A little worse than expected, but what I see that really is worth noting is that the deceleration seems to be increasing.
Last month the RE professionals were talking about stabilizing, but I just don't see it. Unless by stabilizing they mean a steady move downward.
Interestingly my local market (Jersey Shore) is seeing the inventory decline track very well with the rate of the national inventory decline. I don't have my figures right here, but I think our Month's supply number is significantly larger though.
I think the inventory figures have to be taken worth a grain of salt when they report declines. For starters, a lot of people are pulling listings. There is a lot of shadow inventory out there. Plus, isn't the inventory figure rigged since it doesn't include/add back any sales that fall through?
NAR changed their seasonal adjustment. Using the old adjustment, SAAR Sept sales would have been 6.02 million, not 6.18 million.
CR, where did you see mention of the change in the adjustment?
Th eyis seem to have some interesting methodology with regards to prices. If you look at prices for Single-Family and Condos separtely, SFHs fell 2.5% and condos 2.8%, but the combined figure is 2.2%. They seem to claim greater precision on the smaller individual numbers.
Calling back to the foreclosure discussion... if an estimated 2 million foreclosures happen over six months (both guesses, I know), that adds a nominal 333,333 per month.
Which would kick 7.3 months of inventory to 7.9 months for this report.
I've read that in peaking to declining housing markets, sales slow, inventory bloats, prices stop rising and maybe fall a little, then there is a period of seller denial and reevaluation. People who already mentally spent the profit they would make selling a house for $300k can't bare to sell it for less. And people who were trying to sell to trade up to bigger house realize they can't sell their house at a price that makes it feasible.
George, You ask a great question, "just who are these "buyers on sidelines"? Of course, the NAR has no answer.
I have a simpler question for them, one they do know the answer to:
What percentage of homes purchased in September were financed with "funny" loans?
Bob_in_MA, NAR didn't mention a different factor, but I always look at actual (in addition to SAAR). And the actual decline was much worse than the reported decline ... so I checked their SA factor, and sure enough it changed.
This report is probably the weakest we've seen from NAR (prices and sales) since the housing bust started. I don't think the small improvement in inventory means anything at this point.
Following Bob, the composition of owners of the inventory this time is different from past balloons with a higher percentage of owners who cannot just take their property off the market and wait for the rest of the world to catch up to housing inflation. And that is where there are some larger worries --banking worries from institutions that were counting on mortgage-related income.
In the figure of NAR's chief economist Lereah we have a model of a real economist operating in a real market-centric world. The message needs to have some economic authority, but not at the expense of the market that employs him. It's an important model to examine and I appreciate CR's little study here of the decline in professional ethics.
I love all this hocus-pocus smiley faced analysis from the NAR.
They do not discuss increasing foreclosures, increasing delinquency rates, shadow supply of houses, a major ARM reset in 2007, etc.
When I talk to realtors and mortgage lenders that have been in the business for 20-30 years, the optimistic view is let's see Q4 looks. Most of them are getting ready for a 2-4 year slump in the market.
It's all within most of us expected. The prices will continue to bleed with -2%/-3% 12 months trailing decline. And that will continue for several years.
Returning to historic median means 30%-40% of real price decline. With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job.
The good news is that fewer new listings are coming online.
This is the start of the slow time of year, seasonally anyway. i do not see any reduction in inventories in my area of the hood.
aso for prices, i have seen 10-15% drops in prices. The NAR info is lagging big time! They know how bad it is and are trying to halt the bleeding. of course they cheerleaded this price escalation all along now they have lost all credibility as an organization.
"It's all within most of us expected. The prices will continue to bleed with -2%/-3% 12 months trailing decline. And that will continue for several years.
Returning to historic median means 30%-40% of real price decline. With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job."
Bob, I agree with your overall assesment of prices, but I feel that there are forces at work that will push a much faster decline in prices. Maybe as short as 18 months to 2 yrs.
Bob, I agree with your overall assesment of prices, but I feel that there are forces at work that will push a much faster decline in prices. Maybe as short as 18 months to 2 yrs.
ed, please explain. toxic loans are still there for the taking with the qualifications just slightly higher than the loosest period. while some will fall by the wayside as they try to refinance, most will seem to be able to put off the day of reckoning. i think we're looking at a long bear market (7-10 years) in real estate.
