Dont you think it is too early in the cycle to assume that many of these canceled sales will become actual sales? I mean they can sit unsold for months and months. If new home sales are declining could we not also assume that many of these canceled sales are also sitting unsold
And how many of those sales will end up underwater or REO's in a few years, I wonder?
Considering how few places, particularly on the coasts, have affordable housing, I suspect we're seeing a lot of knife-catchers improving the sales numbers.
Tim, that is why I read the home builder reports, and the answer is they are definitely clearing out their previously cancelled homes. On the conference calls, I've heard them called "unintentional spec houses"!
We can't be sure (my sample is just the public builders), but it's very likely that the New Home report is underestimating sales right now.
It also makes sense that cancellation rates would decline: buyers are now aware of the problems getting loans, and builders are requiring larger downpayments and actually trying to qualify buyers. Even if lending standards tightens some more, I don't think cancellation rates will spike as high as Q3 2007 (into the mid-40% range).
This isn't an optimistic post ... I'm just trying to be realistic about the New Home sales report. Housing has huge problems: there is too much inventory, and prices are still way too high in most places.
CR, I agree with Rob on this. All the times you've discussed this, I've never seen a data source that says the builders are actually selling enough of the cancellation backlog to make inventories go down as the cancellation rate goes down. I strongly suspect this varies greatly for different builders in different markets. I don't think the luxury condo tower builders in Florida are working through their backlog in any meaningful way.
Rob Dawg, I disagree. For the longest time I argued the Census Bureau was overestimating sales - and they finally came out with the statement (I doubt I was the cause!), that acknowledged their method overestimates sales with rising cancellations rates.
Cancellation rates are now falling - and the opposite is happening.
albrt, most condos are not included in the New Home sales report - and I agree completely that those areas with significant condo construction have an even larger problem than the data suggests.
To me these are just numbers. The cancellation rate is improving, and that impacts the Census Bureau method (they underestimate sales).
I try to be dispassionate and unbiased when I look at this data.
"interesting statement of our times "improving cancellation rates"... girlbear
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." It would be good if this also applied to our current situation. However, I should point out that Churchill made this speech in November 1942 after the victory at El Alemain. Most of death, devastation, and misery in the second world war occurred afterward in 1943-45 as the Axis were pushed back and defeated.
CR,
Think about the methodology. In normal times cancellations of 10-15% seems reasonable. Normalized the Census would report 100 sales 85 real. Then comes the boom and anyone who closes makes money. Cancellation rates fall to low percentages 3-5%. Census reports 120 sales 115 real. Follows the great bubble and cancellations rise to 40%. Census reports 80 sales, 55 real. Now as the contraction proceeds the cancellation rate drops to 25%. Census reports 65 sales, 48 real.
Normal 15% overreporting.
Bubble 5% overreporting.
Bust beginning 40% overreporting.
Full on bust 25% overreporting.
"I don't think the luxury condo tower builders in Florida are working through their backlog in any meaningful way."
albrt | 05.30.08 - 12:08 pm | #
Condo towers...Not so much. The builders around here have done a good job of cleaning up unsold inventory in SFR. Sure,there are a ton of graded and prepped lots in Cape Coral and Charlotte County,but the build at any cost mentality went away about the middle of last year...
CR, is it the month to month, or quarter over quarter change in cancleation rates that counts or the year over year change. It strikes me that we have yet to aniversary the worst of the canelation spike, even if we are off the peak.
CR, There's a quiet stretch of road about 10 miles from where we live(Bucks County, Pa.) where 3 spec homes have been for sale for more than 2 years(5000 Sq ft and sale price aprox $800-$900K). Two weeks ago one of the homes just vanished, nothing left, not even the foundation. Lot is now for sale. Didn't see any signs of fire or other catasrophe(news articles either). Makes me wonder- any stats/trends available on specs that have been destroyed by fire(heh, heh, heh)?
Think about the methodology. In normal times cancellations of 10-15% seems reasonable. Normalized the Census would report 100 sales 85 real. But they don't add them back and count them AGAIN as sales when they eventually ARE sold. And while these unintentional spec homes may sit empty for months, EVENTUALLY they are sold. If the cancelation rate AND the construction rate were constant, there would be no NET effect because the cancelations from Apr would be balanced out by the cancelations from Jan that did finally sell.
