The census bureau really needs to revisit how it handles (or rather doesn't handle) cancellations. I suppose in the past their current practise was not unreasonable, but given the anecdotely high cancellation rate out there, clearly they are significantly overstating sales and understating inventories. This number gives more fodder to those who believe in stabilization and a soft landing, but the inflation-adjusted 12% drop in prices better reflects reality.
Yeah, people will see what they like here. The one month 10% price drop is certainly eye catching. Subtract all the rebates and it's something even greater.
I guess you can only glean so much from figures that will be revised next month.
My guess, home builders building like mad, wanting to clear inventory of land and building, trying to break even or better, knocking down subs and suppliers. The hell with the prior homebuyers who are further underwater by cuts in new house prices. Build and sell until saturation of the market is complete.
In addition to my standard rant about past revisions downward I'd like to see some $/sf data.
One thing I noticed at the very end. Trends in "for sale by stage of construction." I appears that presales are falling and more houses are reaching completion before selling, if they sell. Despite this the DOM is not moving. This tells me the HBs are pushing product through the pipeline as quickly as possible. Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?
In addition to my standard rant about past revisions downward I'd like to see some $/sf data.
One thing I noticed at the very end. Trends in "for sale by stage of construction." I appears that presales are falling and more houses are reaching completion before selling, if they sell. Despite this the DOM is not moving. This tells me the HBs are pushing product through the pipeline as quickly as possible. Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?
doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
asks us whether 'cancellations' are included in a monthly lagging sort of way. And so maybe for clarity we should view this last entry as a preliminary estimate that will firm up like the rest in due time -a month.
Maybe. What about the possibility that the prices aren't really lower, but the houses being sold are really smaller/cheaper/junkier as buyers and lenders respond to tougher "guidance"?
Not so maybe.
What about those sagging $US --are we taking into account the devaluing dollar on these large numbers that show small changes?
Ok, that's over the top, yes? It's one thing not to swallow every bit of information that comes your way, but to endlessly chew the same bite, is going to put your life in danger.
Maybe.
The data from Bureau of Cencus does not include various incentives that builders are offering to attract buyers. Such as swimming pools, golf-club memberships, paying closing costs and that's just the beginning. That comes on top of generous discounts on the actual prices. It would be interesting to know how much these incentives are in value on average per deal, but I have not been able to find that information, only very rough estimates.
The second issue is that it seems that builders are now pushing hard to get inventories down, including price discounts and various incentives. It's putting downward pressure on all prices and after all, inventories are still very high (both new and existing home sales).
While builders are cleaning their hands of the mess in a rapid manner, normal people trying to sell their previously bought homes are facing a lot of trouble. Actually there was an article on USA Today about this just today. Here's the article:
It could go into a race lowering prices to attract buyers this way and that will not be good for HEWs and MEWs. Also many people may end up with negative equity and that can end up in a real mess.
Again, I'm wary of these inventory numbers due to the large number of cancellations (which, supposedly, are not placed back into inventory).
My speculation is that there could be a significant and growing pool of "hidden inventory", and that the supply problem could be worse than it appears.
Given the level of sales compared to housing completions, should we really be seeing a decrease in inventory?
"doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
jsquaredone | 10.26.06 - 10:53 am | #
so once a cancellation, where does the house go??? that house is left out of any stat for ever??? does it come back as a new house on inventory at some later date?
According to previous CR discussion, once a house enters cancled-land at the Census, it never reemerges. The cancelation never shows up, so if the house ever does sell, the Census simply doesn't count it as a sale (don't ask me how they keep track of this). But if the house never sells? Limbo forever. So there is a shadow inventory, but calculating it would be a difficult game indeed. Unless you know someone at all the major builders who can provide you with the raw data. If you do, please let us know. We nerdmonkeys loves the data.