Yes, I see what you mean. That's actually something I've noticed before in other stats. I wonder if they use some sort of "moving" seasonal adjustment, so the adjustment for this September takes into account last September's figure?
calmo,
I don't know if that's true. If you look at housing busts following booms in Boston and California in the early 90s, there were plenty of forced sales. It seems to me a lot of them are more discretionary, like people moving from high-priced markets to lower costs ones who want to tap into the big capital gain.
I agree there will be a growing number of forced sales. The magnitude really depends on the housing slow-down's effect on the rest of the economy. So far, that really hasn't been significant.
"Bob_in_MA, NAR didn't mention a different factor, but I always look at actual (in addition to SAAR). And the actual decline was much worse than the reported decline ... so I checked their SA factor, and sure enough it changed."
"sales in the South were 9.0 percent below September 2005. The median price in the South was $184,000, down 1.6 percent from a year ago. Existing-home sales in the Midwest were 13.7 percent lower than a year ago. The median price in the Midwest was $169,000, which is 2.3 percent below September 2005.
In the West, existing-home sales were 23.8 percent lower than a year earlier. The median price in the West was $332,000, down 4.3 percent from September 2005. Existing-home sales in the Northeast were 13.4 percent below September 2005. The median existing-home price in the Northeast was $259,000, down 5.1 percent from a year earlier.
Sooo, prices down 1.6%, 2.3%, 4.3%, and 5.1% in each of the four regions. Somehow this all comes out to a 2.2% decline nationwide. Something smells funny with these numbers...
I'm probably going to be flamed for this, but here it goes anyway: What do you expect NAR to say, that the market is going to hell in a handbasket? They have to earn a living in the real estate market, so of course they're going to take an optimistic view. If your livelihood depended on real estate, you might also be inclined to put a happy face on it.
Let the data speak for itself. Personally, I agree with CR's view, but I'm not cheering for a housing collapse.
NAR is saying that inventories are stabilizing, however it looks like many people are taking off the market unsold home, waiting for the the next spring market. It will be interesting to see what happens to the inventories in the spring
As these builders cancel land options
and quit buying raw land it can only
drive RE comps lower. Calif and other coastal states will see a significant decline in raw land value which has been one of the main drivers of the RE bubble.
mp, No bashing here. I agree, "Let the data speak for itself." So, why won't NAR show us how September home sales were financed? Is it possible that data would clarify what the housing sector's prospects really look like?
This is just idle speculation. Yes exotics are still out there, but there is more info that people are getting into trouble with them (report on NBC Nightly news last night.)
With falling prices, some in trouble will find it hard to re-fi on a home worth less than they owe.
But to me the biggest reason is that without the promise of ever increasing value, over-spending for a house is not attractive. I think the downward pressure on prices is heavier than some previous downturns. Making this one swifter.
We will probably have a long bear market, but like Japan the collapse will be quick and then prices stay down for years.
Actually, theres a perfectly valid scientific reason for the NARs new seasonal adjustment factor accelerated global warming. Unbeknownst to CR, David Lereah and a team of realtor/climatologists have recently come up with some important new estimates of the rate of glacial melting and corresponding projections that show coastal flooding will reduce U.S. housing stock dramatically in the not too distant future. Lereah and his colleagues are reportedly leaving for Greenland shortly where they will be taking additional measurements on the ice pack to fine tune their forecast. Rumor has it that they may also be applying for permanent residency there, which is certainly what I would do if I were in their shoes (boots?). ;>)
1) I don't cheer for what might happen to a lot of my fellow citizens (and to our economy) if housing leads us into a recession. I am somewhat disgruntled that if a lot of our national wealth disappears in the form of a credit-bubble induced real estate mania, it will be due to the greed and insanity of people who thought that selling houses to one another was a sufficient substitute for a retirement savings plan...
2) On the other hand, I do hope that whatever the outcome of this mess, that self-serving organizations such as NAR and the brokers working in a market of misaligned incentives, will have to go through some intense reforms - and that consumers will become wiser.
3) as a side note, I find it insane that some of these people, who must have at least basic understanding of economics, believe that a market can be "talked" up or down, and that an obviously tanking market can be arrested if the right wording is inserted into a press release. What sort of rhetoric can outwit simple gravity?
The concept that median prices are direct correlation to value, is a stretch that the NAR often makes. For example, if I buy a house for $100,000, build an addition for $100,000 and sell the house for $200,000 I make $0 but price just went up 100%. Then I have to pay a commission of 6% to sell it.
On a side note, when prices fall there are arguments why it benefits as many people as it hurts. So I disagree that falling prices will definitely spur a recession.