Of course if we assume that builders are finally slowing down in their additions to supply, there would be MORE delayed sales from Jan than new cancelations from Apr because 35% of Jan is a bigger number than 35% of Apr.
Back then Pulte Homes acknowledged a huge jump in cancellations nearing 25% due to their overly aggressively raising of prices. There's nothing normal about 30%.
I work for a private CA builder. We stopped building new starts over a year ago, as did most of the private builders we know. We just lowered the price on 14 Bay Area homes, sold them out in 3 weeks and will be closed out in 45 days. We will not have any standing inventory at that point and no homes in production. Most of the privates we know are in a similar situation, unless they are building out homes for the banks (AKA bank short sales.) New home inventory will not be the problem going forward. Not necessarily the case for resale inventory.
I wonder if the Census Bureau will now "see the light" and modify their methodology now that the improving cancellation rate results in under-reported new home sales? I wouldn't be surprised. Another candidate for "revision" will be owner's equivilent rent in cpi now that equivilent rental rates now over-state core cpi (after artifically depressing it for several years).
As you noted, builders are liquidated a lot of unintended specs.
For example, SPF had a community in Palm Springs. 5 models and 8 specs. No sales for over a year priced between $1-$2 million.
In one morning, all were liquidated at over 40% off. Clearly those liquidated homes will likely not cancel at that price.
Remember, in HB nomenclature, a sale can be an order or a liquidation or closing. Much of Spring sales are orders for delivery later in the year, these are much more likely to cancel down the road prior to closing (maybe a contingency kicks in ect...).
With slower sales going forward, you might see cancellation rates skyrocket in the second half of the year.
Here in the northwest suburbs of Chicago, sales are horrifically low.
Read this report by an otherwise relentlessly upbeat realtor (still trying desperately to put on some positive spin): Realty Times - Error finding Page
Wouldn't it be weird if like sales were counted until shit was actually SOLD and like money had already changed hands and the deal was actually finalized?
CA Builder said: "I work for a private CA builder. We stopped building new starts over a year ago, as did most of the private builders we know. We just lowered the price on 14 Bay Area homes, sold them out in 3 weeks and will be closed out in 45 days...."
Since you're here, may I ask a serious question? When a private builder stops building, what does he do? Is he "out of business"? Does he re-task to do other kinds of construction? Is stopping new home construction completely only something that happens at the end of a cycle, or does it occur at other times?
CA Builder,
It is funny in CA right now. All these homes selling b/c people think they are a good investment now after prices have dropped. Little do they know that they are falling into a big trap and will get crushed. You don't have to know a lot about housing to flip houses. You just need to be aggressive. Agression works great in a rising cycle or, especially, in a bubble cycle. Agression, combined with lack of knowledges, kills you in a falling market cycle or bubble burts.
Think about it. All these flippers haven't been making money in over a year. They are desperate to make more money and are desperate to bet on a bottom, so they can try to get an income again. Too bad for them that they will lose the bet. It will be a small sales bump followed by a return to sales stagnation. As a builder, you should sell all your inventory while you have the chance and find a new career. Homebuilding is dead for several years.
Rob Dawg, I'm with you on this underestimating sales thing. CR, has tried to explain it to me several times, but I don't get it. I think sales are still being overestimated as well.
CR, do you have any stats on the market time of new (non pre-sold) houses? If the market time is say, 10 months, then most of the canceled sale homes from Q3 wouldn't been sold yet. If the market time is 3 months, then the story would be different.
It is possible that some of the homes mentioned by CA builder were bought not by flippers but by buyers who liked the area, liked the home, have real jobs with sufficient income, and intend on staying there a long enough time that further declines in the near term aren't a concern.
You've left out the eventual sale of cancelled homes in normal times. Whatver the cancellation rate, on average the sales rate is close to the reported rate, or builder adjust starts to compensate. If the average pace of sales for a builder in normal times in 100/month and the cancellation rate is 15/month, then the builder is selling 15 homes a month, on average, that don't go into the official monthly sales data. Those are the 15 homes cancelled in prior months that eventaully get sold.
