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.
Case-Shiller Price by Market Map–Flash Envy
The Wall Street Journal has an enviable Flash infographics group.
Here’s their latest treat, an interactive map of Case-Shiller price data by market.
Click image to access Wall Street Journal interactive map.
Will Home Prices Bottom Soon?
CNBC’s Diana Olick reports on today’s S&P/Case-Shiller home price data:
The Treasury Department’s stress test scenarios–both baseline and more adverse–call for continued but shallower declines through the end of 2010. Calculated Risk plots actual S&P/Case-Shiller data against the two Treasury Department scenarios.
His conclusion:
So far prices are tracking between the two stress test scenarios.
Position A for Case-Shiller Home Prices Story
It’s the lead story in the Wall Street Journal.
U.S. home prices continued their multiyear tumble in April, according to the S&P Case-Shiller home-price indexes, although the indexes showed their third-straight month of slightly smaller declines.
Seventeen of 20 major metropolitan areas posted price declines of more than 10% from a year earlier, with the Sun Belt continuing to be hit hardest. Nationally, home prices are at levels similar to the middle of 2003.
David M. Blitzer, chairman of S&P’s index committee, said the pace of residential real-estate decline slowed in April. “While one month’s data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions.”
Here’s the Standard & Poors monthly release.
Calculated Risk charts up the data in three ways to get insight. Here’s a dramatic one on peak-to-date declines in the 20 Case-Shiller cities.
Click to access Calculated Risk post on Case-Shiller data.
Importantly for an understanding of the relationship between housing and the broader economy, Calculated Risk will show current home price declines in comparison to the Treasury Department’s stress test scenarios to gauge the relative health of the banks.
Since last month’s home price declines were already at or worse than the the “baseline” scenarios projected by the U.S. Treasury, this month’s will clearly show that the stress test was not stressful enough to reality check banks.
Still, second-derivative improvement may be as good news as we’ll get for some months to come, and we’ll have to learn to make the most of it. At any rate, it beats Madoff day two stories by a longshot.
Here’s S&P’s David Blitzer on CNBC with toplines on Case-Shiller’s April data:
A Case for Dr. Shiller
Big Builder senior online editor Bill Gloede previews tomorrow’s monthly release of the S&P/Case-Shiller index. But Gloede does so in inimitable and unexpected fashion.
In a fit of apparently propitious timing, MacroMarkets, LLC, the developer and seller of structured financial products co-founded by Dr. Robert Shiller, on Tuesday will introduce its new MacroShares Major Metro Housing Shares to trading on the New York Stock Exchange.
Why propitious? Well, in California at least, it looks like prices are starting to firm up and even rise. The early second-quarter view from Lennar and KB Home earnings ;last week also seems to indicate better news, or at least market movement, ahead.
The new housing shares will trade under the symbols UMM, for housing market up, and DMM, for housing market down. The shares will track the S&P/Case Shiller Composite 10 home price index, a value-weighted average of the 10 original Case-Shiller metro area indices, which include Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington.
Dr. Shiller’s aim is to generate liquidity and stability around residential real estate, outcomes he says will occur if there’s a natural futures market for it.
Housing Data Points Every Which Way
A good morning to litmus test your theory on where the housing juggernaut is heading.
This morning’s Wall Street Journal headline is limbo in 36-point type.
- Markets Await Housing Reports
Worries about the potential for an economic recovery dragged U.S. stocks to their worst one-day decline in two months Monday. The Dow Jones Industrial Average fell 201 points while the S&P 500 slid below the 900 level and turned negative for the year to date.
In addition to concern about the potential for an economic recovery, heavy stock selling by corporate insiders has also weighed on the markets. Insiders of S&P 500 companies have been net sellers for 14 consecutive weeks, according to InsiderScore.com, the longest stretch since June 2007.
At 10 a.m., the National Association of Realtors will report on May sales of existing homes and the Federal Housing Finance Agency will release home-price data for April.
Wall Street analyst consensus calls for a 2.6% month to month increase to 4.8 million home sales. UBS Homebuilding research analyst David Goldberg expects actuals to slightly eclipse the Street. He’s citing a gust of seasonal tailwinds, “still below year ago levels.”
Further, as defaults rise through the back half of 2009, we expec t further pressure on existing home prices.
Also at 10 this morning, the FHFA House Price Index is due. Covering home sales exclusively with conforming loan financing, the HPI has shown none of the volatility nor dramatic cliff diving that the S&P/Case-Shiller Index shows.
The Street consensus calls for a decline in HPI of -0.3% sequentially. UBS notches it down a bit worse, at -0.4%.
Also under lots of scrutiny among housing players will be the FOMC meeting for the Fed’s stance on interest rates and quantitative easing.
What’s your over under on existing homes data just minutes before the release?
We Won’t Get Fooled Again… Or Will We?
Conundrum on a gloomy, rainy afternoon.
Housing is more affordable. But for whom? Which makes the first statement questionable, if not untrue.