I realize this question may make me sound stupider than I might be, but why are house PRICES what everyone focuses on. I heard the Bill Gross interview and have read that everyone has been waiting for prices to fall, but why. How will the affordability problem correct without a price drop? Prices can go up 20% for 3 years, but if they drop 5% in one year the Fed has to cut? It seems like interfering (meddling) with a market. Is it because the price declines put those with mortgages based on higher prices underwater? Or because it interferes with the wealth effect and MEW?
"It seems like interfering (meddling) with a market."
Ho Ho Ho! Yes, the Fed can't just sit on it's hands. Personally I wish the Fed would just go back to counting money and clearing checks. We hardly have a free market. Why have we had two of the most grotesque financial bubbles, back to back (dot.com & housing)? The Fed is largely to blame. Do a search on "Greenspan Put".
It didn't used to be that way. An earlier Fed chairman (McChesney?) used to say "The job of the Fed is to take away the punchbowl just when the party gets rolling". Notice that's what Australia and England have done - and their bubbles did achieve soft landings.
Our Fed however does too much, too late, and too extreme.
doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
There are two parts to that statement...
Part One I think is accurate as evidenced by the numbers... sales didn't fall compared to earlier months (at least until they get revised). Lower prices, incentives and aggressive selling I'm sure played a major part.
Part Two was the suggestion that as a result of Part One the worst is over, at least for 'now'.
Key is to define 'now'... if 'now' is last month then 'yes' you can say that. If you define 'now' as this month and the near future then it is conjecure and we'll have to wait and see until the numbers come in & are revised.
I doubt the worst is over but that too is conjecture.
Looks like the big brains with access to all the data were right after all: We are closer to the trough than the peak, and the worst is probably in the rearview mirror.
Looks like we threw a hard landing that nobody showed up for.
The huge drop in prices for new homes must somehow translate to existing homes, or else there is some serious fraud going on. How can the price (and therefore appraisal) of new homes be literally plunging without affecting nearby existing homes? Where I live there are now incentives on the oversupply of new $600K homes that are bringing prices down to the lower $500's/upper $400's, yet there are still many existing home sellers in the same areas asking $450K for their 5 year old home. While it may take some time, the plunge in new home prices has to push down existing home pries. However, the sources of the two numbers are different, and I'm not shocked to see the NAR #'s worsen "less", particularly after this little "seasonal adjustment" calculation change you discovered.
Calculated, can you make a graph of the annual rate of new home sales initial estimates instead of just adding each months new estimate to a plot of the previous month's revised numbers. By comparing only the originally stated numbers for each money we should get a nice apples to apples comparison of the actually severity and slope of the downtrend.
Baddriver, during a down trend, I usually just consider the last few months too high when looking at the graph. I understand what your suggesting, but I think the original estimates have little value.
On Prices: I'd be careful about revisions on prices. The initial estimates seem to be wildly wrong sometimes ... even worse than sales.
To calculate additional inventory, you need to project demand and find the difference between your prediction and completions. Demand is a function of population change, ownership rates associated with the population change, second home and other seasonal homes and demolitions. Sales only have a minor and short term affect on inventory. If homebuilders aren't able to sell their homes, they'll go out of business and their future completions will be taken out of the future supply and will help correct the inventory buildup quicker.
Also, the increase in home sales this month could be attributed to some homebuilders having their fiscal year end in September. HBs (like DR Horton) may sell their inventory at low or 0% EBIT margins to get their return of capital. This would also explain part of the large price decrease. In future months, look at HBs that have large owned land supplies that they need to turn their inventory to generate FCF for possible reasons to explain Census data.
To answer some people questions about incentives, on average, they only amount to about 3% of the value of the home (as MDC and Meritage have said recently). When you hear of $20,000 shopping sprees and new cars, those are the exceptions and not the norm.
Also, the existing home market prices and new home prices are somewhat detached in that the HBs have different incentives that a normal homeowner does. In tough times, you will see HBs have larger discounts than an existing owner since they need to generate cash to continue their business where a homeowner could just wait until somebody buys their house.