The same thing is happening now. The question is whether cancellations sold in the average month match ne cancellations. When the cancellation rate rises, that's tough to do at first. Once adjustment in starts gets underway, sales of just finished homes or homes under construciton compete less with sales of homes that were part of a cancellation.
I don't know where in the process we are, but it doesn't seem that your numerical example makes the case you want it to make, because it seems to ignore the eventual sale of cancelled homes in normal times. Experience suggests that CR does a better than average job figuring this stuff out. Doesn't mean he's right, but it is not a good idea to dismiss him on the basis of a flawed numerical demonstration.
"bluestatedon writes:
It is possible that some of the homes mentioned by CA builder were bought not by flippers but by buyers who liked the area, liked the home, have real jobs with sufficient income, and intend on staying there a long enough time that further declines in the near term aren't a concern."
There's still a lot of owner-occupied demand in the inner bay area at the right price. Maybe not farther out in Solano, Eastern Contra Costa, and so on. But Fremont, Hayward, even Pleasanton? Sure, why not, especially if it's near a BART line? An emigre from Berkeley or SF who can't afford the market there would still be quite interested.
CR - How does Census report prices? For a cancellation the reported price is the first sale, presumably. The final sale today would probably be a distressed sale; 20%-50% discount. With so many cancellations, prices must be massively overstated.
Sure, some people are buying for a "home," but flippers are trying to make it, too.
Bob, what is the right price? I'd rather buy at the right right price then the wrong right price, and right now the wrong right price seems to be for sale.
At first I agreed with Rob Dawg but I think technically CR is correct; but regardless the culprit is lame methodology (not allowing correction via cancelled sales).
Here is my example to prove CR's point. Start with 1200 houses. I am using round numbers to make it easy.
Jan - report 100 sales but don't report 50 cancels
Feb - report 100 sales but don't report 50 cancels
Mar - report 100 sales but don't report 50 cancels
Apr - report 100 sales but don't report 50 cancels
May - report 100 sales but don't report 50 cancels
Jun - report 100 sales but don't report 50 cancels
mid-year report, the truth comes out;
600 sales reported
300 cancels not reported
300 houses taken ownership
clearly sales were over-reported
Jul - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Aug - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Sep - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Oct - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Nov - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Dec - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
end-of-year report
600 sales reported
300 cancels not reported
900 houses taken ownership
clearly sales were under-reported
The problem is that 600 houses were reported as sold both reporting periods; but actually it was 300 and 900.
Of course I am assuming that the building rate stayed the same.
And I have to totally agree with barely; prices would seem to be "massively overstated" given that the bying of previously cancelled sales probably included a discount in the price that was previously reported.
It is a shame that this (innumeracy) happens. And it isn't happening just in the arena of reporting "sales" of new homes. Take a look at population projections; boomers are not changing the dynamics of the population, they represent 20% of the population and they will continue to represent 20% of the population (we [America] are not "getting older"). Hispanics are not taking over America either; non-hispanic whites are such a huge number and are growing fast enough that every Hispanic family regardless of race (Hispanic is an ethnicity not a race) is going to have to have 30 kids to even make a dent. Adding 50,000 jobs to the economy last month is not good; 150,000 kids and immigrants became of job-needing status in that same period (which of course means 100,000 didn't get a job).
I won't go on; this group is fairly good at understanding this problem.
"Bob, what is the right price? I'd rather buy at the right right price then the wrong right price, and right now the wrong right price seems to be for sale."
I'm afraid I can't help you there; it's going to be subjective. To a well-heeled renter from SF or the better parts of Berkeley/Oakland, "right price" might seem higher than to the rest of us. Comparative to what they'd get for the same money in SF.
Keith your math is internally consistent but doesn't model the reality. You have real sales in the second half of the year running three times the real sales rate of the first half. We are nowhere near market conditions of flat sales never mind 3x rising rates.
There will come a time when sales will be undercounted but that time is not now or soon.
Yes I was making up the numbers and I didn't intend to map reality. But it does show that when more people take ownership of the new houses being built and that some of them are buying previously reported sales that were previously not reported as cancellations that the 'new home sales' being reported are indeed under-reporting real "sales" during that time as CR had originally expressed.
rob dawg
in normal times (steady state) when cancel rates are 15%, 100% of sales take place... the 85% that were not cancelled plus a number equal to 15% from previously cancelled sales.
