Housing: Cancellations, New Home and Total Inventory
Submitted by
CalculatedRisk on Mon, 10/01/2007 - 7:40am (62 comments)
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If "normal" resale inventory is ~3% and we currently have 6% and counting...
Heck, maybe even a Federal Reserve chairman could figure out what is going to happen next.
CR,
One thing to keep in mind, I believe if a house is sold from this shadow inventory (from canceled sales) it also does not show up in the stats. So, if you adjust the inventory upward, shouldn't you also need to adjust the sales upward?
Macleans Canada
Can you say recession?
Can you say recession? | Macleans.ca - Canada - Features
Bob - if we use the sales figures from the homebuilders as well as the cancellation rates reported, we can get an idea of whether we should adjust upward or downward from the Census reported sales. The last couple of months there have been distressed groans emanating from the builders, so....
(Sorry about the lack of spaces, Tanta. I suppose it should be . . . .)
Another way to look at this is that if the builders were clearing inventory dropped off Census, their sales figures should be diverging in trend from Census, but on the whole they are not.
Bob_in_Mass, yes. I have a second chart (not shown) that indicates the adjustment to Census Bureau reported sales based on cancellations.
As I noted last week, when the Census Bureau sales hits bottom - cancellation rates will probably be falling - and the Census Bureau will be understating sales.
In fact, until this quarter, cancellation rates have been moving down slightly. That gave some people a little encouragement about housing. But those people apparently missed the next downturn - something we've been discussing for some time and that is now here - based on the tighter lending standards.
These graphs help with the supply side of the equation - but we also have to watch quantity demanded.
Best Wishes.
I got a flood of flyers in the mail this weekend from local real estate agents and condo developments - some were making fire and brimstone threats not to "pay somebody else's rent".
I'm starting to worry that some of these people are going to be showing up at my door soon.
Panic, do I smell panic?
--
I think that the stat that should be watched is:
New Homes Completed For sale at end of period (000):
\t
January\t177
February 180
March\t181
April\t181
May\t182
June\t181
July\t178
August 180
The peak in previous cycles was 125K! The bottom is more like 60K.
When this falls below 100K then we can say that the supply-demand of new homes is coming into some balance. No?
Jas
OT, the markets are getting way too loony and euphoric; have a look at EEM, AAPL, and GOOG. Something is coming down the pipe that will cause a turn. Could be a Shanghai sell-off, the jobs report this week, who knows. But something will trigger fear back into the markets at some point very soon. Be prudent!
Time for me to thank you, CR, for these graphs which once again beat the snot out of stats which do not usually even try to portray their context.
Appreciate that note about short-selling: yet another view of why recent not-too-alarming housing sales might be misleading...and down-right alarming if that segment of the market is representative.
The Tax Foundation - New Census Data Shows Where Property Taxes Hit Homeowners Hardest
Nicely parsed data on median homeowner income as opposed to the normal data about median income.
Phoenix is going to have a very ugly winter selling season.
By "distressed inventory" what do you mean?
I think you mean houses that will only sell at substantially reduced prices. But I think there are neighborhoods, communities and even states that are so distressed that some houses may not sell at any price, especially after years of vacancy, neglect and vandalism.
Now that Michigan is in financial crisis mode, facing a combination of severe budget cuts and tax increases, how many people will be migrating into Michigan? As in-migration slows, fiscal burdens on residents will increase, forcing more people out. Maybe as many as 5-10% of the existing housing units in Michigan will never be needed.
So there's "distressed inventory" and maybe also "surplus inventory" in some areas. Let's call it like it is.
Of course the lag in reassessments of two years will result in increased appraisals and taxes on a home down 40% in value.
The tax data also colors the median income multiplier for housing valuation.
Stocks up today
There are some examples out there that we have our hands around the subprime problem,'' said Igor Golalic, who manages $2.5 billion at Federated Investment Inc. in Pittsburgh.There's a perception that the worst is over, now that the Fed is on our side.'