CR, I like your site and you do some good analysis. I've only had one grip with your estimation of excess inventory. You estimated that there was 1.2 million homes overbuilt in the US and then you assumed that demand would be reduced by the oversupply. That would be true in a fluid market. The problem is that you don't know where the inventory is. You'd have to assume that the excess inventory was worked off over 2 or 3 years. Also, if you assumed that most of the inventory was in the overheated markets of Florida and California, those are the markets that have the best fundamentals to handle inventory overhangs.
I take this blog and CR's writing very seriously, but this comment by R Cote:
"Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?"
...cost me half a cup of coffee and possibly a keyboard. LOL!
"...cost me half a cup of coffee and possibly a keyboard. LOL!"
As dryfly and others will attest; "Stand in line." I've lost track of the number of people accusing me of ruining their keyboards. IIRC First time I was blamed coffee was $0.69 and Keyboards $69.00. Now that they are both $6.90 I'm not sure if it isn't you who owes me.
One time, just one time, and I swear I won't ask again. Just one time I would like to see a media report on a housing info release that wasn't worthless drek.
Once again Bloomberg (internet) and NPR (radio) start with the 5.3% increase nonsense. Please. Note, they don't even say "an apparent" to indicate the possibility (likelihood) of a revision, it just goes out there as a fact. Ugh.
Bloomberg doesn't even note the discussion is based on the SA number.
Would it kill these guys to go to the real numbers listed on release? I wouldn't even care if they don't say anything about the downward revisions or potential for more revisions. It would at least be more accurate.
Apropos of working off the excess inventory, I wonder if the home builders will slow construction as much as many assume. As land prices, building materials, and labor costs decline can the home builders just not start building homes at 2001 prices again? If interest rates stay low or even go lower that would also increase their ability to sell at a lower price point and make a profit. The real losers in this mess would seem to be the buyers of the last 5 years and those who buy the 'discounted' new homes now on the market.
Hey folks, down below in the existing home sales thread I found out the reason for the seasonal adjustment anomoly on a yr/yr basis. One more Saturday this year than last year. If you click on my home page I put a fairly extensive post there about it. I also have a post that shows a triangle table of the new home sales figures as shown each month going back to May (that didn't change between last month and this, so I assume May is a final number). On the homepage, click on "Full Analyst Blog".
Interesting ideas Charles Reese. However, if the home builders just build drastically less expensive homes (on cheap lots with less expensive materials) wouldn't large number of the recent buyers (over the last few years) go into foreclosure. These "real losers" would take down the economy, incuding banks and other lenders. If we really get a 30-40% decline in home prices over a period of 2-3 years, I don't see how the overall economy could withstand such a shock. Not many home owners have the financial where withall to sell at such a big loss.
Just who will be the Buyers for these lower price homes?
With HB moving inventory at any cost these days it would seem that more of the forward demand will be absorbed soon creating even greater soft markets in 07-08.
CR - thanks for posting the graphs every month...I began reading your site when there were far fewer bars...it's been an
education. It's as if they've never heard of a second derivative being negative (and maybe not even a first derivative). They'll continue to revise the data until the bottom finds them.
I see this 1.075 million number for 5 months already, and each time it is reported as 5% up. I think the statistical people who count that are just masturbating in public
The census bureau really needs to revisit how it handles (or rather doesn't handle) cancellations. I suppose in the past their current practise was not unreasonable, but given the anecdotely high cancellation rate out there, clearly they are significantly overstating sales and understating inventories. This number gives more fodder to those who believe in stabilization and a soft landing, but the inflation-adjusted 12% drop in prices better reflects reality.
doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
Part of The Real Estate Industrial Complex must be very grouchy this moring.
Yeah, people will see what they like here. The one month 10% price drop is certainly eye catching. Subtract all the rebates and it's something even greater.
I guess you can only glean so much from figures that will be revised next month.
Just a reminder: All New Home sales revisions are down during downtrends. This is a systemic problem for the Census Bureau.