CR
The critical question is, is inventory rising or falling? If rising, then too many are still being built, and if falling, too few... though I doubt the latter. Price matters; if price declines 30%, can builders build and make money, given current prices for materials and labor?
Do you think prices will reassert their long-term relationship with the CPI? See sudden debt curve at http://bp3.blogger.com/_2fuk3iGxQxM/SD0EgvTycHI/AAAAAAAABfE/HyO_BiFTKtU/s1600-h/cs+2.JPG
If price returns to the long-term trend line, then the decline will be nearly 50%. Personally I expect prices to dip below the CPI, just as they did do in the nineties, and with the area below the curve eventually equating with the area above it, otherwise the long-term trend will be permanently raised, so prices might go down as much as 2/3 from peak. Builders will have a tough time competing in such a price environment, so prices will eventually turn up when we work through the foreclosures.
IMO you seem pretty optimistic considering the wave of option arm loan resets whose defaults will be with us until end 2012... IMO virtually all of these loans will default. Would you care to comment on this coming issue? For that matter, a lot (most?) of other loans bought and financed during the height of the bubble, say from early 05 to end 07, will blow up... something like 20MM units. People will step in and buy at the bottom, and many of these will be those that bailed on the house across the street. Lenders will be desperate to unload their inventory, a foreclosure on the record will not bother them; and, they'll finance it too.
Oh, and I completely agree with you that in the real sense of now, the "under-reporting" to which CR refers is miniscule and doesn't map to the reality that the real estate market (and general economy) is deep in the crapper.
I get totally incensed when numbers like this ("sales are up; time to buy!") are "reported" in the media. I just don't understand why America can't handle the truth. Why must every day be painted as rose-y? Bad news just means we know what needs to be worked on.
jkiss; regarding all of these option-ARMs that are resetting.
Do you think these people are more financially savy then the sub-prime folks? Will they get out of their ARMs sooner than the reset period in 2012?
I am hoping so in that the hit to the economy will be greater but over a shorter time rather than a constant sore. And truth be told, I want to buy their house (it seems to me that option-ARMs are held by people who bought more expensive homes) when it goes to foreclosure...
Hey the stock market is doing just fine, except for a few bad apples in the real estate area. So Happy Days have never gone away. I mean why all the doom and gloom? CR tells us there will be no recession and by jingy there hasn't been one yet. Whoopee.
We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales.
CR,
I'm not sure I follow the logic of that. For the Census Bureau to be underestimating sales, builders would need to be taking homes out of the shadow inventory faster than they are putting new cancellations into that inventory. I don't see how a change in the current cancellation rate directly impacts that.
How do you get there?
Say a builder is in 10 markets, five are in CA, FL, etc., and are in the tank, two are in NC and TX and doing OK, and a couple are in between.
All the phantom inventory may well be in CA, FL, AZ, NV, and they could still be adding to it, even if the company-wide cancellation rate changes.
CR,
Dont you think it is too early in the cycle to assume that many of these canceled sales will become actual sales? I mean they can sit unsold for months and months. If new home sales are declining could we not also assume that many of these canceled sales are also sitting unsold
interesting statement of our times "improving cancellation rates"...
more like less contracts being signed in the first place...many buyers are chasing the short sales and REOs
And how many of those sales will end up underwater or REO's in a few years, I wonder?
Considering how few places, particularly on the coasts, have affordable housing, I suspect we're seeing a lot of knife-catchers improving the sales numbers.
Here in Taos there are NO sales and therefore there are No cancellations
No CR. The Census is not "underestimating" sales it is merely "less overestimating" sales.
Tim, that is why I read the home builder reports, and the answer is they are definitely clearing out their previously cancelled homes. On the conference calls, I've heard them called "unintentional spec houses"!
We can't be sure (my sample is just the public builders), but it's very likely that the New Home report is underestimating sales right now.
It also makes sense that cancellation rates would decline: buyers are now aware of the problems getting loans, and builders are requiring larger downpayments and actually trying to qualify buyers. Even if lending standards tightens some more, I don't think cancellation rates will spike as high as Q3 2007 (into the mid-40% range).
