CNBC’s Diana Olick on Pending Home Sales
Here’s the briefing on the National Association of Realtors data on pending home sales from CNBC’s Diana Olick.
Then, there’s what to make of the data. Calculated Risk always helps with the so-what perspective.
This suggests a further decline in existing home sales for the March report (January was the most recent report). Note: there still might be a slight increase in existing home sales in February based on the December Pending Home Sales report.
Note: Existing home sales are reported at the close of escrow, pending home sales are reported when contracts are signed. The Pending Home Sales index leads existing home sales by about 45 days, so the January report suggests existing home sales will decrease from February to March.Finally, ignore the “affordability index”. That really just tells us that interest rates are low – something we already know.
Still, “something we already know” may be overly dismissive.
What we’ll begin to see is a relationship between revert-to-mean home pricing and the psychological conviction among home buyers that they won’t lose money by buying. That’s the inflection point where private sector bid and ask behavior will trump government policy.
The Boom Gloom Factor
Face it. A lot of this might be Baby Boomers’ fault. We’d like to credit “the big troubles” to subprime borrowers who wanted to waltz into homeownership without the financial necessaries.
Not so fast.
What about Baby Boomers, 78 million highly entitled adults who’d begun to believe that scrimping and saving was an “old hat” anachronism? Many of them thought they could ride the 401K Express to retirement, with the bonus of home appreciation to add extravagance to their Golden Age. Short cuts are us. The Golden Age, by the way, would never end because rock and roll and boomers will never die.
News flash.
Comeuppance is not pretty.
Here’s a CNBC article that’s like a lightbulb going on for those who may have needed a wake up call. The government and entrenched Wall Street establishmentarians are locked in a fierce school yard scrap, and that leaves a population that thought it would have its nest feathered featherless, spectators who’ve bought tickets to the rumble.
Check out a blog post from a real estate pro/radio host who’s been hearing it from Boomers who’ve slammed up against painful reality as their hasty home-appreciation retirement strategy gets drawn into the home price give-back.
Essentially, these callers are all asking the same sorts of questions: Is now a good time to sell my home? Should I sell my house and trade down to something smaller and less expensive? Will I have to keep working to afford the mortgage on a property I would have sold to help fund my retirement?
What these Baby Boomers have begun to realize is that when a market has stalled, it stalls for pretty much everyone, not just a few souls here or there.
Sure, some houses are selling. But in October 2008, around 45 percent of existing homes sold were bank-owned foreclosures, according to data from the National Association of Realtors. That means just 55 percent of homes were sold by homeowners (with or without agents) to buyers.
As the economy continues to slog through the current recession, the news won’t be good anytime soon for sellers who are looking to get out from under their adjustable rate mortgages (ARMs).
HousingCrisis.com sister brand, Builderonline.com last week analyzed recently released data from the Center for Economic and Policy Research that attempts to tally the dollar impact of the downturn on Boomers’ wealth.
The median wealth of 55 to 64 year olds in 2004 was $315,400. CEPR projects that this wealth will fall to $168,800 in 2009, or to $143,200 in the worst-case scenario. The average wealth drop would be 29% to $708,000. Even at the top wealth quintile, the average falloff is projected to be 25% from $3.8 million.
The 45 to 54 year old group is generally less affluent to begin with, so the hit it has taken from the downturn in the housing market is starker. The study projects the median wealth of this group will erode by 41% to $101,800 in 2009. In the worst-case scenario, the decline would be more than 45%. This group’s average wealth will decline 36% to $408,500, with the losses in scenarios two and three notably larger. For example, in the second scenario, median net wealth in 2009 is $94,200 (a drop of 45 percent) and the average net wealth is $387,900 (a drop of 39 percent).
This age group’s median equity in real estate was $83,600 in 2004, but that’s fallen drastically since. For instance, in the first scenario, median real estate equity in 2009 is projected to be $27,100—a drop of 68%—while in the third, median equity is projected to be only $6,600, or a loss of 92%. The projected decline for 55 to 64 year olds from their 2004 equity median of $142,000 will range from 47% to 63% in 2009.
