Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 4 members and 144 guests online.
Huh? I'll never get it with the Census Bureau numbers.
Your equation contains an unknown. No one tracks sale of previously cancelled new houses. You also make a generous assumption that the HBs are reporting in good faith.
IMO as long as cancellation rates remain above traditional rates the Census is overestimating new home sales.
Can you define "cancellation"? If houses aren't moving what exactly is being canceled?
What baffles me is why builders are seeing ANY cancellations. I would have thought that builders would have tightened contract terms SO much (once the bust began last year) that no one would dream of cancelling an order. If buyers had to put 40% down, cancellations would cease almost overnight.
Rob Dawg, yes, the data isn't available for the entire industry, but the homebuilders report net sales. So we can extrapolate from their reports to the industry. It looks like I'm just going to keep reporting this number - and keep being told I'm wrong.
Best Wishes.
Sniglet, that was kind of where I was going with my question.
With fewer speculators in the market to buy a house wouldn't there be fewer cancellations? Isn't that what these numbers suggest?
So you're calling a bottom right here?
Boiled Frog, houses are still being sold. Yes, new home sales have fallen significantly (from around 1.3 to 1.4 million annual rate to almost 0.5 million annual rate). But homes are still selling.
And homes are still being cancelled.
Best to all.
We also run into the problem of in process status. It isn't uncommon for HBs to hold construction short of final inspection for any number of reasons not least property tax considerations.
Huh, this looks like interesting news:
Moody's may downgrade Ambac, MBIA ratings
MBI just fell 15%.
Nemo, a bottom for what? A bottom for existing home sales and prices? No. I thought the first paragraphs made that clear.
For new home sales? Not yet, but we are probably getting close. One thing is for sure, most of the new home sales decline is behind us! Ok - that is safe by definition since we've fallen over 50%.
The problem for the home builders isn't that sales will keep falling, it's that sales won't recover in any meaningful way after finding the eventual bottom.
With record inventories of existng homes (a competing product), new home sales will stay at the bottom until that inventory is reduced.
Best Wishes.
Please excuse my ignorance. In order for the formula to work it has to be assumed that, no current sales of prior cancellations, are included in the current Census Bureau's "gross sales" number. How does one confirm this fact?
Nemo, a bottom for what?
Just yanking your chain, CR. I did actually read what you wrote.
OT : Who should buy LEH ?
Quick Answer: Blackstone
Who Might Buy Lehman? -- Seeking Alpha
Correction- how does one confirm this ASSUMPTION?
but the homebuilders report net sales. So we can extrapolate from their reports to the industry.
We could if we knew which HBs the Census uses for their sampling. As you note the individual variation is quite wide, TOL normally ~7% versus others typically 20% plus.
Again there is the generous assumption that the HBs are reporting in good faith. I recall in the early 90s SoCal contraction new house were 'sold' to sub-contractors to satisfy liens and unpaid work.
Nemo, I figured as much! Thanks for everything - I just posted that Moody's article (with a hat tip to you!).
Been there, the Census Bureau states that they do not include sales of previously cancelled sales in their numbers. Here is their statement:
If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. ... Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold.
Best to all.
Thanks for the follow up CR!
Rob Dawg, I'm definitely relying on the home builder SEC filings - and assuming that those reports are reasonably accurate. I sample several of the homebuilders every quarter, and they are all showing the same pattern. So even if one of them is fudging their numbers, I'd be very surprised if there was a conspiracy.
To me these are just numbers.
Best Wishes.
CR,
Thanks for the response.
CR,
I am actually starting to get what your argument is. However, I wonder if the "underestimating" of new home sales is reflective of reality. HBs can underprice conventional existing homes (but probably not REOs), so it would seem that the buying public would buy more homes from HBs and less existing homes in order to get a better value. So, maybe when the cancelled "new" homes are sold at negative margins to blow out cancelled inventory that could be considered a "new home" sale. I think it is an existing home sale, though, because these homes are probably often over a year old. So, in my thinking, existing home sales might be underreported, but, because new home sales still are falling and cancellations are realtively high, new home sales are still overreported. But, based on the way the Census Bureau counts, your argument may be valid despite its disconnect from reality. I think the vast oversupply of new homes has broken the Census Bureaus model.
What sales prices gets baked into the stat set, and when ?
Hypothetical example:
House originally "sold" 01/01/2007 for $1 million. Builder starts work.
Assume it takes 6 months to build the house.
When push comes to shove, buyer can't get financing.
Cancellation occurs 06/01/2007
Build finally "really" sells house 4 months later, 10/01/2007 for $750K.
What sales price do they report, and when ?
And what does this do to the "median price" statistics ?
This could mean that the published median prices are grossly overstating the real prices of new homes.
Lose the rose-colored glasses, CR.
Your optimism is distressing, and sad.
In Miami-Dade county, the developers of the infamous towers got 30% down from people they deemed speculators.
It didn't stop people from walking away when it became obvious that the values were going to drop more than 50%.
(OT) Anonymous said: "Lose the rose-colored glasses, CR.
Your optimism is distressing, and sad."
CR, I don't think you're charging anywhere near enough for your newsletter subscription, considering what you must be subjected to.
Sebastia
So now we've cleared up the under-estimating of new home sales, can you have a stab at quantifying the under-estimating of existing home sales?
If only sales by registered realtors are included then the explosion in auction sales of foreclosed homes must count as under-reporting.
