Is FHA 3.5% Down Payment Toast?
As we noted here in a post yesterday, HUD Secretary Shaun Donovan and his team have Federal Housing Administration mortgage insurance policy high up on their To-do List.
In an analysis on Big Builder Online, editor Sarah Yaussi gets perspective from home builders on their biggest areas of anxiety, even as their lenders raise the barriers to entry for home buyers as a reaction to FHA’s already intensified pressure on banks.
Here’s an excerpt:
Eric Lipar, CEO of Texas-based entry-level builder LGI Homes, for example, said that his staff recently did some analysis to find out how many of their buyers this would’ve been unable to qualify for FHA financing if the required minimum credit score had been 640 rather than 620. The answer was 7% would not be able to close under those more stringent credit requirements. Not an overwhelming percentage but hardly insignificant either. I’m not sure any builder would be psyched about that much of their business being eliminated in one stroke of a pen.
“Every time that [credit score] number jumps, you take potential borrowers out of the market,” he said.
However, Lipar wasn’t sweating that part of Donovan’s testimony. After all, FHA’s underwriting guidelines have never spelled out a minimum credit score; lenders-and investors in the secondary mortgage markets-have largely called the shots when it comes minimum credit scores through the establishment of credit overlays. In fact, according to Lipar, the bar on minimum credit score has been steadily rising since 2008, so Donovan’s pronouncement appeared to him more as formalization of what was already happening in the marketplace.
However, what does worry Lipar and others like him is the idea that some of Donovan’s other proposals–specifically the increase in a down payment requirement, the reduction of seller concessions at closing, and the increase in insurance premiums–might go into effect in conjunction with one another at precisely the wrong time. Wrong time, of course, meaning just as the federal home buyer tax credit is set to expire.
So what are the real odds HUD will fiddle with the 3.5% minimum down payment?
Calculated Risk, who shows superior insight into what might motivate a policy change of this nature, is betting no. The money quote:
I think the most likely changes are higher insurance premiums, lower seller concessions, and tougher standards.
Home Buyer Tax Credit 2.0
Many believe that every facet of the housing boom of the early part of the 2000s was pure economic pathology, a loosely knit series of white-collar crimes perpetrated by those unrestrained by scruples upon those undeterred by sound judgment.
Ones without principles stray into evil with impunity. The unknowing ones swept into the “everybody wins” jetstream are hardly more innocent–ignorance alone is never an excuse, especially when many of those “taken for a ride” leapt at the illogical “opportunity” to get something wonderful for nothing.
There being no innocents, the conclusion of those who regard the financial and real estate bubbles as pure malfeasance is that fire, brimstone, and cathartic correction must level the place and start afresh.
Nobel laureate Princeton economist and New York Times columnist Paul Krugman writes about those who believe in the economy as if it were an self-filtering ecosystem that–left untouched–would find its quickest route to recovery.
It’s all there: mass unemployment is necessary, because you have to shift resources away from sectors that got too big, stimulus is a bad thing because it slows the necessary adjustment. And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.
And this has exactly what to do with high volume home builders just now? There’s one critical measure we’re going to be looking at for the next several months as job numbers keep getting worse. That is “temporary” hours. Once hours among temporary workers start to expand, the recovery will really have started. So far, that metric is still getting worse.
So, here at the intersection of Smith and Keynes, big builders need to choose their lane. The problem here is that “big builders” are not a homogeneous bunch. They are different in magnitude, geography, business model, and just about every other characteristic you can talk about, except that they together account for six out of every 10 of the half million new homes being bought these days.
Today, a public home building company CEO’s looking at another year ahead of mostly finding ways to value-engineer product and swap out land enough to drive volume, turns, and cash. Most privately capitalized companies are trying to find lenders who’ll bankroll going vertical on land that can more and more be gotten for a song.
They’re different as day and night from one another, but if they’re going to have a business to build on during 2010, they’re going to need to speak with the same conviction for the same goals, and it’s past time now to decide what those goals should be.