Whether the statement–Housing is more affordable–is valid or not is a big question. Many of housing’s economists say that the degree to which housing affordability reverts to longtime norms–such as house price-to-household income ratios and house price compared with market rate rents–will tell when the housing correction is complete. Once the house price correction is complete, and norms are restored, the assumption is the housing economy will have troughed out, and transactions, absorptions, and an efficient market will resume.
People will buy because it will be the time to buy. But is that asking too much of an economy whose consumer sector–the engine that could…once–is under such duress as it is?
We like Irvine, Calif.-based real estate consultant John Burns; he’s smart, and he can be a help to clients on both sides of the bid-ask chasm that has paralyzed the central nervous system of real estate in the United States.
We also like CNBC real estate correspondent Diana Olick for her standup job of reporting on the housing landscape from both Wall Street and Main Street.
What’s more, we like good news, just as much as the next guy.
These three stars aligned today, but we’re not comforted.
First, John Burns released data that backed up his lead assertion. “We have the best housing affordability in 38 years…” That’s 1971, folks.
Burns trots out chart porn to illustrate the drama of his assertion.
Source: John Burns Real Estate Consulting
Here’s Burns’ commentary on the data.
The monthly cost of homeownership has fallen 43% from the peak in this cycle, with more than half of that due to the decline in price, and the remainder due to the decline in mortgage rates and increase in incomes. The median-income household, which earns $52,800 per year, only needs 25% of their income to buy the median-priced single-family home of $164,600. In July 2006, that ratio was 44%.
Those of us who are in the housing business know that the monthly payment is far more important than the price for entry-level buyers. Entry-level buyers compare the cost of homeownership to the cost of renting and have no idea what a Case-Shiller index means. Once the word gets out that homeownership is less expensive than renting, which is now also true in 54 of the 88 markets where we track this information, we expect buying activity to increase substantially (even in a horrible economy).
CNBC’s Diana Olick caught wind of Burns’ data and smelled a good news headline, which all of us wish for desperately. See earlier Wishful Sinful post. Here’s her take today in her blog: “Yes, You Can Afford A House.” Her evidence of the validity of that claim? John Burns, of course.
I know we’ve been saying over and over that home affordability is soaring to record levels, but a report today from John Burns Real Estate Consulting really puts it into hard numbers, which I thought I’d share.
Let’s start with the big number: the cost of homeownership has fallen 43 percent from the peak in this cycle, with more than half of that due to the decline in home prices and the rest due to lower mortgage rates and increases in income.
Still, realty reality is what it is, not some spin that gets a fleeting instant of attention and then goes away like so much in this throwaway society.
Affordability, by definition, is a real-world term, not a theoretical one.
For instance, what happens when you add home price depreciation rates to your mortgage rates to figure out your real monthly interest rate?
This is the real world way that Chris Flanagan, Asset Backed Securities Research chief at JP Morgan, advises us to look at affordability. Flanagan notes that that by adding the FHFA index’s current 7% YOY decline to a 5% mortgage rate, “real” mortgage rates are closer to 12%, which results in affordability being near the lowest level in the last 30 years.
The other issue is your cost-to-household income ratio. Just as the “V” in loan-to-value has been destabilized by deflationary forces, so too have household income data points been corrupted by galloping job loss trends, which also corrupt consumer confidence.
Fact is, the single most important data point for housing and real estate people to watch is industrial absorptions. This is where the rubber hits the road in non-cyclical job formation that will need to happen to turn the tide on real estate across the board.
All the jobs formed during the W Bush administration have been wiped out. Structural challenges with non-cyclicals that pre-dated the jobs and economic run up of the 2002-2007 period continue. We’re going to need to see non-cyclical industry sectors get well–and household incomes to normalize–before we’ll see the term “affordability” mean anything in the housing market.
We like Burns, Olick, and good news. But we don’t believe them here.
Local Intel–Update 3/26 with Fixed SlideShow ;-)
People don’t buy nor do they sell homes pegged to national real estate trends. Nor even do potential investors or sellers of land make their decisions based on Case-Shiller or any broad stroke metric. Real estate is as local as the next door neighbor’s property line and the length of the drive or walk to necessary destinations like the school, or transportation, or shops, or healthcare.
Especially since job markets are in convulsion–real estate analyst John Burns calls for employment to retreat to 88% of adults who seek full-time work in the next couple of years–waves of local recesssions, lowpoints, and recoveries will occur in different locales at different moments.
The Concord Group, a land use and real estate consultancy, has plotted a recovery timeline for a number of geographies based on job and household formation dynamics that economic drivers have set in motion. No secret to the formula is that land prices, notoriously sticky, will exhibit give first and come closer to “bid” prices as soon as clarity emerges on the latest Geithner plan for banks’ toxic assets.
Once land truly resets and trades resume at some volume, the lot cost-base of new homes will firm up, and a corrected normalized level of volume and pricing will take shape.