As an example, here is the original July release:
July New Home Sales: 1.072 Million Annual Rate
Today, July was revised down to 0.984 million.
OUCH. This can be very misleading unless people are aware of the problem.
Best to all.
My guess, home builders building like mad, wanting to clear inventory of land and building, trying to break even or better, knocking down subs and suppliers. The hell with the prior homebuyers who are further underwater by cuts in new house prices. Build and sell until saturation of the market is complete.
In addition to my standard rant about past revisions downward I'd like to see some $/sf data.
One thing I noticed at the very end. Trends in "for sale by stage of construction." I appears that presales are falling and more houses are reaching completion before selling, if they sell. Despite this the DOM is not moving. This tells me the HBs are pushing product through the pipeline as quickly as possible. Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?
In addition to my standard rant about past revisions downward I'd like to see some $/sf data.
One thing I noticed at the very end. Trends in "for sale by stage of construction." I appears that presales are falling and more houses are reaching completion before selling, if they sell. Despite this the DOM is not moving. This tells me the HBs are pushing product through the pipeline as quickly as possible. Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?
jsq's note
asks us whether 'cancellations' are included in a monthly lagging sort of way. And so maybe for clarity we should view this last entry as a preliminary estimate that will firm up like the rest in due time -a month.
Maybe. What about the possibility that the prices aren't really lower, but the houses being sold are really smaller/cheaper/junkier as buyers and lenders respond to tougher "guidance"?
Not so maybe.
What about those sagging $US --are we taking into account the devaluing dollar on these large numbers that show small changes?
Ok, that's over the top, yes? It's one thing not to swallow every bit of information that comes your way, but to endlessly chew the same bite, is going to put your life in danger.
Maybe.
Two quick notes -
The data from Bureau of Cencus does not include various incentives that builders are offering to attract buyers. Such as swimming pools, golf-club memberships, paying closing costs and that's just the beginning. That comes on top of generous discounts on the actual prices. It would be interesting to know how much these incentives are in value on average per deal, but I have not been able to find that information, only very rough estimates.
The second issue is that it seems that builders are now pushing hard to get inventories down, including price discounts and various incentives. It's putting downward pressure on all prices and after all, inventories are still very high (both new and existing home sales).
While builders are cleaning their hands of the mess in a rapid manner, normal people trying to sell their previously bought homes are facing a lot of trouble. Actually there was an article on USA Today about this just today. Here's the article:
Sellers sing the blues as price drop sets record - USATODAY.com
It could go into a race lowering prices to attract buyers this way and that will not be good for HEWs and MEWs. Also many people may end up with negative equity and that can end up in a real mess.
Again, I'm wary of these inventory numbers due to the large number of cancellations (which, supposedly, are not placed back into inventory).
My speculation is that there could be a significant and growing pool of "hidden inventory", and that the supply problem could be worse than it appears.
Given the level of sales compared to housing completions, should we really be seeing a decrease in inventory?
"doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
jsquaredone | 10.26.06 - 10:53 am | #
DRINKING THE KOOL-AID. GALLONS OF IT.
so once a cancellation, where does the house go??? that house is left out of any stat for ever??? does it come back as a new house on inventory at some later date?
ac asks a good question. isn't there a way to calculate the extra inventory based on new house completions minus sales?
i prefer the grape kool aid!!
chris m, here is a good article on cancellations: Think Housing's Stabilized? See Cancellations
Jason M, I'm open to suggestions. I think there are too many unknowns to make a decent calculation on actual inventory.
Best to all.
Reported in this blog on 10/11, Bill Gross used 5 -10% drop a major danger sign for the Fed. Awfully close now, don't you think?
chris m:
According to previous CR discussion, once a house enters cancled-land at the Census, it never reemerges. The cancelation never shows up, so if the house ever does sell, the Census simply doesn't count it as a sale (don't ask me how they keep track of this). But if the house never sells? Limbo forever. So there is a shadow inventory, but calculating it would be a difficult game indeed. Unless you know someone at all the major builders who can provide you with the raw data. If you do, please let us know. We nerdmonkeys loves the data.