The wealth of baby boomers could be further compromised when they are trying to sell their houses. The CEPR study states that only 2.6% of 45 to 54 year olds had less than 6% equity in their primary residences, meaning they’d have to bring cash to a closing when selling their homes in 2004. This year, however, 17% to 28% of each wealth quintile (depending on which they fall into) would need to bring cash to close a resale in 2009. Even households at the top of the wealth ladder won’t be immune: In 2004, no households in the top quintile of the survey had less than 6% equity in their primary residences. By 2009, between 10% and 20% of the most affluent households in this age group would need to bring cash to a closing.
Obviously, an owner’s wealth exposure magnifies if his or her house is worth less than the mortgage. The study projects that between 23% and 38% of homeowners in this age group with negative equity would need to bring cash to close a resale in 2009, versus only 3% in 2004.
Boomers can only take heart in knowing that if and when home prices revert to their century old mean, it’s more likely that their kids might be able to afford one of the suckers. It’s a be careful what you wish for thing, as in a bridge to what otherwise would be Generation Gap No. 358.
Disraeli Tears
Oft-quoted Benjamin Disraeli said:
There are three kinds of lies: Lies, damned lies, and statistics.
At HousingCrisis.com, we do not subscribe to the notion that ideology always and inevitably enlightens. Extremism, thinly veiled as news reporting, illuminates little other than the swollen ego and deficient reasoning power of the reporter.
For example, the following six-minute video of Fox News’ Glen Beck, offering his take on the U.S.’s 80-plus year house price timeline and President Barack Obama’s plans to stop the downward spiral in house prices.
“Here’s what the market wants,” says Beck.
To think, this organization is a sister company now to the Wall Street Journal. Scary.
Motor City OMG!
The Big Picture blog’s Barry Ritholtz noted this a.m. the stuff that nightmares are made of. We’ve seen firsts and worsts galore this past couple of months, but this story says it all.
According to the Chicago Tribune, the median price for a home sold in the month of December 2008 in Motor City is Seven Thousand, Five Hundred dollars.
I had to write it out that way because I simply couldn’t wrap my head around the numeral $7,500 for a home.
Granted, its in one of the most economically devastated regions of the country, but still — that data point is amazing.
The Trib:
“It may be tough to get financing for a new car these days, but in Detroit you can buy a house with a credit card.
The median price of a home sold in Detroit in December was $7,500, according to Realcomp, a listing service.
Another Play to Stabilize Home Prices: Uncle Sam Buys 2 Million
The scary part about this idea is that it’s one of the more heavy-handed policy intervention notions one can imagine–the government buys 2 million existing for-sale homes at a mean national pricetag of $170K per, or a total of $340 billion. Only its author claims that it is a free-market plan, because the U.S. Treasury makes its money back from the resale of homes into a putatively stronger selling market.
Here’s the gist:
The US commits to purchase up to two million homes (beginning with the 770,000 currently foreclosed) at the current market price.
This purchase will reduce the inventory of homes on the market to just 1.7 million, which is the correct number for a healthy market (3-4 month supply). Ending the supply glut and removing foreclosed homes from the market will restore the balance between supply and demand, and so restore real estate values and mortgage security, permitting refinancing or sale of homes as necessary. The current median home price nationally is about $170,000, which is a healthy price when measured by both historic trends and median household income. So now is the right time to correct inventory. Purchasing two million homes will cost about $340 billion at the median price, but the homes could be sold again into a healthy market over several years at a likely profit that covers management, maintenance, and policing. Correcting the inventory will also put builders back to work answering renewed demand. Meanwhile, having a reserve of up to two million homes will forestall another round of speculation while we enjoy record-low interest rates.
The theory intrigues one and its designer –Kevin Parcell, who pasted his idea in as a comment to NY Times’ columnist, Princeton economist and Nobel prize winnter Paul Krugman’s “Stress Test This“ blog post yesterday–has a data-rich position that makes this straightforward plan seem almost too simple. Which it is.