This isn't an optimistic post ... I'm just trying to be realistic about the New Home sales report. Housing has huge problems: there is too much inventory, and prices are still way too high in most places.
Best Wishes.
I get tired of everyone micro analyzing every report
CR, I agree with Rob on this. All the times you've discussed this, I've never seen a data source that says the builders are actually selling enough of the cancellation backlog to make inventories go down as the cancellation rate goes down. I strongly suspect this varies greatly for different builders in different markets. I don't think the luxury condo tower builders in Florida are working through their backlog in any meaningful way.
Rob Dawg, I disagree. For the longest time I argued the Census Bureau was overestimating sales - and they finally came out with the statement (I doubt I was the cause!), that acknowledged their method overestimates sales with rising cancellations rates.
Cancellation rates are now falling - and the opposite is happening.
Best Wishes.
OK, if you are checking the individual home builder reports I guess that counts as a data source.
albrt, most condos are not included in the New Home sales report - and I agree completely that those areas with significant condo construction have an even larger problem than the data suggests.
To me these are just numbers. The cancellation rate is improving, and that impacts the Census Bureau method (they underestimate sales).
I try to be dispassionate and unbiased when I look at this data.
Best to all.
"interesting statement of our times "improving cancellation rates"... girlbear
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." It would be good if this also applied to our current situation. However, I should point out that Churchill made this speech in November 1942 after the victory at El Alemain. Most of death, devastation, and misery in the second world war occurred afterward in 1943-45 as the Axis were pushed back and defeated.
For the longest time I argued the Census Bureau was overestimating sales
I remember that post well, and the prediction was made in the comments section about the effects when the trend reversed... talk about deja vu
CR,
Think about the methodology. In normal times cancellations of 10-15% seems reasonable. Normalized the Census would report 100 sales 85 real. Then comes the boom and anyone who closes makes money. Cancellation rates fall to low percentages 3-5%. Census reports 120 sales 115 real. Follows the great bubble and cancellations rise to 40%. Census reports 80 sales, 55 real. Now as the contraction proceeds the cancellation rate drops to 25%. Census reports 65 sales, 48 real.
Normal 15% overreporting.
Bubble 5% overreporting.
Bust beginning 40% overreporting.
Full on bust 25% overreporting.
We aren't even back to normal overreporting yet.
"I don't think the luxury condo tower builders in Florida are working through their backlog in any meaningful way."
albrt | 05.30.08 - 12:08 pm | #
Condo towers...Not so much. The builders around here have done a good job of cleaning up unsold inventory in SFR. Sure,there are a ton of graded and prepped lots in Cape Coral and Charlotte County,but the build at any cost mentality went away about the middle of last year...
Chris
CR, is it the month to month, or quarter over quarter change in cancleation rates that counts or the year over year change. It strikes me that we have yet to aniversary the worst of the canelation spike, even if we are off the peak.
Barry's great for the markets, but you and Tanta are the housing info source. ;^)
Based on my talks with builders, typical/average cancellation rates are about 28%.
Last year during the worst of it, cancellation rates were approaching 50%.
A 30% cancellation rate indicates a return to normalcy. New homes were the first to see a decline. I suspect they'll be the first to see an increase.
R-D-, nice example; clear, logical, helpful. Thanks!
CR, There's a quiet stretch of road about 10 miles from where we live(Bucks County, Pa.) where 3 spec homes have been for sale for more than 2 years(5000 Sq ft and sale price aprox $800-$900K). Two weeks ago one of the homes just vanished, nothing left, not even the foundation. Lot is now for sale. Didn't see any signs of fire or other catasrophe(news articles either). Makes me wonder- any stats/trends available on specs that have been destroyed by fire(heh, heh, heh)?
Think about the methodology. In normal times cancellations of 10-15% seems reasonable. Normalized the Census would report 100 sales 85 real. But they don't add them back and count them AGAIN as sales when they eventually ARE sold. And while these unintentional spec homes may sit empty for months, EVENTUALLY they are sold. If the cancelation rate AND the construction rate were constant, there would be no NET effect because the cancelations from Apr would be balanced out by the cancelations from Jan that did finally sell.
Of course if we assume that builders are finally slowing down in their additions to supply, there would be MORE delayed sales from Jan than new cancelations from Apr because 35% of Jan is a bigger number than 35% of Apr.