Re: Housing PRICES and Bill Gross
I realize this question may make me sound stupider than I might be, but why are house PRICES what everyone focuses on. I heard the Bill Gross interview and have read that everyone has been waiting for prices to fall, but why. How will the affordability problem correct without a price drop? Prices can go up 20% for 3 years, but if they drop 5% in one year the Fed has to cut? It seems like interfering (meddling) with a market. Is it because the price declines put those with mortgages based on higher prices underwater? Or because it interferes with the wealth effect and MEW?
"It seems like interfering (meddling) with a market."
Ho Ho Ho! Yes, the Fed can't just sit on it's hands. Personally I wish the Fed would just go back to counting money and clearing checks. We hardly have a free market. Why have we had two of the most grotesque financial bubbles, back to back (dot.com & housing)? The Fed is largely to blame. Do a search on "Greenspan Put".
It didn't used to be that way. An earlier Fed chairman (McChesney?) used to say "The job of the Fed is to take away the punchbowl just when the party gets rolling". Notice that's what Australia and England have done - and their bubbles did achieve soft landings.
Our Fed however does too much, too late, and too extreme.
doesnt the bounce off the revised prior month indicate that lower prices have attracted buyers and that,at least for now, the worst is over?
There are two parts to that statement...
Part One I think is accurate as evidenced by the numbers... sales didn't fall compared to earlier months (at least until they get revised). Lower prices, incentives and aggressive selling I'm sure played a major part.
Part Two was the suggestion that as a result of Part One the worst is over, at least for 'now'.
Key is to define 'now'... if 'now' is last month then 'yes' you can say that. If you define 'now' as this month and the near future then it is conjecure and we'll have to wait and see until the numbers come in & are revised.
I doubt the worst is over but that too is conjecture.
Looks like the big brains with access to all the data were right after all: We are closer to the trough than the peak, and the worst is probably in the rearview mirror.
Looks like we threw a hard landing that nobody showed up for.
The huge drop in prices for new homes must somehow translate to existing homes, or else there is some serious fraud going on. How can the price (and therefore appraisal) of new homes be literally plunging without affecting nearby existing homes? Where I live there are now incentives on the oversupply of new $600K homes that are bringing prices down to the lower $500's/upper $400's, yet there are still many existing home sellers in the same areas asking $450K for their 5 year old home. While it may take some time, the plunge in new home prices has to push down existing home pries. However, the sources of the two numbers are different, and I'm not shocked to see the NAR #'s worsen "less", particularly after this little "seasonal adjustment" calculation change you discovered.
What? Sorry, those are my comments above.
Calculated, can you make a graph of the annual rate of new home sales initial estimates instead of just adding each months new estimate to a plot of the previous month's revised numbers. By comparing only the originally stated numbers for each money we should get a nice apples to apples comparison of the actually severity and slope of the downtrend.
Baddriver, during a down trend, I usually just consider the last few months too high when looking at the graph. I understand what your suggesting, but I think the original estimates have little value.
On Prices: I'd be careful about revisions on prices. The initial estimates seem to be wildly wrong sometimes ... even worse than sales.
Best to all.
To calculate additional inventory, you need to project demand and find the difference between your prediction and completions. Demand is a function of population change, ownership rates associated with the population change, second home and other seasonal homes and demolitions. Sales only have a minor and short term affect on inventory. If homebuilders aren't able to sell their homes, they'll go out of business and their future completions will be taken out of the future supply and will help correct the inventory buildup quicker.
Also, the increase in home sales this month could be attributed to some homebuilders having their fiscal year end in September. HBs (like DR Horton) may sell their inventory at low or 0% EBIT margins to get their return of capital. This would also explain part of the large price decrease. In future months, look at HBs that have large owned land supplies that they need to turn their inventory to generate FCF for possible reasons to explain Census data.