If only this once, home builders from Tampa to Tucson to Tacoma and from Orange County, California to Orange County, New York, should pick a lane and unify.
The issue is this: people do not get the the theory behind the home buyer tax credit. Many voters see it as a hand-out to “haves” in society paid for in great part by people not fortunate enough to cross into homeownership. Many elected officials see it as that, or as a hand-out to big builder companies that helped build too many new homes in bubble markets, inflating the price of homes everywhere. Many economists see it as an extravagant means of depleting the pool of renters to “shift the deckchairs on the Titanic.”
What’s not clear, after all, is that a home buyer tax credit stimulus–the one that would really work if it included all buyers of primary residences–works in multiple ways on the economy. It works not only on stoking demand and removing vacant and for-sale units from the stock of homes regarded as excess inventory.
- It creates jobs
- It builds communities where owners have a greater stake in taking the baby-steps toward developing a new local economy
- It creates demand for consumer goods and services
- It creates positive impact on earnings
- It creates more jobs
Calculated Risk’s big argument against the extension, expansion, or continuation of the tax credit for home buyers as part of the ARRA stimulus program is that he asserts that it’s a hugely expensive way to get incremental home purchases, and ones that rob the rental universe, to boot.
What Calculated Risk discounts is a housing tax credit’s impact on the broader economy. To get household growth back to where it needs to be, it’s going to take jobs. But first, it’s going to take more temporary hourly wages as the need for inventory grows.
Stimulate demand in home purchases at all price ranges, and temporary hourly wages will start climbing again.
Fact is, government policy and private sector market forces are going to have to work with and around each other for another couple of years as the economy recovers from the past two years’ shock.
It’s a tough dilemma. Do you support further intervention in the economy? Or dropping it in favor of letting the market correct itself?
Are you guys together on this issue or no? Do you have the voice in Washington you need to make your case, or no? On this issue, home builders — large and small, Rust Belt and Sun Belt, public and private — should find a way to pressure Congress to do the right thing.
Home Buyer Tax Credit Econ 101
If American taxpayers get a bill for $43,000 for the sale of every home to a first-time buyer who would not have bought if he or she didn’t get an $8,000 credit, is the program, which is set to expire in 60 days, worth it?
This estimate comes from our preferred calculator of risk, Calculated Risk, but we contend that this is a miscalculation of risk. Follow CR’s original logic here:
The NAR recently reported:
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.
You can calculate the new $15 billion projection; 1.9 million times $8,000.
But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.
Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.
Since that original post, the $43,000 price tag per incremental home sold thanks to the $8,000 tax credit under the terms of the American Reinvestment and Recovery Act of 2009, has gotten wide play among economists who generally posit that Americans would spend their tax money in better ways.
Recently, using that same calculus, CR goes so far as to assert that the 350,000 incremental home buyers in 2009 is 1) wrecking the apartment rental market, and 2) very likely to exert a deflationary fieldforce on the Consumer Price Index if a home buyer tax credit gets an extension.
The rental vacancy rate was already at a record 10.6% in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11% soon.
And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.
And falling rents are already pushing down owners’ equivalent rent (OER), and my guess is OER will probably turn negative soon. Since OER is the largest component of CPI (and almost 40% of core CPI), this will push down CPI for some time.
CR can continue to build a fabulous series of scenarios from his original assumption, but we believe that original assumption is a miscalculation.
Paul Krugman writes below, not about the home buyer tax credit, but about calculating accurately, the cost of proposed cap and trade legislation. But his logic on that issue is what leads us to believe that Calculated Risk’s $43,000 figure is an erroneous benchmark of the program’s cost:
Beck got his number from someone who learned about a guesstimate of what the auction value of permits might be (way higher than current estimates, by the way), divided by the number of households, and proclaimed this the cost of the bill. In effect, he looked at a guess about the size of the blue rectangle, which does not represent an economic cost, and called that the cost to the economy.
In a way, though, what Martin Feldstein did was worse. He took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.
Another way to say this is that under the Feldstein method, any time you try to correct an externality, which necessarily means changing relative prices, all of the negative effects of the price change will be counted as a cost — but none of the positive effects will be counted as a benefit.