NAR's months of inventory calculation is understated by any reasonable calculation method. 7.6 is about as low as it can reasonably go, and that's making some assumptions that are unlikely to be true. This has become a farce similar to their affordability calculations. I'm laughing so hard I can barely type.
Here's one possible way of calculating it. First, make the assumption that sales will stop declining as of September, and remain at the current rate. Compare September 2006 sales figures (actual) to September 2005s: 527,000/630,000 = .8365. Okay, we are about at 84% of last year's sales rate currently. 2005 total sales were 7,075,000 * .8365 = 5,918,237 /12 = 493,186 = average sales per month at this rate (lower than our current sales because September is relatively higher than many other months, although it is not the peak). NAR has inventory of 3,746,000 as of September = 493,186 = 7.6.
This is probably overoptimistic, because shifting the sales total sample forward six months would capture a slice of the 2006 decline and produce a higher months of inventory number, and thus be more comparable to the next six months in all probability. Furthermore, the next six months is the lowest sales volume of the average year, so again, I am overoptimistic. But at LEAST I do have some basis in the underlying numbers.
On a side note, when prices fall there are arguments why it benefits as many people as it hurts. So I disagree that falling prices will definitely spur a recession.
Recall that last year 40% of new construction was owned by folks who already had a principal dwelling (or 2) and so speculation was a large factor. With house prices starting down the slope now, it could be that investment in this sector is looking at alternatives --and hence worries about a recession.
Similarly, (to some people benefitting from house price declines) recessions are good for lawyers.
But I like your open perspective. How about this: the avalanche of speculators who rode the housing boom to near instant wealth is paid for by those who didn't and who will continue working to pay for this heist well into the future.
So I disagree that falling prices will definitely spur a recession.
Remember only a small percentage of homes sell in any given time period.
Consider a gated community with 100 homes... Say two houses sell in that community for 5% lower than previous sales or selling price expectations. It doesn't just effect the two buyers and the two sellers. All of a sudden 98 neighbors also feel 5% less wealthy as word spreads...
The question is which will have a bigger impact on the overall economy (say by spurring consumption)... The two that got the good deal or the two who sold for less than they wanted & the 98 others who all of a sudden feel poorer - at least in their mind?
That's why a recession is a risk.
Having said that - I can understand why the two that sold would be bummed but the 98 who previously thought they were better off just because of previous appreciation shouldn't. It was all paper profit and could go poof at any time.
I agree with 'S' comment above... real estate appreciation is no substitute for producing real goods & the discipline of saving. This will be a tough lesson to learn for individuals & probably our whole society.
I suppose I should just list the reasons why falling prices COULD spur an economic expansion:
1) Anybody that rents just got a better deal when they do decide to buy
2) Anybody that owns but is looking to purchase somehting bigger/better benefits.
3) Speculaters will move more of their wealth back to the stock market. An empty house doesn't do anything for the economy but investing in corporations creates jobs.
4) If your home is underwater you can always walk away from the mortgage.
fever--
A :better deal"? What, 5-10% off a house who "value" doubled in 5 years? Please...5-10% off all-time historic peak prices is no deal when affordability is at an all-time low.
"On a side note, when prices fall there are arguments why it benefits as many people as it hurts."
Well, there might be, but I think they're pretty flawed. For the median household, almost all their wealth is in their house. If people's largest asset lost a nominal 2.2% yoy, the median households net wealth probably dropped 1.5%. You're talking about $500b total in lost wealth.
A lot of people who speculated are going to be selling stocks and other assets to cover their losses on Florida condos. And the person thinking of buying up who had 30% equity, lost 7%, because no matter what, the bank loan will be paid off in full. Plus, he'll be taking a risk that he won't be able to sell his old house before he needs to pay for the new one.
If there's a recession, it will probably be from a combination of the lost economic activity (then jobs) from the decrease in sales and refinancing volume, the loss of activity (then jobs) from the fall in homebuilding, and the loss of activity from the decrease in MEWs...
One interesting aspect of the NAR figures is how relatively uniform the drop is across regions, one of the things that was so unlikely because housing is so regional. The Mid-West was supposed to come out fine, because things never got as hot, but price and volume decreases there were almost even with the national averages.
Bob, the uniformity is quite surprising. But perhaps we are really seeing the reaction and counteraction of nationally loosened credit standards, which would account for some of this odd interaction.
I find it amusing how many of you are 100% convinced that a decline in real estate values translates into an economic recession. I mean, is there any way to prove any past recession was a direct result of a residential real estate decline?