Barry's great for the markets
LMAO!! Good one!
In a Nov 1, 2004 Business Week article:
Homebuilders Are Stretched Thin
Back then Pulte Homes acknowledged a huge jump in cancellations nearing 25% due to their overly aggressively raising of prices. There's nothing normal about 30%.
I work for a private CA builder. We stopped building new starts over a year ago, as did most of the private builders we know. We just lowered the price on 14 Bay Area homes, sold them out in 3 weeks and will be closed out in 45 days. We will not have any standing inventory at that point and no homes in production. Most of the privates we know are in a similar situation, unless they are building out homes for the banks (AKA bank short sales.) New home inventory will not be the problem going forward. Not necessarily the case for resale inventory.
I wonder if the Census Bureau will now "see the light" and modify their methodology now that the improving cancellation rate results in under-reported new home sales? I wouldn't be surprised. Another candidate for "revision" will be owner's equivilent rent in cpi now that equivilent rental rates now over-state core cpi (after artifically depressing it for several years).
CR,,
As you noted, builders are liquidated a lot of unintended specs.
For example, SPF had a community in Palm Springs. 5 models and 8 specs. No sales for over a year priced between $1-$2 million.
In one morning, all were liquidated at over 40% off. Clearly those liquidated homes will likely not cancel at that price.
Remember, in HB nomenclature, a sale can be an order or a liquidation or closing. Much of Spring sales are orders for delivery later in the year, these are much more likely to cancel down the road prior to closing (maybe a contingency kicks in ect...).
With slower sales going forward, you might see cancellation rates skyrocket in the second half of the year.
Here in the northwest suburbs of Chicago, sales are horrifically low.
Read this report by an otherwise relentlessly upbeat realtor (still trying desperately to put on some positive spin):
Realty Times - Error finding Page
Wouldn't it be weird if like sales were counted until shit was actually SOLD and like money had already changed hands and the deal was actually finalized?
Call me crazy....
Moody's to keep Bear Stearns on review for possible upgrade
hooodaphuckcoodanode
CA Builder said: "I work for a private CA builder. We stopped building new starts over a year ago, as did most of the private builders we know. We just lowered the price on 14 Bay Area homes, sold them out in 3 weeks and will be closed out in 45 days...."
Since you're here, may I ask a serious question? When a private builder stops building, what does he do? Is he "out of business"? Does he re-task to do other kinds of construction? Is stopping new home construction completely only something that happens at the end of a cycle, or does it occur at other times?
TIA for any comments.
Sebastian
CA Builder,
It is funny in CA right now. All these homes selling b/c people think they are a good investment now after prices have dropped. Little do they know that they are falling into a big trap and will get crushed. You don't have to know a lot about housing to flip houses. You just need to be aggressive. Agression works great in a rising cycle or, especially, in a bubble cycle. Agression, combined with lack of knowledges, kills you in a falling market cycle or bubble burts.
Think about it. All these flippers haven't been making money in over a year. They are desperate to make more money and are desperate to bet on a bottom, so they can try to get an income again. Too bad for them that they will lose the bet. It will be a small sales bump followed by a return to sales stagnation. As a builder, you should sell all your inventory while you have the chance and find a new career. Homebuilding is dead for several years.
Rob Dawg, I'm with you on this underestimating sales thing. CR, has tried to explain it to me several times, but I don't get it. I think sales are still being overestimated as well.
CR, do you have any stats on the market time of new (non pre-sold) houses? If the market time is say, 10 months, then most of the canceled sale homes from Q3 wouldn't been sold yet. If the market time is 3 months, then the story would be different.
"When a private builder stops building, what does he do?"
Fire everyone, slash fixed costs by selling off most everything and cancelling leases... and try to wait it out. Gonna be a long long wait...
It is possible that some of the homes mentioned by CA builder were bought not by flippers but by buyers who liked the area, liked the home, have real jobs with sufficient income, and intend on staying there a long enough time that further declines in the near term aren't a concern.