Dear CR
You seem to be indicating that things will get worse before they get better.
Regards,
Financial Times Will Allow Some Free Access to Web Site - users to get up to 30 articles a month for free...
- NY Times
CR,
You state: "As I noted last week, when the Census Bureau sales hits bottom - cancellation rates will probably be falling - and the Census Bureau will be understating sales. "
Doesn't that assume that the reporting by the surveyed hombuilders is honest? Sorry to be donning the tinfoil hat but the idea that every previously contracted but cancelled home never makes its' way back into the new homes inventory looks to me like a bit too trusting. Put another way, where on the books are these houses -moved- to reflect their changed status?
Fascinating disconnect between equity & capital markets. Maybe this is more like the period during the S&L crisis, where the equity market goes up in the face of all the problems in the financial system. Rates were going down then too.
One thing for sure, except for the homebuilders, a lot of capital recently pumped into the real estate sector is now getting routed to more productive uses.
Score another 1 for HelicopterBen over Turmoil Imelda.
Shorts taking a huge hit today. There was way too much money to be had today by squeezing the shorts for it not to have happened.
Fascinating disconnect between equity & capital markets. Maybe this is more like the period during the S&L crisis, where the equity market goes up in the face of all the problems in the financial system.
Also, recall that in 1929 stocks rallied throughout the summer despite an economy that was already in a recession.
This sort of thing isn't unprecedented in the worst of financial breakdowns.
So, 120MM units x 2.1% (6.8-4.7)= 2.5 MM extra inventory units over/above prior record ? 6 months of sales just to get down to the prior all time high that came about with record high interest rates ?
Great to see Citibank's housing analyst Stephen Kim renewing his call for a bottom in the homebuilders. Its been a rough summer for Mr Kim, and its good to see that he's still working. Based on the previous timing of his calls, this rally is about over.
Graphs don't seem to picture inventory as being 45% higher than previous all-time high. (2.1/4.7).
Should scaling be different ?
For those of you who are looking at the indices, also check out the yen.
The yen has collapsed today. The money that is going into the indices is carry trade.
Give credit where credit is due.
"Based on the previous timing of his calls, this rally is about over."
Agreed. Today reminds me of that 280+ point gain for the Dow in the middle of July, and we all know what happened after that. I'm thinking about buying some more shares of SRS.
The first day of the month has a very strong bullish bias, especially during the afternoon. Think of all of the 401K money coming in. For this reason, I take some profits on puts before the end of the month and buy S&P futures for the first day of the month. Doing really well on the S&P futures, but I will close the position at 4:00 or so.
According to my charts, builders are still strongly over sold, so I am expecting that they should go up more, before one should buy more puts.
us bears is screwed
Amazing how the equities analysts continue to misread the market action. They confuse rallies with strength in the economy here or abroad rather than the simple savage short covering that actually dominates price moves. It's a speculators' market.
I see hidden inventory carried by developers with cancellations, overpriced reos, and for sale by owners, and inventory held off the market by sellers renting. This inventory is not being captured properly by the Census Bereau. I expect spring selling 2008 to have an unexplained inventory increase.
Citi goes -60% and worst is over rotfl
guys are giving up in there, watch out.
Also, recall that in 1929 stocks rallied throughout the summer despite an economy that was already in a recession.
also recall that there were no financial futures markets at that time...
Amazing how the equities analysts continue to misread the market action.
Nobody gets paid to give away good information.
If the market stays strong, do NOT expect a rate cut.
The 50 basis point cut destroyed the dollar. For those of you keeping score, that is seriously inflationary.
Unless the banking industry really seizes up, no more cuts.
That's bearish.
Ridiculous. A lot of capital recently pumped into real estate was leveraged and is being lost, greatly reducing investors' ability to take more risk or their appetite/access to borrow more speculative money. The unwinding of massive amounts of global speculative leverage pumped into equity (real estate or stocks) takes time. Relax.