Big Builder editor Sarah Yaussi has produced this brief drill-down of the Concord Group analysis, with commentary from Concord principal Andrew Borsanyi.
Bottom Dollar
We don’t believe Wall Street, Washington, Main Street, nor the Economists quite get it. They don’t get the velocity of the correction of errors. Here’s conventional wisdom on the housing price correction masquerading as “contrarian” thinking.
It’s from a blogger whose mantra and tagline are “you are either a contrarian or a victim.” Given the mainstreamish rationale here, we think dude’s a victim.
For example, in a post, “Where’s That Mythical Housing Bottom?” the logic for saying “we still have a ways to go” is laughable.
Click image to see enlarged chart on Contrarian Profits.
This is a chart of the S&P/Case-Shiller Home Price Index.
As you can see, it’s plummeted over the last 18 months or so.
It shows that U.S. house prices have been spanked harder than a disrespectful 5 year old.
And, unfortunately, it shows no sign of bottoming anytime soon.
This makes sense considering the flood of foreclosures hitting the market.
In my parents’ neighborhood in Fort Lauderdale, Florida, homes that were selling for $250,000 during the peak are now going for $70,000 in foreclosure.
Repeat this scenario across the country, and you’ll see that home prices still have further to go.
“Spanked harder than a disrespectful five year old.” Thing is, there’s no reasoning in the chart nor the post that says why “home prices still have a ways to go.” This has become conventional wisdom for many observers, and is the last thing from contrarian thinking.
What contrarian thinking might be really helpful to do right now is to help everybody understand the “cliff-dive” phenomenon of change–the velocity–that seems to have everybody stumped and everybody spooked. If stocks are supposed to be the great discounting mechanism to tell people where things are headed, how come stocks forgot to discount for so immediate a future as occurred in the past 12 months.
It’s anybody’s guess, but we’d suppose a true contrariant would be the best one to assist on this question of the velocity of change from good to bad.
Case-Shiller’s Next Chiller Chapter
Time travel is the new adventure travel. Yesterday, stocks fell to a level they’d last seen in 1997. Today, we have home prices that nationally have taken us back to 2003.
Here’s the Wall Street Journal sum-up of freshly minted data from the S&P/Case-Shiller home-prices index, which continue their roller-coaster ride downward, careening forward to the past.
The U.S. National Home Price index, which covers all nine U.S. census divisions, fell 18% in the fourth quarter from a year earlier, the largest decline in the measure’s 21-year history.
“There are very few, if any, pockets of turnaround that one can see in the data,” said David M. Blitzer, chairman of S&P’s index committee. “Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and eight of those [areas] now with negative rates exceeding 20%.”
Both composite indexes and 13 of the 20 metropolitan areas have reported consecutive record year-over-year declines since December 2007.
As of December, average home prices are down 27% from their mid-2006 peak. The 10-city and 20-city indexes have fallen every month since August 2006, 29 straight.
Both the 10-city and 20-city indexes fell 19% in 2008. December’s drop marks the 10-city index’s 15th-straight monthly report of a record decline.
The indexes showed prices in 10 major metropolitan areas fell 2.3% from November, while home prices in 20 major metropolitan areas fell 2.5% from November.
What’s more, you don’t have to be buying or selling a home these days to know things in real estate, residential and commercial, are bad. Problem is, issues have surfaced in mortgage and commercial real estate borrowing, but haven’t really begun to rear their ugly heads when it comes to car loans and credit cards.
That’s next.
Meanwhile, pithy commentary and analsysis from those we count on as these events unfold… here’s Calculated Risk’s punch line:
Prices are still falling, and will probably continue to fall for some time.
Here’s some bullet points from Josh Levin, Citigroup’s analysts for home building:
Data Likely Skewed by Foreclosures – Like other home price data, we think Case-Shiller is skewed downward by foreclosures. Case-Shiller includes the sale of bank-owned homes in its calculations. The NAR recently estimated that foreclosed homes currently comprise ~45% of existing home sales. As such, we think that decline in the values of non-foreclosed homes is likely less than the headline decline of ~(18.6%). Towards Equilibrium, Not Free Fall – While today’s report will likely generate negative headlines, we think it is important to bear in mind that home prices are not falling into a bottomless abyss. We think that home prices need to fall another 10%-15% nationwide in order to reach an equilibrium that is not distorted by a credit bubble and instead is a function of fundamental factors such as income and rents. The Sooner, The Better – In our opinion, the sooner home prices reach equilibrium, the better. Reaching equilibrium sooner rather than later will allow (1) potential homebuyers to have some measure of confidence that they are not about to lever up in order to invest in a depreciating asset and (2) investors to have greater confidence in homebuilders’ stated book values since price declines are the largest driver of impairments charges.
The Big Picture’s Barry Ritholtz will weigh in with commentary at some point, but for now, he’s letting the big picture [made smaller here] tell the story.
Click on image for access to The Big Picture post.