Rob Dawggy Dog,
Were you associated with an outfit called "The Mortgage Police" at one point? If inclined, you can email me at "unclebillyclimbs@gmail.com"
Rob D,
You've left out the eventual sale of cancelled homes in normal times. Whatver the cancellation rate, on average the sales rate is close to the reported rate, or builder adjust starts to compensate. If the average pace of sales for a builder in normal times in 100/month and the cancellation rate is 15/month, then the builder is selling 15 homes a month, on average, that don't go into the official monthly sales data. Those are the 15 homes cancelled in prior months that eventaully get sold.
The same thing is happening now. The question is whether cancellations sold in the average month match ne cancellations. When the cancellation rate rises, that's tough to do at first. Once adjustment in starts gets underway, sales of just finished homes or homes under construciton compete less with sales of homes that were part of a cancellation.
I don't know where in the process we are, but it doesn't seem that your numerical example makes the case you want it to make, because it seems to ignore the eventual sale of cancelled homes in normal times. Experience suggests that CR does a better than average job figuring this stuff out. Doesn't mean he's right, but it is not a good idea to dismiss him on the basis of a flawed numerical demonstration.
"bluestatedon writes:
It is possible that some of the homes mentioned by CA builder were bought not by flippers but by buyers who liked the area, liked the home, have real jobs with sufficient income, and intend on staying there a long enough time that further declines in the near term aren't a concern."
There's still a lot of owner-occupied demand in the inner bay area at the right price. Maybe not farther out in Solano, Eastern Contra Costa, and so on. But Fremont, Hayward, even Pleasanton? Sure, why not, especially if it's near a BART line? An emigre from Berkeley or SF who can't afford the market there would still be quite interested.
CR - How does Census report prices? For a cancellation the reported price is the first sale, presumably. The final sale today would probably be a distressed sale; 20%-50% discount. With so many cancellations, prices must be massively overstated.
Sure, some people are buying for a "home," but flippers are trying to make it, too.
Bob, what is the right price? I'd rather buy at the right right price then the wrong right price, and right now the wrong right price seems to be for sale.
At first I agreed with Rob Dawg but I think technically CR is correct; but regardless the culprit is lame methodology (not allowing correction via cancelled sales).
Here is my example to prove CR's point. Start with 1200 houses. I am using round numbers to make it easy.
Jan - report 100 sales but don't report 50 cancels
Feb - report 100 sales but don't report 50 cancels
Mar - report 100 sales but don't report 50 cancels
Apr - report 100 sales but don't report 50 cancels
May - report 100 sales but don't report 50 cancels
Jun - report 100 sales but don't report 50 cancels
mid-year report, the truth comes out;
600 sales reported
300 cancels not reported
300 houses taken ownership
clearly sales were over-reported
Jul - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Aug - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Sep - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Oct - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Nov - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
Dec - report 100 sales but don't report 50 cancels but 100 others "buy" previously reported sales
end-of-year report
600 sales reported
300 cancels not reported
900 houses taken ownership
clearly sales were under-reported
The problem is that 600 houses were reported as sold both reporting periods; but actually it was 300 and 900.
Of course I am assuming that the building rate stayed the same.
And I have to totally agree with barely; prices would seem to be "massively overstated" given that the bying of previously cancelled sales probably included a discount in the price that was previously reported.
It is a shame that this (innumeracy) happens. And it isn't happening just in the arena of reporting "sales" of new homes. Take a look at population projections; boomers are not changing the dynamics of the population, they represent 20% of the population and they will continue to represent 20% of the population (we [America] are not "getting older"). Hispanics are not taking over America either; non-hispanic whites are such a huge number and are growing fast enough that every Hispanic family regardless of race (Hispanic is an ethnicity not a race) is going to have to have 30 kids to even make a dent. Adding 50,000 jobs to the economy last month is not good; 150,000 kids and immigrants became of job-needing status in that same period (which of course means 100,000 didn't get a job).
I won't go on; this group is fairly good at understanding this problem.
"Bob, what is the right price? I'd rather buy at the right right price then the wrong right price, and right now the wrong right price seems to be for sale."
I'm afraid I can't help you there; it's going to be subjective. To a well-heeled renter from SF or the better parts of Berkeley/Oakland, "right price" might seem higher than to the rest of us. Comparative to what they'd get for the same money in SF.
Keith your math is internally consistent but doesn't model the reality. You have real sales in the second half of the year running three times the real sales rate of the first half. We are nowhere near market conditions of flat sales never mind 3x rising rates.