It will be a relentless trend for at least the next six months. Hang onto your yen awhile.
Unless the banking industry really seizes up, no more cuts.
The Fed still needs to raise rates.
The fundamental problem is that without threat of rate hikes, hedge funds can effectively print as much money as they want by cyclically borrowing, buying, and then borrowing against the asset appreciation they've created.
It's conceivable that they could even refine the process to the point of being highly shock resistant, dragging it on for years.
The longer it goes on, the worse the consequences.
I believe the Fed is now profoundly derelict in it's duty to maintain the integrity of the financial system (assuming it has such an obligation).
They are literally engineering a disaster.
Contrary Investor is one of the best financial sites doing research on ecnoomy and finance on the web:
Market Observations
Take a look in particular to the last chart -- Median Family House Price Relative to Median Family Income.
My interpretation of this chart is that there is still a lot more pain ahead of us in the coming years.
CNBC's Maria Bartiromo/Bill Maher Housing Bubble Video
Here is a clip from Real Time with Bill Maher which aired Friday September 28th. I have never heard the housing slump sound or look this good.
http;//thegreatloanblog.blogspot.com
More than anyone knows, because there is no law that says all the liquidity hedge funds have access to must be bet on the long side of the market. The wildcard in today's market, that we have never had before, is a combination of three factors:
Poor Joe Public stock market investor has become cannon fodder...and the cannon is being loaded.
Poor Joe Public stock market investor has become cannon fodder...and the cannon is being loaded.
It's just not the stock market -- rates on fixed mortgages have risen significantly since the Fed's rate cut in concert with the stock market rally.
So distressed homeowners who really need to refinance into lower fixed rates right now are getting kicked in the teeth so hedge funds can make a few more bucks.
It's financial and economic cannibalism.
cyclically borrowing, buying, and then borrowing against the asset appreciation they've created
and there instructions, from the fed,is to go out and spend 90% of what they make, on yachts , porsche's, 900sqft homes, 4000sqft 2nd's, 3 month-long world tours/year,
arbogast said: "If the market stays strong, do NOT expect a rate cut..."
Actually, I expect one or two more, regardless of what the stock market does. The Fed funds target rate (an arbitrary level) is still at a sizeable premium over the 13-week T-bill rate (which is more market-controlled). Whenever this has happened to this extent in the past the Fed has moved to bring the two rates more in-line by easing. (Another relatively simple Excel exercise. Gifted amateurs can create an indicator in their stock-charting software.)
The Fed has plenty of cover for easing, too. It has weak economic numbers to point to and very low inflation.
(BTW, the "disconnect" between the stock market behavior and the economic numbers is because the stock market has already discounted the present weakness and is looking ahead.)
FWIW.
Sebastia
is no law that says all the liquidity hedge funds have access to must be bet on the long side of the market
don't be so sure...
have you read the charter's of fund like citadel, caxton, art adivsors?
--
David Rosenberg, ML:
In the market for new homes, despite the price capitulation by the builders, and the move to cut housing starts to 1.33 million units in August (the lowest level since June 1995) down nearly 30% at annual rate over the past three months the inventory backdrop worsened in August to 8.2 months supply from 7.6 months in July. At the end of August, there were a total of 531,000 new unsold homes on the market and only one-third of them were completed. And, of the 178,000 completed homes available for sale last month, less than 15% managed to find any takers. So as the market continues to weaken, look for the builders to continue to offer huge discounts to move product. In fact, futures prices are pointing to home prices deflating right through to 2010.
Jas
Sebastian "The Fed funds target rate (an arbitrary level) is still at a sizeable premium over the 13-week T-bill rate (which is more market-controlled). "
Bullshit. The 13wk tbill is a speculation play on what the fed might do in the near future. It has nothing to do with the economy, directly.
Bullshit. The 13wk tbill is a speculation play on what the fed might do in the near future. It has nothing to do with the economy, directly.