Bad stuff. And what you should bear in mind is that all I’m doing here is conventional neoclassical economics, quite literally basic textbook material. What does it say when the people who claim to believe in this stuff throw it out the window as soon as it leads to policy conclusions they don’t like?
I.e. It is possible to do the arithmetic correctly and get the math wrong. (It should be noted though, that Krugman has voiced opposition to tax credits for new home buyers as well, so this example is not to say that he supports our view about the potential extension of the program).
Everybody knows the immediate pressing issue is we need to get the public sector out of the grill of the private sector. That’s going to take jobs. First jobs have to stop going away, and then they–private sector ones–have to start coming back.
We need an extension of the home buyer tax credit to keep the economy headed toward where it will begin to expand jobs sooner than later. Let’s talk about the program from a realistic cost and benefit analysis.
The Volcker Speaks
Meet the new boss. Same as the old boss.
Paul Volcker
Paul Volcker is trying to help the men and women elected to serve our nation’s interests on the Senate Banking committee get their brains around what needs to change in the financial system to safeguard the economy from the failings of human nature.
He’s drafted a now widely quoted — The Big Picture and Calculated Risk, to name a couple — prepared statement that states that the nation’s big banks have enjoyed official protection via government policy that effectively keeps the private sector from checking and balancing these institutions in a healthy way.
Bottom line, analysts are reading Volcker’s guidance as a call for restoration of Glass-Steagall Act provisions that have been on hiatus since Nov. 1999. A 10-year joyride. Here’s some thread from the statement:
Over recent months the Administration has set out important proposales which, taken together and implemented, would provide a reformed framework for financial regulation and supervision. There are key elements of the Administration’s approach that I believe deserve your full support. I particularly welcome the strong reaffirmation of one long-standing principle — the separation of banking from commerce — that has long characterized the American approach toward financial regulation. In practice, over a numbe of years that approach has been eroded by loopholes in the legal framework and by technological changes in financial instruments and the nature of banking. As emergency measures, further exceptions to the rule were accepted in the face of the severe crisis.
Failure to close those existing loopholes will inevitably weaken needed prudential safeguards and raise difficult questions about the extent of “moral hazard”, an issue that looms very large in the light of events of the past year. It is those events — including particularly the rescue of money market mutual funds and the decisions to broaden direct access by non-banks to Federal Reserve credit facilities — that ponit to the need for strong enforcement of the distincting between banks and other financial or commercial institutions.
The Big Picture points out several other key recommendations from the former Fed chief:
Volcker also notes two other key needed elements in need of reform: the Moral Hazard of the bailouts, and the ongoing policy of “Too Big To Fail.”
And, Volcker also emphasized the importance of the Federal Reserve maintaining independence from political pressures.
He also called for a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance. Rather than toss trillions at these self-wounded entities, we should instead appoint a special “Conservator” to take control of a bank in clear danger of defaulting on its obligations.
The Conservator should have the authority to negotiate an exchange of debt for new stock to resolve the near insolvent firm, to arrange a sale or merger, or, to arrange an orderly liquidation.
This authority would preempt normal bankruptcy/reorg, justified only by the risk of systemic breakdown.
The question now is how well Volcker knows [at least on part of] his audience — Congress. And whether they know what he means by it all.
Maybe new local and community banks will start up after the scorched earth period plays out over the next 12 to 18 months or so.
The Home Buyer Tax Credit Crunch Bunch
Cartoon by Randy Bish, Pittsburgh Tribune-Review
Make no mistake, any extension or expansion of the tax credit after the current program’s hard sunset on November 30 will reflect venal political motivation (i.e. reelection bids) more than it does Congressional math skills.
Still, why are so many people getting the math wrong as they voice pro or con about whether more home buying stimulus is worth our tax money or not?
- Big Builder’s Sarah Yaussi sets at least one part of the record straight on the economics of the $8,000 first-time home buyer program.