Let me use some real life examples why a housing price drop can be good for the economy:
A renter that wants to buy a home. That renter buys a house for $300,000 that would have cost $500,000 when the market was hot. So instead of having to make ends meet on a big mortgage he has a much smaller mortgage. With his extra savings he spends more money on goods and services and the economy grows.
Or how about the Systems Analyst that quit to speculate on real estate. Now that quick profits are gone she goes back to being a Systems Analyst.
Fever - the reason your example doesn't hold water is there are so few buyers/sellers vs those owning & 'watching'. And believe me people know what other homes in their neighborhood sell for.
So the positive effect from the small number of people who benefit from lower prices is tsunami tidal wave wiped out by the negative effect of all the owners who each realize the new comps have lowered their 'net worth' by that same amount and now compensate by cutting back on consumption.
CR Great article! In evaluating changes in trend for commodities I would usually look for improvement of at least two of inventory, prices and sales. In this case only one has improved so the weakening trend is clearly continuing.
"With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job."
You're assuming wages will keep up with inflation. Rather big assumption these days, don't you think. If wages don't keep up with inflation housing becomes even less affordable which puts more downward pressure on nominal prices.
Yes I agree, home prices went up as high as they did because of a loosening of credit standards, which may have started in California, but quickly spread across the country. Some areas with stagnant wages, like the upper midwest, got the degradation without the jump in prices.
The increase in home prices due to falling interest rates was fully accounted for by mid-2003. The rise after that was due to fairy dust.
Let's not confuse the issue. We both believe (and most every economist) the real estate market is crashing and accordingly a lot of new worth has been wiped away. We disagree about the impact to our economy a real estate crash will have.
Net worth tied up in real estate isn't necessarily a positive driver for the economy. It goes like this; investors are realizing that residential real estate should not be considered an investment but merely a place to live. These investors are putting what liquid wealth they have left back into the stock market and as a result companies have cash to grow. Based on the stock market's recent gains, it appears Wall Street agrees with me a lot more than it agrees with you, just look at the numbers.
From what have I it seems that retails investors are still staying away from the stock market.
The more pausible explanation would be that the yen carry trade is back and bigger than ever. Hedges fund are borrowing at rock bottom rates from Japan and buying US equities. This could would also explain why the yen has been so weak.
I got somw clarification on the difference between the yr/yr change in home sales between the seasonally adjusted and non-SA numbers. Apparently the NAR uses the Census X11 seasonal adjustment factor with trading days and this year we had 5 Saturdays in Sept vs. just 4 last year. While Sat is usally the busiest day of the year for realtors to do showings, the closings usually happen on weekdays, thus with one less weekday, things looked better on the SA vs. the NSA basis. I'm not sure I quite buy it, since the extra Sat means there was an extra weekend day for realtore to go around and do showings, which should lead to better, not worse sales. However, it was not a case of intellectual dishonesty on the part of the NAR. However, I do think they should at least footnote this in their press release.
Net worth tied up in real estate isn't necessarily a positive driver for the economy. It goes like this; investors are realizing that residential real estate should not be considered an investment but merely a place to live. These investors are putting what liquid wealth they have left back into the stock market and as a result companies have cash to grow. Based on the stock market's recent gains, it appears Wall Street agrees with me a lot more than it agrees with you, just look at the numbers.
We aren't talking about investors, we are talking about my neighbors who own homes and precious little stock or any other liquid assets to buy stocks with - and there are thousands of them for every 'savvy investor'.
Last year they reasoned like this... "You hear the news, Bill & Mary sold their dump for 200 grand, do you believe that! Hell our home should be worth at least 50 grand more than theirs, we're RICH - let's go buy that boat... meet you at the bank tomorrow after work!"
This year... "Wow, Frank & Linda have had their place on the market for months, not a nibble... dropped price twice and still nothin' and now it's winter... Remind me, how much do we owe on that boat?"
I agree it will be 'good' to reallocate resources away from consumption (most housing is, after all consumption) and toward production (stock market is the spearhead of that process)... but it won't be painless & it won't be immediate.
In fact 'pain' is the mechanism (like touching a hot stove) that insures the correction in resource allocation happens. It reinforces what we all knew was right all along.
The future rewards then reinforces that reallocation.
But first we feel pain and all the Federal Reserve morphine in the world won't make the hurt completely go away.
The pain will be the slow down & possible recession driven by slowing consumption caused by people's personal disasters related to RE... it will effect them and everyone who USED to do brisk business with them.