Haha. Bravo.
short sales here
Emerging-Market Short Sales Rise, Entice DWS, Fisher (Update1) - Bloomberg.com
Sebastian said...
'The market is looking to the future'
and from this I gather everything is coming up roses.
Was the market pricing in the future in February of 2000? When the sky was 'limitless' as well?
Back in early 2000, housing prices where 50% lower here in central Connecticut.
Rich,
I didn't see who you were quoting there, but you're correct. What we're seeing now is a cycle of personal and corporate bankruptcies in RE. Bankruptcies are simply destruction of wealth. Sure, sharks may include bankruptcy as part of a fraud, other smart people might avail themselves of the spoils and hopefully, the bankruptees will learn and improve, but the act of bankruptcy cannot in itself help an economy.
short sales here
Man, I was thinking about putting some shorts on those emerging markets and then I saw those "bubble" pictures in the WSJ (comparing emerging markets to the NASDAQ in 2000), and I ran as fast as I could.
BTW, the "disconnect" between the stock market behavior and the economic numbers is because the stock market has already discounted the present weakness and is looking ahead.
By that logic then, the market was thinking that UBS would post a much larger loss than they did.
Personally, I think that efficient market theory is overrated.
I'm throwing in the towel, liquidating my puts and buying some small caps on the next dip. No way to fight this tape.
I still think that the market is acting irrationally in the sense that it is assuming a Goldilocks scenario of more Fed cuts, yet no consumer recession. However I'm short enough on my own pride to recognize that I could be wrong. Plus the timing is unknown; it seems that Americans won't stop buying crap they don't need until they are unemployed and all their access to credit is cut off.
Regardless of what the stock market does the next 12 months, housing is going to get worse. That is about the only thing I'm sure of.
Central Scrutinizer:
You need to get into the flow of things. The time to short is after a strong rally. Right after the Fed hike was a great time to short housing related stocks. Last week was a good time to cover, at least partially. I guess that by next week, we may have a good time for buying shorts and puts.
The stochastics have been good indicators for puts and shorts. Cover when they go to 20 or 10 and turn up. Buy when they hit 80 and turn down.
"I'm throwing in the towel, liquidating my puts and buying some small caps on the next dip. No way to fight this tape."
The stock market going up like this is like a beaucrat who thinks his job is almighty because he makes a six figure salary. Focus on the fundamentals, don't get seduced by the money, and be prudent damn it!
ac
i missed that pictures do you have a link ?
CR,
This suggests a flood of REOs in the coming months.
Making It up on Volume
Bill, thanks for the advice, much appreciated.
At least my conservative style has saved me somewhat ... most of my portfolio is in cash so I can take a hit on some bad trades.
I just updated my previous article with a very amusing REO horror story involving break-ins, vandalism, stolen copper pipes, and an old hot-wired Pontiac Firebird driven 10' into the back of the house. It has a happy ending though, sort of.
the market is always righ today,
will be right tommorrow,
and 99% of the time
dead wrong yesterday
Great to see Citibank's housing analyst Stephen Kim renewing his call for a bottom in the homebuilders.
Kim is the ultimate shill for the home builders. Given the pasting Citigroup has taken on losses on mortgage-backed securities (see the preceding post because, yes, there is a connection).
I remember a few wise people were speculating that Kim's earlier cheerleading was, indeed, at the behest of his employers, who were, as we now have evidence, growing worried about their bad investments in MBS.
It's actually quite funny he would come out with his "upgrade" now that his employer has delivered its bad news. Again, the coordinated action is all-too-obvious.
Expect more bad sailing for the home builders, despite what Kim has to say. And, more importantly, expect more dead bodies getting brought out when it comes time for Citi to report 4th quarter earnings.
rates on fixed mortgages have risen significantly since the Fed's rate cut in concert with the stock market rally.
You are much more knowledgeable than me, but I don't think this is quite the case. I follow my bank's rates every day and they've been hovering between 6.25 and 6.5. Not bad - cheaper than my 6.75 back in June.