We know that Calculated Risk–a solid economics analyst–believes the policy should have never happened and should go away. He’s done much-quoted arithmetic that puts a U.S. taxpayer pricetag of $43,000 on each house sold under the program that would not have sold if the program did not exist.
Today, he says “most economists–left and right–oppose” the tax credit. He links to a J. Patrick Coolican Las Vegas Sun article that quotes a slew of right- or left-leaning economists who give myriad, often conflicting reasons the current measure is bad.
We’ve heard economists who contend that a home buyer demand stimulus can act as an adrenaline dose that can stabilize home-price declines, slow foreclosures, get people working, and steady the economy for a sustainable period.
Maybe they’re actually a minority of economists, but we think the claim that “most economists oppose” the credit may be pushing the truth.
Thing is, who do economists employ, anyway? They don’t make jobs happen or even household formations, so why should a bunch of economists–the majority of whom did not, like Tom Lawler or Robert Shiller, call the housing bubble nor anything else in the past 10 years–have any say at all? Venal political motivations cloud most of their best economic judgment anyway, so they’re really no different than the politicians.
In this case, best trust people who actually run companies large and small that put people to work. Ask them whether or not it’s worth taxpayers’ money to give housing a bit more of a bump to keep some momentum going.
Taking on Risk
Calculated Risk wants his audience to know what the $8,000 first-time-home-buyer tax credit program costs, and why not?
There are at least four proposals and resolutions with varied amounts of support in both Houses of Congress, awaiting the return of our esteemed representatives for further consideration among the urgencies of healthcare, energy, and financial system regulation. Huge stakes. Already, it looks like our grandchildren will take the brunt of the pain for federal programs flying at the financial system’s woeful state today.
We only know the author of the Calculated Risk blog by his first name, Bill.
We know that his blend of economic analytical discipline, common sense, and a deadpan, just-the-facts-maam writing style make his observations work as insights. Often enough, Calculated Risk’s analysis leads to mind-changing, light-bulb-illuminating, calls to action.
Where CR does the math, it’s alway in English, not Numblish. A reader doesn’t need an advance degree in economics or finance to grasp the point. For instance, on the cost to American taxpayers of the $8,000 tax credit, his tally goes as follows:
Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.
The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home.
The conclusion we’re to draw from the analysis is that the cost of the program outweighs the benefits. CR’s own conclusion is this:
And the numbers will get worse if the program is extended.
But to be fair, we don’t think “the numbers” here are correct.
CR’s math assumes National Association of Realtors data on sales of “existing homes” and NAR estimate of the incremental boost to sales during the term of the $8,000 tax credit to first time home buyers.
NAR “existing home sales” do not include new home sales; so there’s a factor, albeit maybe only 10% of the “existing home sales” market, that has been left out of the addition.
NAR’s home builder counterpart, the National Association of Home Builders, estimates the incremental jolt from this year’s $8,000 tax credit for first time home buyers is not 350,000, but 383,000, or 33k more than the NAR estimate.
Let’s say that delta of 33,000 home sales–a little less than 10% of the 350,000 boost in existing home sales NAR says the tax credit program stimulated–represents the number of new homes sold that would not have sold during that time period without the $8k tax credit.
So, go back to the NAR estimate that 1.9 million home buyers will avail of the tax credit, get the $15.2 billion figure CR arrived at, and divide not by 350,000, but by 383,000, which includes new homes sold [that wouldn't have without the tax credit boost], as well as incremental existing home sales.
A more accurate cost of the program, using CR’s assumptions then, would be $39,686 per home, not “$43,000 per additional home.”
Also, when you factor in the almost $7 billion in revenue produced by just the 33,000 new homes in the equation, and take a look at the multiplier effect of jobs gained or saved, tax revenue generated to localities, business created, etc., the cost per additional home goes down significantly.
CR analysis argues against extending the tax credit for home buyers, which traces back to data that housing supply exceeds demand, and therefore, stimulating demand with incentives only stalls a necessary real estate price correction.
Our argument here is that demand destruction factors have overshot normalized demand, which makes supply look disproportionately excessive.