To answer some people questions about incentives, on average, they only amount to about 3% of the value of the home (as MDC and Meritage have said recently). When you hear of $20,000 shopping sprees and new cars, those are the exceptions and not the norm.
Also, the existing home market prices and new home prices are somewhat detached in that the HBs have different incentives that a normal homeowner does. In tough times, you will see HBs have larger discounts than an existing owner since they need to generate cash to continue their business where a homeowner could just wait until somebody buys their house.
CR, I like your site and you do some good analysis. I've only had one grip with your estimation of excess inventory. You estimated that there was 1.2 million homes overbuilt in the US and then you assumed that demand would be reduced by the oversupply. That would be true in a fluid market. The problem is that you don't know where the inventory is. You'd have to assume that the excess inventory was worked off over 2 or 3 years. Also, if you assumed that most of the inventory was in the overheated markets of Florida and California, those are the markets that have the best fundamentals to handle inventory overhangs.
Looks like we threw a hard landing that nobody showed up for.
Who say's the party is over. It's fashionable to come late.
I take this blog and CR's writing very seriously, but this comment by R Cote:
"Anyone interested in buying the last house drywalled by a sub-contractor that hasn't been paid in 4 months slapping up the last house he's likely to contract for years all the while being pressured by the prime to go quicker?"
...cost me half a cup of coffee and possibly a keyboard. LOL!
"...cost me half a cup of coffee and possibly a keyboard. LOL!"
As dryfly and others will attest; "Stand in line." I've lost track of the number of people accusing me of ruining their keyboards. IIRC First time I was blamed coffee was $0.69 and Keyboards $69.00. Now that they are both $6.90 I'm not sure if it isn't you who owes me.
One time, just one time, and I swear I won't ask again. Just one time I would like to see a media report on a housing info release that wasn't worthless drek.
Once again Bloomberg (internet) and NPR (radio) start with the 5.3% increase nonsense. Please. Note, they don't even say "an apparent" to indicate the possibility (likelihood) of a revision, it just goes out there as a fact. Ugh.
Bloomberg doesn't even note the discussion is based on the SA number.
Would it kill these guys to go to the real numbers listed on release? I wouldn't even care if they don't say anything about the downward revisions or potential for more revisions. It would at least be more accurate.
This gobbledygook is getting very tiring.
Apropos of working off the excess inventory, I wonder if the home builders will slow construction as much as many assume. As land prices, building materials, and labor costs decline can the home builders just not start building homes at 2001 prices again? If interest rates stay low or even go lower that would also increase their ability to sell at a lower price point and make a profit. The real losers in this mess would seem to be the buyers of the last 5 years and those who buy the 'discounted' new homes now on the market.
Hey folks, down below in the existing home sales thread I found out the reason for the seasonal adjustment anomoly on a yr/yr basis. One more Saturday this year than last year. If you click on my home page I put a fairly extensive post there about it. I also have a post that shows a triangle table of the new home sales figures as shown each month going back to May (that didn't change between last month and this, so I assume May is a final number). On the homepage, click on "Full Analyst Blog".
Interesting ideas Charles Reese. However, if the home builders just build drastically less expensive homes (on cheap lots with less expensive materials) wouldn't large number of the recent buyers (over the last few years) go into foreclosure. These "real losers" would take down the economy, incuding banks and other lenders. If we really get a 30-40% decline in home prices over a period of 2-3 years, I don't see how the overall economy could withstand such a shock. Not many home owners have the financial where withall to sell at such a big loss.
Just who will be the Buyers for these lower price homes?
With HB moving inventory at any cost these days it would seem that more of the forward demand will be absorbed soon creating even greater soft markets in 07-08.
CR - thanks for posting the graphs every month...I began reading your site when there were far fewer bars...it's been an
education. It's as if they've never heard of a second derivative being negative (and maybe not even a first derivative). They'll continue to revise the data until the bottom finds them.
I see this 1.075 million number for 5 months already, and each time it is reported as 5% up. I think the statistical people who count that are just masturbating in public
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