There will come a time when sales will be undercounted but that time is not now or soon.
Yes I was making up the numbers and I didn't intend to map reality. But it does show that when more people take ownership of the new houses being built and that some of them are buying previously reported sales that were previously not reported as cancellations that the 'new home sales' being reported are indeed under-reporting real "sales" during that time as CR had originally expressed.
rob dawg
in normal times (steady state) when cancel rates are 15%, 100% of sales take place... the 85% that were not cancelled plus a number equal to 15% from previously cancelled sales.
CR
The critical question is, is inventory rising or falling? If rising, then too many are still being built, and if falling, too few... though I doubt the latter. Price matters; if price declines 30%, can builders build and make money, given current prices for materials and labor?
Do you think prices will reassert their long-term relationship with the CPI? See sudden debt curve at
http://bp3.blogger.com/_2fuk3iGxQxM/SD0EgvTycHI/AAAAAAAABfE/HyO_BiFTKtU/s1600-h/cs+2.JPG
If price returns to the long-term trend line, then the decline will be nearly 50%. Personally I expect prices to dip below the CPI, just as they did do in the nineties, and with the area below the curve eventually equating with the area above it, otherwise the long-term trend will be permanently raised, so prices might go down as much as 2/3 from peak. Builders will have a tough time competing in such a price environment, so prices will eventually turn up when we work through the foreclosures.
IMO you seem pretty optimistic considering the wave of option arm loan resets whose defaults will be with us until end 2012... IMO virtually all of these loans will default. Would you care to comment on this coming issue? For that matter, a lot (most?) of other loans bought and financed during the height of the bubble, say from early 05 to end 07, will blow up... something like 20MM units. People will step in and buy at the bottom, and many of these will be those that bailed on the house across the street. Lenders will be desperate to unload their inventory, a foreclosure on the record will not bother them; and, they'll finance it too.
Uncle Billy Climbs Mt. Pelerin,
Yes. Shot you an email. Do tell.
Oh, and I completely agree with you that in the real sense of now, the "under-reporting" to which CR refers is miniscule and doesn't map to the reality that the real estate market (and general economy) is deep in the crapper.
I get totally incensed when numbers like this ("sales are up; time to buy!") are "reported" in the media. I just don't understand why America can't handle the truth. Why must every day be painted as rose-y? Bad news just means we know what needs to be worked on.
Pardon my naiveté, but how useful is unreliable information?
I'm struggling to find use for the term "PROBABLY" underestimating sales. Here's the dilemma: If in fact cancellations are not counted,and given the credit crunch, the 30% figure you quote i'm sure is statistically accurately reflected, but in reality 45% is more like it, what does that mean to me? If the unsold dwellings continue to pile up, does not the inventory grow? Don't prices drop? Doesn't that make the stat inaccurate? And aren't wrong decisions made?
I guess what's confusing me is the statement, "The housing outlook is grim, but there is no need to borrow trouble. We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales." What prompts such statement? Can someone enlighten me, please?
jkiss; regarding all of these option-ARMs that are resetting.
Do you think these people are more financially savy then the sub-prime folks? Will they get out of their ARMs sooner than the reset period in 2012?
I am hoping so in that the hit to the economy will be greater but over a shorter time rather than a constant sore. And truth be told, I want to buy their house (it seems to me that option-ARMs are held by people who bought more expensive homes) when it goes to foreclosure...
Hey the stock market is doing just fine, except for a few bad apples in the real estate area. So Happy Days have never gone away. I mean why all the doom and gloom? CR tells us there will be no recession and by jingy there hasn't been one yet. Whoopee.
We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales.
CR,
I'm not sure I follow the logic of that. For the Census Bureau to be underestimating sales, builders would need to be taking homes out of the shadow inventory faster than they are putting new cancellations into that inventory. I don't see how a change in the current cancellation rate directly impacts that.
How do you get there?
Say a builder is in 10 markets, five are in CA, FL, etc., and are in the tank, two are in NC and TX and doing OK, and a couple are in between.
All the phantom inventory may well be in CA, FL, AZ, NV, and they could still be adding to it, even if the company-wide cancellation rate changes.