It doesn’t count for the stampede of foreclosures that would erupt the moment Uncle Sam started trolling the real estate landscape looking to buy up the deeds, first of foreclosed homes, then of buyers bent on getting out of their obligations.
Our problem is that we need ground-up positive psychology to counter negative sentiment due to worsening economic conditions. What’s coming into focus is that the “if we don’t do something now” line has lost its urgency and bailout fatigue is broad-brushing every initiative that comes along. People can’t keep track of all the programs, and they know that what they’re adding up to is tax Armageddon at some point sooner than later.
Still, ideas shared, and, hopefully, competent execution of one or more of them may begin to ping against the ediface of doubt and uncerainty about a free-falling house price environment. However, it should be noted that Paul Krugman sounds as if all he’s seeing from the new Administration is rearranging deck chairs on the Titanic. Buying 2 million homes, he’d probably say, is one of those deck chairs.
Robert Shiller: We’re Not there Yet
Yale’s Robert Shiller stops by with Yahoo Finance’s Henry Blodget for a discussion on you-know-what.
This is the Stress Test financial institutions need to endure, plus the collateral impact of home price deflation on credit cards, and eventually commercial real estate.
Are We There Yet?
Barry Ritholtz, author of The Big Picture blog, has built a strong case that home price correction, (i.e. restoration of trend relationship between median prices at resale and rents, as well as an ironclad tie to household income) is as inevitable as a law of nature.
Charts such as the one below, which he pulls up in his commentary today from Barron’s Up and Down Wall Street–a column by Alan Abelson entitled “Double Trouble”–offer evidence of how compliant home prices traditionally have been to these two economic guard rails.
Accompanying the charts–as presented by Barry in a posting earlier this morning–are some commentary from Abelson himself about the tie that binds.
“ALTHOUGH WE’VE ALWAYS BEEN a firm believer that a word is worth a thousand pictures, the two charts adorning this page, we’re forced to admit, provide eloquent and graphic descriptions of why housing still isn’t able to get out of its own way and why there’s still plenty of room on the downside for prices.
We lifted the charts from a recent commentary by our estimable friends at ISI Group. As their respective headlines nicely explain, one shows the ratio of house prices to rents; the other, the median house price divided by median family income.
At a glance, they both relate the same message: House prices are still too high, and not by a modest amount, either. Nor, ISI reckons, will reducing the number of foreclosures, desirable as that may be, halt the erosion in prices. While fewer foreclosures are likely to slow the rate of decline, they won’t reverse the downtrend or determine “where homes prices end up.”
And while the sharp contraction in residential construction of new houses is obviously a plus, the homebuilders, at last report, were still building appreciably more houses than they were selling, and inventories of unsold houses are huge.
But given the remorseless rise in unemployment, which, if anything, is destined to accelerate in the months ahead, the simple fact that so many people are too strapped to afford to buy a home, is, we believe, the most formidable barrier to even a tepid housing recovery.
For that to happen (much less to get a sustained and reasonably robust rebound) will require home prices to suffer a further steep decline, in tandem with a radical improvement on the jobs front.
House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we’re talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn’t in the cards for certainly as long, if not longer.”
Ritholtz suggests that a price drop of another 10% would be moderate, and 20% would be more brutal. His kicker line begs a thousand questions, which is probably why he gets lots of comments to his blog postings.
However, these are not worst case scenarios, and I will spare you the details of those, as they are truly sickening.
We believe that post-industrial, post WWII, post nuclear family economics, and post knowledge economy trends will prove to shatter the way home prices obey the rules of rent and income comps. These factors do not truly reflect affordability. They don’t reflect the way households behave as the engine of the economy.
Confidence and a job growth [or decline] inflection point are probably the bellweathers that will eventually stabilize home prices where they’ll need to normalize. The turn in those two factors will preindicate where the bottom is on home prices.
Starts Head Farther South; Supply’s Finally Less than Demand
As the housing starts story continues to make home builders and their materials and products suppliers grimmace, the bad news is becoming good news.
Most of our dads or authority figures liked to hear the bad news first, so we’ll comply with that dictate. The Wall Street Journal reports:
U.S. home building and industrial production plunged last month as the recession puts Americans out of work and slows their purchases of cars and houses.
