increased this month, based on the NAR report. Still the data was skewed by major Northeastern and Western MSAs. The median price of an existing home sold in July increased 0.7% from the year ago mark. The price of a single-family home was 0.9% higher than a year ago. Single-family home prices increased in 11 of 19 metropolitan statistical areas (MSAs) in July, year-to-year (1 MSA data point missing). That means 8 MSAs did not report price increase though, or nearly half. The median existing condo price fell 1.7% in July.

Generally speaking, price increases in the Northeast and West offset price decline in the Midwest and South. We took a closer look at the MSAs and found scarce price increases, though they were in existence in the heavily populated MSAs of Boston, New York, Washington DC, etc. I have to believe that wherever markets are global in nature, prices are more stable, a benefit of that extra demand stream.


Home inventory is directly impacted by the rate of sales, which fits into the denominator of the equation that finds it. The numerator is the number of homes on the market. As you might expect, with the severely lower denominator, existing home inventory shot up in July to a 12.5 month supply, from 8.9 months in June. However, even in absolute terms, the news was bad. The number of existing homes on the market increased 2.5% in July, to 3.98 million. The supply of single-family homes on the market in July marked the highest housing supply since 1983 (11.9 months supply).

Lawrence Yun, the NAR's Chief Economist placed a majority of the blame on the end of tax credits. He said that it would take a few more months before the affect of the conclusion of the credits wore off. The idea is that the credits did not really create activity, but pulled forward what would have otherwise occurred this month and next, and perhaps after that as well. What that basically tells us is that housing activity is anemic, has been anemic and will be anemic for the foreseeable future. It's a wake up call to investors who may have gotten ahead of themselves, and it leads one to wonder, have home prices been artificially stabilized and will they take a second leg lower? The answer is yes, unless economic activity gains some traction. All signs point to that not occurring any time soon.

The Good News is Limited

The good news for some of my uber-wealthy neighbors in NYC is that the ultra rich are still buying homes. The highest end of the spectrum, encompassing $1 million plus homes, was the only one to see sales increase in July. This ultra-rich segment marked a 6.9% increase in sales activity in July. Of course, characteristics of this group do not include "surviving by the skin of their teeth on unemployment checks."

Regurgitating Some Old Greek Wisdom

We wrote the following a month ago, it still applies, and I cannot say it any better:

Sad State of Affairs

The low mood in housing continues to find causation in an overhang of near 10% unemployment, extremely altered lending standards and a flood of foreclosure activity. While unemployment lingers at a suspect 9.6% rate (probably understated due to workforce declines), the underemployed, or those working insufficient hours at inadequate income remain upward of 16%. That simply will not inspire a fantastic spending scenario.

With regard to lending, the game has changed. With the secondary market for mortgage securities seeing a seismic shift in investor perception, and with a commensurate change in demand for the investment pools, a significant degree of liquidity is gone. But that's not what is limiting housing starts now. Rather, that's what will limit housing growth once the economy starts to gain traction again.

Lending standards have shifted as well, since these assets are finding less secondary demand. You can't just write them and sell them anymore (though some would say you never really could - Countrywide, Washington Mutual, etc.). Anyway, we would like to take this moment to again thank the rating agencies for rating MBS investment grade in the first place; thanks a lot S&P (NYSE: MHP) and pals (NYSE: MCO). Let your policy makers know that we're still waiting for justice.

Meanwhile, foreclosures continue to mount, flooding the market with low-priced inventory. Why would any cost-sensitive buyer look toward the new construction market under these conditions? Well, plenty are not.

Distressed home sales accounted for 32% of all transactions in July, up from 31% last year.

Even with mortgage rates at historic lows, buyers are still not turning up. According to Freddie Mac (OTCQB:FMCC), the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.56 percent in July from 4.74 percent in June; the rate was 5.22 percent in July 2009. Last week, Freddie Mac reported the 30-year fixed was down to 4.42 percent.

Thus a confluence of factors weigh against housing. The problem is of course that the main factor is systemic; too many Americans simply cannot or will not buy a home under these conditions. Finally, housing itself is a systemic driver of the overall economy and spurs all sorts of consequential spending. We have found ourselves caught in a continual loop of lousy, a death spiral. It will take some original thought to get us out of this mess. We need to stimulate the economy, not to stand it up on stilts like we have with the housing tax credit and via the issuance of $300 checks. Otherwise, we will inch ahead and pray for Asian growth and demand to pick us up.

Relevant Tickers include NVR Inc. (NYSE: NVR), D.R. Horton (NYSE: DHI), Pulte Group (NYSE: PHM), Gafisa SA (NYSE: GFA), Toll Brothers (NYSE: TOL), Lennar (NYSE: LEN), MDC Holdings (NYSE: MDC), KB Home (NYSE: KBH), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Standard Pacific (NYSE: SPF), Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Brookfield Homes (NYSE: BHS), Avatar Holdings (Nasdaq: AVTR), Xinyuan Real Estate (NYSE: XIN), M/I Homes (NYSE: MHO), Comstock Homebuilding (Nasdaq: CHCI), Senior Housing Properties Trust (NYSE: SNH), NYSE: DMM, NYSE: UMM, Fidelity Select Construction & Housing (Nasdaq: FSHOX), China Housing (Nasdaq: CHLN), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR, Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), BRE Properties (NYSE: BRE), Apartment Investment Management (NYSE: AIV), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties Trust (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Education Realty Trust (NYSE: EDR), Associated Estates Realty (NYSE: AEC), PennyMac Mortgage Investment (NYSE: PMT) and Two Harbors Investment (NYSE: TWO).

Disclosure: No positions

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