Congress needs to weigh the “cost per additional home” sold factor carefully and holistically–including the multiplier effect of new homes sold–if it is going to make a sound decision on whether to continue a tax credit or not.
Fitch to be Tied
The aptly named Roelof Slump has spoken [everywhere, but here quoted in the Wall Street Journal].
“The cure rates have really collapsed,” said Roelof Slump, a managing director at Fitch.
Cure rates, which ran at 45% for prime loans as a rule, are coming in at 6%. Unless that changes, there’s big trouble ahead on the more than three-quarters of home mortgage loans that are prime.
Still, while one might have hoped this would not be the case, it can not come as a surpise that underwater loans and lost jobs would spread delinquincies and foreclosures into the prime market.
The risk has been calculable. What can’t be predicted is whether policy and, perhaps a market sentiment shift, will stem the tide before it peaks to worst-case scenario levels in 2010.
The less our admired analyst Bill at Calculated Risk comments subjectively, the more one surmises that he believes the scary numbers speak for themselves.
Still, we believe this psychological indicator–underwater mortgage holders failing to cure–may improve with a kick at the first sign that demand and access to credit normalizes after volume in transactions stays strong for a bit.
Long Absent, the Word “Frenzy” Resurfaces to Describe Home Buying
The fingers type the words “buying frenzy” with zest. Possessed of their own emotional impetus and trajectory, the digits that ply their trade on the keyboard most of the day realize that they have sorely missed typing out the terminology of our now utterly bygone risk-a-philia and profligacy.
Thus, zestily noted from Calculated Risk last Thursday.
I’ve talked with several people – and there is a buying frenzy right now. First-time homebuyers, especially those with a limited down payment, are desperate.
From the Chicago Tribune: First-time buyers race to beat credit deadline
With a growing sense of urgency, first-time buyers are searching for homes, worried that time is running out on an $8,000 federal tax credit.
Real estate agents say they’re seeing a surge of first-timers who want to close on a property by Nov. 30, the deadline for the credit. The rush has set off bidding wars and stirred up a normally quiet August market.
“We’re inundated,” said Paula Clark, an agent with Coldwell Banker.
To meet the Nov. 30 deadline, buyers need to have a contract by around Sept. 30, because inspections, mortgage approvals and other details typically take about two months.
Also from Reuters: Race is on as U.S. home buyer tax credit nears end
“I am willing to settle for something” to finish buying quickly, said 20-year old Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot “is speeding up the process,” she said, adding that “$8,000 could help remodel the house, redo carpets and cabinets.”
For loans backed by the Federal Housing Administration (FHA), which require a minimum 3.5 percent down payment, the $8,000 can be also be applied upfront toward the purchase rather than later on tax returns like other mortgages.
In addition $8,000 to the Federal tax credit, there are some state programs, as an example from Newsday.com: NYS rolls out tax credit for first-time home buyers – but most of the frenzy is being driven by the Federal Tax credit.
We’d contest some of Bill’s conclusions on Calculated Risk.
He asserts that the level of demand is unsustainable at the low end, even if there’s an extension for the current first-time buyer tax credit — there are proposals in both Houses of Congress to extend, enhance, and boost the tax-credit program — beyond the Nov. 30 deadline. He says once you get rid of “pent up” demand from among the 43% of buyers who are first-time home buyers, you’re done with the momentum boost.
We believe that conclusion doesn’t take into consideration a normalized demand from among first-time buyers from among those people who’ve been working on their credit, saving for a down payment, and want to flow into the dream of homeownership. Not to mention “pulling forward” first-time buyers who might jump off the sidelines a bit earlier than they might have because stars–prices, interest rates, and tax credits–are only aligned for just so long.
The other point we’d take issue with–although we believe Calculated Risk probably can show supportive data, and we’re playing devil’s advocate here–is that his analysis is that the high rate of REO and short sale/distressed deals means that those homes that are purchased by buyers using the tax credit are not producing any demand for “move-up” homes.