Key pieces of economic data were released Wednesday, including a U.S. Commerce Department report showing housing starts in January tumbled 16.8% to a seasonally adjusted 466,000 annual rate compared with the prior month.
At the same time, we’re going to have to gulp and see a worsening report card on the overall economy, according to the New York Times.
In gloomy economic projections released by the central bank, the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would soar to 8.5 to 8.8 percent, and that inflation would remain under greater pressure.
Bleak economic data reflecting a sharpening slide in housing, trade, industrial production, spending and employment rates “more than offset” any potential impact from an economic stimulus plan, the Fed said, forcing it to cut its economic outlook.
Which leaves it up to the “silver liners,” those who can’t take too much of a bad thing. But seriously, despite the fact that demographic projections regarding household growth might find themselves derailed like everything else these days, one could believe that housing will begin to correct when demand for homes actually outpaces supply. We haven’t seen that for some time.
Now that housing starts have dropped to such depths, we’re just about at the tipping point, at least according to this report from CNBC contributor Tony Crescenzi, chief bond market strategist at Miller Tabak+ Co.
Importantly, housing completions fell a record 24.2% to a record low 776k annualized rate, the first reading below 1.0 million since 1982. The is extremely important because until now builders were still completing homes at a pace too strong for current conditions, preventing inventory levels from falling more rapidly than they recently have. Now that fewer homes are hitting the market for sale, the growing U.S. population will have fewer homes to choose from. This will accelerate the recent decline in home inventories. Have no doubt: this is a game changer for inventories and prices.
Doubters on the inventory idea will surely point to the difficulties that prospective homeowners face in obtaining credit to purchase homes. In doing so they will ignore the most important top-down concept, which is to compare the net change in the housing stock to population growth and household formation.
The concept is simple: a basic element of human survival is shelter and the need for shelter increases along with the population. Housing starts have now fallen to levels well below what is needed to support population growth. Whether people can afford to purchase a home or obtain the credit necessary to do so is not as important as the fact that they need shelter and will rent space if necessary. The bottom-line is that empty homes will become occupied one way or another so long as builders under-build relative to population growth.
The tough part for home builders is this: Of the few brave souls who are still buying new houses, about half of them want to buy a ready-to-move-in home. This means home builders have to build spec homes even though spec homes are part of the problem.
This makes the good news bad news in its way. Home builders still have to over-produce to meet the needs of at least 50% of their current customers. This means starts will probably bottom soon based on real orders and purchases, and will be a solid baseline.
U.S. Department of Vocabulary Minting
Seeking a new term–preferably confidence-inspiring–for ”bank failures.” Michael Shedlock, aka Mish, has an analysis of recent failures from the FDIC “Failed Bank List.”
Euphemists Anonymous, now’s the time to speak or forever hold your peace.
Calculated Risk highlights a New York Times article that sparks the need for this new terminology. In the article, Failed Banks Pose Test for Regulators, CR notes the F.D.I.C. is having trouble with the volume of troubled assets it must dispose of through auctions.
… The F.D.I.C. faces tough choices … every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.
The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.
Getting investors to move–like getting home buyers to move–in this environment where assets of all classes are in free-fall, doesn’t happen with a snap of the fingers.
Zillow Survey: The Housing Crisis is Real
HousingWire has this scoop from Zillow’s Q4 Homeowners Confidence Survey: The housing crisis is real.
More than half of America’s homeowners — 57 percent — believe their own home lost value during 2008, according to the survey. This is markedly more than the 38 percent who believed their home’s value was declining when asked during the second quarter of 2008.
In reality, 76 percent of all U.S. homes lost value in 2008, according to analysis of the Zillow Q4 Real Estate Market Reports. With these new findings, Zillow’s Home Value Misperception Index shrunk to 10 in the fourth quarter, from 16 in the third and 32 in the second quarter. An index of zero would mean homeowners’ perceptions were in line with actual values.
One doesn’t suppose that some of the wishful thinking data Zillow culls could have anything to do with who’s conducting the survey.