As for the stock market... it is an inch deep and a mile wide at this point - a little early to say it will float many boats.
"When consumers recognize that home sales are stabilizing, well see the buyers whove been on the sidelines get back into the market..."
Alas, the lenders are likely to run screaming in the face of the "biggest one month price drop in history".
A little worse than expected, but what I see that really is worth noting is that the deceleration seems to be increasing.
Last month the RE professionals were talking about stabilizing, but I just don't see it. Unless by stabilizing they mean a steady move downward.
Interestingly my local market (Jersey Shore) is seeing the inventory decline track very well with the rate of the national inventory decline. I don't have my figures right here, but I think our Month's supply number is significantly larger though.
ac, NAR changed their seasonal adjustment. Using the old adjustment, SAAR Sept sales would have been 6.02 million, not 6.18 million.
Using actual sales of 527K, sales are off over 16% from Sep 2005 - the worst YoY comparison of the year.
This is too funny.
Best Wishes.
These clowns with the NAR never acknowledeged the top now they are calling the bottom!??! Go figure.
Yes, inventory is declining MOM - but not YOY. It is up significantly. They are grasping at straws to bring more sheeple to the slaughter!
Why aren't you trumpeting that little bit of NAR deception? That is important news!
CR-
I reminded of the saying:
"One month does not a trend make"
"When consumers recognize that home sales are stabilizing, well see the buyers whove been on the sidelines get back into the market..."
We've got record home ownership and now the speculators are gone....just who are these "buyers on sidelines" supposed to be?
Mark, I added an "alternate" press release. Just the facts ... with a slightly different spin.
Best to all.
Great point, George!
I think the inventory figures have to be taken worth a grain of salt when they report declines. For starters, a lot of people are pulling listings. There is a lot of shadow inventory out there. Plus, isn't the inventory figure rigged since it doesn't include/add back any sales that fall through?
NAR changed their seasonal adjustment. Using the old adjustment, SAAR Sept sales would have been 6.02 million, not 6.18 million.
CR, where did you see mention of the change in the adjustment?
Th eyis seem to have some interesting methodology with regards to prices. If you look at prices for Single-Family and Condos separtely, SFHs fell 2.5% and condos 2.8%, but the combined figure is 2.2%. They seem to claim greater precision on the smaller individual numbers.
Calling back to the foreclosure discussion... if an estimated 2 million foreclosures happen over six months (both guesses, I know), that adds a nominal 333,333 per month.
Which would kick 7.3 months of inventory to 7.9 months for this report.
Fun.
I've read that in peaking to declining housing markets, sales slow, inventory bloats, prices stop rising and maybe fall a little, then there is a period of seller denial and reevaluation. People who already mentally spent the profit they would make selling a house for $300k can't bare to sell it for less. And people who were trying to sell to trade up to bigger house realize they can't sell their house at a price that makes it feasible.
wunderbar!
George, You ask a great question, "just who are these "buyers on sidelines"? Of course, the NAR has no answer.
I have a simpler question for them, one they do know the answer to:
What percentage of homes purchased in September were financed with "funny" loans?
Bob_in_MA, NAR didn't mention a different factor, but I always look at actual (in addition to SAAR). And the actual decline was much worse than the reported decline ... so I checked their SA factor, and sure enough it changed.
This report is probably the weakest we've seen from NAR (prices and sales) since the housing bust started. I don't think the small improvement in inventory means anything at this point.
Best Wishes.
who will fall fater : home sales or home inventory ?
Sales may fall even if inventory falls.
Following Bob, the composition of owners of the inventory this time is different from past balloons with a higher percentage of owners who cannot just take their property off the market and wait for the rest of the world to catch up to housing inflation. And that is where there are some larger worries --banking worries from institutions that were counting on mortgage-related income.
In the figure of NAR's chief economist Lereah we have a model of a real economist operating in a real market-centric world. The message needs to have some economic authority, but not at the expense of the market that employs him. It's an important model to examine and I appreciate CR's little study here of the decline in professional ethics.
I love all this hocus-pocus smiley faced analysis from the NAR.
They do not discuss increasing foreclosures, increasing delinquency rates, shadow supply of houses, a major ARM reset in 2007, etc.
When I talk to realtors and mortgage lenders that have been in the business for 20-30 years, the optimistic view is let's see Q4 looks. Most of them are getting ready for a 2-4 year slump in the market.