Even if the distressed purchase rate is near half, that means that the other half–many thousands of sellers–are completing their deals in the teeth of the market, and would be on the market for a higher priced home, either new or existing.
I.e. our conclusion is that the boon in first-time buying does not confine demand to the lowest end homes, and can favorably benefit move-up, and second time move-up sellers.
Still, the fingers do relish typing the words “buying frenzy.” But now they have it out of their system.
The Time Calls for More Focus at Home Builders’ Trade Group
A document dated June 22, 2009 from National Association of Home Builders vice chairman Bob Jones to the trade group’s executive board outlines six broad issue areas.
- Builder Liability (including the Chinese drywall issue)
- Construction codes and standards (including green building)
- Environment (the climate cap & trade issues)
- Federal tax and trade policy
- Housing finance
- Labor/Safety & Health
Around page 80 of the 95 pages of the memorandum comes a series of Amicus briefs that state the association’s position in litigation for everything ranging from “takings,” to endangered species, to fair housing, to effluent limitation guidelines.
Which is to say that housing’s worst stretch since the Great Depression hasn’t slowed down the onslaught of advocacy issues, battles, and policy challenges the NAHB and many of its trade association peers have had to deal with these days.
As a dramatic overhaul of the nation’s health care complex begins to reel under its own weight even as President Barack Obama pushes to bring a revolutionary new plan home, Obama has begun to have to reckon with America’s capacity to adapt in so many ways at once.
Were the economy not so afflicted, focus on the health care system, energy sourcing and economics, regulation of finance, and rebuilding the country’s infrastructure could get a fair shake. Despite high levels of urgency around each of these issues and challenges, neither exected representatives, agency officials, nor the public at large have the capacity to reinvent everything about everything.
Maybe each of these matters is a high priority. But, for the moment, we’re dealing emergently with events and consequences that put us in triage mode, which trumps or at least disrupts prioritization.
We believe the same goes with the NAHB. The question is how many of the initiatives and endeavors the trade group is allocating its resources to will wind up being academic if the vicious circle of home price deflation, foreclosures, bank losses, profitability declines, job losses, and more foreclosures keeps up at a significant pace?
How many home builders will there be to represent in Washington, D.C., if the focus here doesn’t lead somehow to a stabilization of the value of what consumers pay their life’s earnings to come by. Even as more and more sound and disciplined economic analysis posits that at least a few of housing’s multiple bottoms are coming into plump view.
Here’s Tim Iocono’s well-argued and well-illustrated case for green shoots mixed with grains of salt.
Even Bill at Calculated Risk–who holds that we haven’t seen nearly the end on home price declines–has had positive observations creep into his analysis over the past several months.
As policy and free enterprise do their double-helix thing in the next six to 24 months, the NAHB’s mission walks an increasingly delicate line. Look at one of the lines in Iacono’s piece:
Don’t feel too sorry for the homebuilders – they had a few very good years.
This is a widely held view.
Home builders’ representation of their industry’s interests on Capitol Hill need to drive for what will structurally help economic recovery: jobs, jobs, jobs. At this point, reality looks as if the government and free enterprise are forced bedfellows and they’re going to have to get used to it fast if they want to ward off years of less than anemic economic activity.
We understand that–like home building and home builders–the association is facing one of its biggest survival challenges ever.
Some of the executive committee members Jones’ memo addresses believe that that the seriousness of the challenges call for measures more drastic than prioritization.
Very likely, by the trade group’s Fall Board meeting in Chicago, a dramatic restructuring of the NAHB may surface. Just as some of the big home builders have had to relook at how they rationalize operations in markets–and in many cases, have chosen to exit some–the NAHB may have to look at all of its resource allocation with a sharp eye toward making the best with less.
Advocacy is the what home builders need most. That’s where the group should hunker down and do what it does best.
In Home Sales, Seasonality Matters, But Raw Numbers Pay the Bills
We still think the jury’s out on what this week’s new home sales data and Case-Shiller numbers mean.
- The bloggers/analysts have seized the high-ground on saying they’re interpreting the data precisely, and with discipline.