Thanks, CR, for the clarification. That does make sense, and I think we all appreciate your analysis, and your lack of a bias. There is no shortage of mindless doom-and-gloom bubblehead bloggers out there.
But what about the double-secret inventory?
If only sales by registered realtors are included...
No, sales as recorded with the County are typically reported after excluding re-fis and certain not-arms-length transactions.
Lose the rose-colored glasses, CR. Your optimism is distressing, and sad.
I vote for ignoring anonymous posters instead. I suspect there are a lot of readers like myself who don't comment as frequently as the cheerleaders (both bull & bear variety) but value your data-driven approach.
This is bound to piss off the perma-bears now every bit as much as it did the perma-bulls during the bubble, but it's where the real value lies (for me, anyway.)
Thanks for a great blog.
-Ant
Census does not really report "gross sales." Here is its explanation:
The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice. As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.
Here's a hypothetical example: suppose a builder takes out a permit and reports it as being "built for sale" and that it is sold. That counts as a sale.
Now suppose the next month the sale is canceled. That "sale" is not netted out of "month two's" sales.
Now suppose the builder "resells" that home in month three. That new sale is not counted as a sale in that month.
Over the full three months, the builder's net sales is one, as is its "net sales". If the builder only built one home, then in its reports month one would show net sales of one; month two would show net sales of minus one; and month thress would show net sales of 1, and the three months would show net sales of one.
In the "Census" world, month one sales would be one, and there would be no sales in months two and threee, and the three months would show sales on one.
Seriously, a few more slightly optimistic posts and the readership will tank. Only bad news sells. Just ask Jas.
O-Joe
CR, thanks for the post. This clears up a lot the questions I with had with the other "cancellation" article.
There's one other clarification I'd like to point out: If the "# of cancellations" is increasing, then the Census is probably overestimating new home sales. If the "# of cancellations" is decreasing, the Census is probably underestimating new home sale.
Its possible for the percentage of cancellations to fall while the # of cancellations rise. This could happen if there's a big enough increase in the gross sales of new home sales.
Example: If the cancellation rate fell from 40% to 30% but the gross sales rose by 100%, then the # of cancellations would rise: If you sold 100 homes last year, then there were 100 x 0x4 = 40 cancellations last year. If you sold 200 homes this year, then there were 200 x 0.3 = 60 cancellations this year. So there would have been more cancellations this year even though the cancelation rate (as a percentage) decreased.
But that's not what is acutally happening now. According to the data, gross sales decreased by 60% AND the cancelation rates decreased as well. So the # of cancellations have decreased by over 60%. This means that if the home builders just sold 50% of their previosly cancled homes from last year, it would more than offset the # of cancellations from this year.
CR, I appreciate this clarification, which is similar to what you posted in the comments the other day.
Unfortunately, I'm hearing more talk of developers clearing inventory with "bulk sales" to investors. If that's the case then there really is a "double secret" inventory of homes. Especially if the transactions are not really arm's length, as Rob suggests.
The individual builders may be able to hold off insolvency by converting inventory to cash, but the market as a whole wouldn't be any closer to clearing the inventory overhang if substantial numbers of empty homes are in the hands of would-be vultures.
albrt,
Excellent point.
What we really need is for one of the big HBs to BK so we can look behind the curtain to see what kinds of games they are playing with their reporting. There cannot be many left with sizable lines of untapped commercial credit at the same time their asset bases are being devalued.
"Boiled Frog, houses are still being sold. Yes, new home sales have fallen significantly (from around 1.3 to 1.4 million annual rate to almost 0.5 million annual rate). But homes are still selling."
So... cancellation rates are down, because overall sales have fallen off a cliff and are still dropping. Even though a greater fraction of new homes sold is making it to the closing table (perhaps b/c builders/lenders have tightened contracts, as more than one poster suggested), the total number of homes being sold is still down YoY.
So what's the argument here? CR is not being particularly optimistic about RE here, just making an observation.
Diana Olick spent the day at a foreclosure phone-a-thon, discussing the BOGO homes... My Day At A Foreclosure Call-In Center - CNBC
HARM,
You should know by now these "arguments" are about the size of the iceberg not whether we've hit one or not. Remember Randy H lambasting me on patrick's for insisting this time won't be sticky? Same thing. I am claiming that as long as cancellations are higher than normal the Census is comparatively overestimating sales. CCR is claiming that any decline in the cancellation rate even if still above long term averages represents a Census underestimate. CR uses SEC reportage to track HB completed sales but I am suspicious that those transactions include inventory in lieu of liens or invoices.
albrt writes:
...
Unfortunately, I'm hearing more talk of developers clearing inventory with "bulk sales" to investors.
albrt,
I've heard of land/lot sales, but they've been selling completed homes this way too?
Three cheers for the Countrywide shill and her rose-colored glasses wearing co-blogger! Long may they publish their cheap tabloid journalism.
Ant writes:
Lose the rose-colored glasses, CR. Your optimism is distressing, and sad.
I vote for ignoring anonymous posters instead. I suspect there are a lot of readers like myself who don't comment as frequently as the cheerleaders (both bull & bear variety) but value your data-driven approach.
This is bound to piss off the perma-bears now every bit as much as it did the perma-bulls during the bubble, but it's where the real value lies (for me, anyway.)
Thanks for a great blog.
-Ant
Ant strikes a blow for us data-sucking, logic-loving lurkers. Thanks Ant
NTW