It's all within most of us expected. The prices will continue to bleed with -2%/-3% 12 months trailing decline. And that will continue for several years.
Returning to historic median means 30%-40% of real price decline. With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job.
If you have at least 20% of equity you are fine.
CR,
You need to get this NAR deception out publicly. What a bunch of rats!
The good news is that fewer new listings are coming online.
This is the start of the slow time of year, seasonally anyway. i do not see any reduction in inventories in my area of the hood.
aso for prices, i have seen 10-15% drops in prices. The NAR info is lagging big time! They know how bad it is and are trying to halt the bleeding. of course they cheerleaded this price escalation all along now they have lost all credibility as an organization.
"It's all within most of us expected. The prices will continue to bleed with -2%/-3% 12 months trailing decline. And that will continue for several years.
Returning to historic median means 30%-40% of real price decline. With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job."
Bob, I agree with your overall assesment of prices, but I feel that there are forces at work that will push a much faster decline in prices. Maybe as short as 18 months to 2 yrs.
ed, please explain. toxic loans are still there for the taking with the qualifications just slightly higher than the loosest period. while some will fall by the wayside as they try to refinance, most will seem to be able to put off the day of reckoning. i think we're looking at a long bear market (7-10 years) in real estate.
CR,
Yes, I see what you mean. That's actually something I've noticed before in other stats. I wonder if they use some sort of "moving" seasonal adjustment, so the adjustment for this September takes into account last September's figure?
calmo,
I don't know if that's true. If you look at housing busts following booms in Boston and California in the early 90s, there were plenty of forced sales. It seems to me a lot of them are more discretionary, like people moving from high-priced markets to lower costs ones who want to tap into the big capital gain.
I agree there will be a growing number of forced sales. The magnitude really depends on the housing slow-down's effect on the rest of the economy. So far, that really hasn't been significant.
CR,
"Bob_in_MA, NAR didn't mention a different factor, but I always look at actual (in addition to SAAR). And the actual decline was much worse than the reported decline ... so I checked their SA factor, and sure enough it changed."
Can I have a link please?
"sales in the South were 9.0 percent below September 2005. The median price in the South was $184,000, down 1.6 percent from a year ago. Existing-home sales in the Midwest were 13.7 percent lower than a year ago. The median price in the Midwest was $169,000, which is 2.3 percent below September 2005.
In the West, existing-home sales were 23.8 percent lower than a year earlier. The median price in the West was $332,000, down 4.3 percent from September 2005. Existing-home sales in the Northeast were 13.4 percent below September 2005. The median existing-home price in the Northeast was $259,000, down 5.1 percent from a year earlier.
Sooo, prices down 1.6%, 2.3%, 4.3%, and 5.1% in each of the four regions. Somehow this all comes out to a 2.2% decline nationwide. Something smells funny with these numbers...
Two weeks ago Lereah's forecast for 2006 (with 8 months of data in the bank) called for existing sales of 6.45 million.
If we "stabilize" at the current decline of 16.3 percent lower sales than 05 for the rest of the way he's off by about 150K.
Back in January his prediction for O6 was for 6.79 Million existing sales.
Here's the link to Lereah's Oct. forecast
Real Estate Data, Statistics, Demographics, & Trends: NAR Current News
I'm probably going to be flamed for this, but here it goes anyway: What do you expect NAR to say, that the market is going to hell in a handbasket? They have to earn a living in the real estate market, so of course they're going to take an optimistic view. If your livelihood depended on real estate, you might also be inclined to put a happy face on it.
Let the data speak for itself. Personally, I agree with CR's view, but I'm not cheering for a housing collapse.
I'm cheering and praying, cause I want to own a home someday. And, I'm currently priced out!!!
NAR is saying that inventories are stabilizing, however it looks like many people are taking off the market unsold home, waiting for the the next spring market. It will be interesting to see what happens to the inventories in the spring
Anto1
As these builders cancel land options
and quit buying raw land it can only
drive RE comps lower. Calif and other coastal states will see a significant decline in raw land value which has been one of the main drivers of the RE bubble.
mp, No bashing here. I agree, "Let the data speak for itself." So, why won't NAR show us how September home sales were financed? Is it possible that data would clarify what the housing sector's prospects really look like?
mp, I agree. I expect NAR to put a positive spin on what I consider some fairly ugly numbers.
David, the NAR data is here
(Excel file).
Best Wishes.
This is just idle speculation. Yes exotics are still out there, but there is more info that people are getting into trouble with them (report on NBC Nightly news last night.)