- The mainstream media is regarded by said bloggers/analysts as the gang who can’t shoot straight, but they’re making the bigger splashes with their headlines and news flashes.
There is no arguing two important facts, one of which Barry Ritholtz’s The Big Picture blog drums into our thickish skulls. That is that the Census Bureau’s data on new home sales comes each month with a margin of error, and almost invariably undergoes revision down or up. When the percentage margin of error exceeds the percentage gain or loss, then you have to assume that you’re learning approximately zero from the released figure.
Anyone who wants to argue this matter with Barry, be our guest.
So, before getting too thrilled by the new home sales data, factor in the margin of error.
Second, sheesh, remember this business is a seasonal business. God, or whomever, made residential construction a Seasonally Adjusted business. People, despite little more than one in five of them being married-with-children families, still tend to shop in the Spring and buy in the late Spring, early Summer timeframe.
Up, in other words, is only up if it compares with the same time last year, or for many of the previous years. If you can’t sell more houses after the Super Bowl than you can when the National Football League games are on all day Sunday for 20-or-so weeks, then this business is not for you.
Clearly, if a disciplined economic assessment of national housing numbers and what they foretell is what you rely on, then Calculated Risk and The Big Picture are where to look.
Why are the media so fixated on Sequential Ups, when it is year-on-year or seasonally adjusted figures that are the true telltales of the direction? Will calling the housing bottom sell more newspapers or generate higher TV ratings, resulting in more cash for the media? Doubtful. Will real estate advertisers flock back to the media upon word from the editorial side that recovery is no longer as far down the road? Perhaps.
Maybe it’s a case of reporters, editors, and producers not recognizing where the news is in the data, because they’re inexperienced, or obstinate, or overly busy, or maybe just dumb.
Still, by being wrong and undisciplined in their reporting about the data and its meaning, they may wind up being right enough to drive the bloggers crazy. All it will take is for “Animal Spirits” to flip-flop from paralysis to zeal, from fear of buying to fear of losing the opportunity of a lifetime, and the dumbest, most-undisciplined, stubborn, cub business reporter ever might correctly call a turn in the tide of the market.
Many folks who are slogging it out in the residential construction landscape with companies that develop or build homes do not have the luxury to rely much on the disciplined, economically precise sources of insight for their action plans. If they were to guide their companies based on the prognostications of these analysts, they would probably wind up just grabbing what little money there may be in their reserves and go far, far away for a while.
Many of them don’t behave that way. They’re in what they do, many of them, for reasons resembling a vocation. They believe in making new neighborhoods, and employing good people to do that, and building a legacy for their company’s name.
So numbers that are better on a raw, month to month basis, are just that, better. The restrained optimism (remember, the NAHB builder sentiment reading HMI was up only insofar as two more home builders per 100–up to 17 now–see improving conditions in their markets) is by no means more than that. Many, many home builders are probably more bearish themselves about prospects than even the economic blog meisters we quote here so often.
However, to them, the absolute numbers are how they pay their bills. If a public home builder has standing new-home inventory in a community (their store) that is nearing a close-out threshold, it will sell those units at whatever it takes to generate cash, and zero out costs related to keeping that operation going. So, if June’s non-seasonally adjusted national sales number reflected a lift of 3,000-plus new home sales from a month earlier, then those home-sales represent both cash generation and cash preservation.
A lift in new-home sales, in absolute, is a lifeline to companies. Months’ supply of new homes finally encroached into the 8-plus months area for the first time since 2006 sometime.
Employment and the stability of home values are the only two ways there’ll be solid ground for recovery. The only random factor that could trump these forces could be a psychic shift of “Animal Spirts,” which by its nature would not be explained by the disciplined data analysis of the blogger econ gurus.
Meanwhile, there’ll be good reading when, after the Case-Shiller Index offers more “up” numbers for June, we start seeing seasonality and spreading distress kick-start the rate of price-declines to a renewed pace. Or maybe the MSM will have inadvertently gotten things right by bungling the business information but correctly reading consumer sentiment.
Time will tell.