With falling prices, some in trouble will find it hard to re-fi on a home worth less than they owe.
But to me the biggest reason is that without the promise of ever increasing value, over-spending for a house is not attractive. I think the downward pressure on prices is heavier than some previous downturns. Making this one swifter.
We will probably have a long bear market, but like Japan the collapse will be quick and then prices stay down for years.
CR, Awesome post!!! Great job unearthing the SAR computation change. How bogus is NAR? Unbelievable.
Don't know about buyers, but there could be a few sellers on the sidelines waiting for that 5 point uptick to cover closing costs.
Maybe the decrease in inventory is because ivy is growing on the for sale signs, kind of like Italian scaffolding.
Actually, theres a perfectly valid scientific reason for the NARs new seasonal adjustment factor accelerated global warming. Unbeknownst to CR, David Lereah and a team of realtor/climatologists have recently come up with some important new estimates of the rate of glacial melting and corresponding projections that show coastal flooding will reduce U.S. housing stock dramatically in the not too distant future. Lereah and his colleagues are reportedly leaving for Greenland shortly where they will be taking additional measurements on the ice pack to fine tune their forecast. Rumor has it that they may also be applying for permanent residency there, which is certainly what I would do if I were in their shoes (boots?). ;>)
1) I don't cheer for what might happen to a lot of my fellow citizens (and to our economy) if housing leads us into a recession. I am somewhat disgruntled that if a lot of our national wealth disappears in the form of a credit-bubble induced real estate mania, it will be due to the greed and insanity of people who thought that selling houses to one another was a sufficient substitute for a retirement savings plan...
2) On the other hand, I do hope that whatever the outcome of this mess, that self-serving organizations such as NAR and the brokers working in a market of misaligned incentives, will have to go through some intense reforms - and that consumers will become wiser.
3) as a side note, I find it insane that some of these people, who must have at least basic understanding of economics, believe that a market can be "talked" up or down, and that an obviously tanking market can be arrested if the right wording is inserted into a press release. What sort of rhetoric can outwit simple gravity?
I was really shocked by this report. The condo median in the west is down over 12% year over year. Walkaways.
This is worse than I expected.
Atta boy CR! I love it when people like you bust NAR and their "new formulas" for making things look better than they actually are.
In case you haven't heard, CAR recently changed the formula they use for figuring affordability.
Using their new magic formula, housing affordability in CA immediately jumped from 15% to 23% of all households.
Amazing. Anyone who thinks they are getting objective information from economists that are beholden to any given industry is just plain nuts.
4shzl,
LOL. Thanks.
The concept that median prices are direct correlation to value, is a stretch that the NAR often makes. For example, if I buy a house for $100,000, build an addition for $100,000 and sell the house for $200,000 I make $0 but price just went up 100%. Then I have to pay a commission of 6% to sell it.
On a side note, when prices fall there are arguments why it benefits as many people as it hurts. So I disagree that falling prices will definitely spur a recession.
NAR's months of inventory calculation is understated by any reasonable calculation method. 7.6 is about as low as it can reasonably go, and that's making some assumptions that are unlikely to be true. This has become a farce similar to their affordability calculations. I'm laughing so hard I can barely type.
Here's one possible way of calculating it. First, make the assumption that sales will stop declining as of September, and remain at the current rate. Compare September 2006 sales figures (actual) to September 2005s: 527,000/630,000 = .8365. Okay, we are about at 84% of last year's sales rate currently. 2005 total sales were 7,075,000 * .8365 = 5,918,237 /12 = 493,186 = average sales per month at this rate (lower than our current sales because September is relatively higher than many other months, although it is not the peak). NAR has inventory of 3,746,000 as of September = 493,186 = 7.6.
This is probably overoptimistic, because shifting the sales total sample forward six months would capture a slice of the 2006 decline and produce a higher months of inventory number, and thus be more comparable to the next six months in all probability. Furthermore, the next six months is the lowest sales volume of the average year, so again, I am overoptimistic. But at LEAST I do have some basis in the underlying numbers.
Dear CR, sign me Bemused and Deeply Amused.
Cheering for a price collapse?
You are damn right I am. The prices went up 100% in short order and that was okay?
NAR would do their morons a favor and talk down prices to rational levels.
fever, about this:
Recall that last year 40% of new construction was owned by folks who already had a principal dwelling (or 2) and so speculation was a large factor. With house prices starting down the slope now, it could be that investment in this sector is looking at alternatives --and hence worries about a recession.
Similarly, (to some people benefitting from house price declines) recessions are good for lawyers.
But I like your open perspective. How about this: the avalanche of speculators who rode the housing boom to near instant wealth is paid for by those who didn't and who will continue working to pay for this heist well into the future.
So I disagree that falling prices will definitely spur a recession.
Remember only a small percentage of homes sell in any given time period.
Consider a gated community with 100 homes... Say two houses sell in that community for 5% lower than previous sales or selling price expectations. It doesn't just effect the two buyers and the two sellers. All of a sudden 98 neighbors also feel 5% less wealthy as word spreads...
The question is which will have a bigger impact on the overall economy (say by spurring consumption)... The two that got the good deal or the two who sold for less than they wanted & the 98 others who all of a sudden feel poorer - at least in their mind?
That's why a recession is a risk.
Having said that - I can understand why the two that sold would be bummed but the 98 who previously thought they were better off just because of previous appreciation shouldn't. It was all paper profit and could go poof at any time.
I agree with 'S' comment above... real estate appreciation is no substitute for producing real goods & the discipline of saving. This will be a tough lesson to learn for individuals & probably our whole society.
I suppose I should just list the reasons why falling prices COULD spur an economic expansion:
1) Anybody that rents just got a better deal when they do decide to buy
2) Anybody that owns but is looking to purchase somehting bigger/better benefits.
3) Speculaters will move more of their wealth back to the stock market. An empty house doesn't do anything for the economy but investing in corporations creates jobs.
4) If your home is underwater you can always walk away from the mortgage.
The fever name is apt, so apt
No doubt if your novel theories are realized they will inaugurate the first ever economic expansion spurred by...
fever--
A :better deal"? What, 5-10% off a house who "value" doubled in 5 years? Please...5-10% off all-time historic peak prices is no deal when affordability is at an all-time low.
Fever's reason #3 is legit - that is the real benefit... push people back into productive & tradable enterprise.
But we'll have to got through a recession & pain first. You know, no pain, no gain.
"On a side note, when prices fall there are arguments why it benefits as many people as it hurts."
Well, there might be, but I think they're pretty flawed. For the median household, almost all their wealth is in their house. If people's largest asset lost a nominal 2.2% yoy, the median households net wealth probably dropped 1.5%. You're talking about $500b total in lost wealth.
A lot of people who speculated are going to be selling stocks and other assets to cover their losses on Florida condos. And the person thinking of buying up who had 30% equity, lost 7%, because no matter what, the bank loan will be paid off in full. Plus, he'll be taking a risk that he won't be able to sell his old house before he needs to pay for the new one.
If there's a recession, it will probably be from a combination of the lost economic activity (then jobs) from the decrease in sales and refinancing volume, the loss of activity (then jobs) from the fall in homebuilding, and the loss of activity from the decrease in MEWs...
One interesting aspect of the NAR figures is how relatively uniform the drop is across regions, one of the things that was so unlikely because housing is so regional. The Mid-West was supposed to come out fine, because things never got as hot, but price and volume decreases there were almost even with the national averages.
Another myth bites the dust.
4shzl,
The trip to Greenland is to scout out locations for a major new beach resort development
Bob, the uniformity is quite surprising. But perhaps we are really seeing the reaction and counteraction of nationally loosened credit standards, which would account for some of this odd interaction.
Here in Santa Clara County, y-o-y sales volume was negative for the 22nd straight month (since December, 2004) and 25th out of the last 26.
See all the latest numbers at:
http://www.viewfromsiliconvalley.com/id273.html
Thanks!
I find it amusing how many of you are 100% convinced that a decline in real estate values translates into an economic recession. I mean, is there any way to prove any past recession was a direct result of a residential real estate decline?
Let me use some real life examples why a housing price drop can be good for the economy:
A renter that wants to buy a home. That renter buys a house for $300,000 that would have cost $500,000 when the market was hot. So instead of having to make ends meet on a big mortgage he has a much smaller mortgage. With his extra savings he spends more money on goods and services and the economy grows.
Or how about the Systems Analyst that quit to speculate on real estate. Now that quick profits are gone she goes back to being a Systems Analyst.
Fever, a $500K house now selling for $300K would consitute a 40% decline. And that defines a crash.
Maybe early next year your rosy scenario for Joe Renter will have become a reality.
Fever - the reason your example doesn't hold water is there are so few buyers/sellers vs those owning & 'watching'. And believe me people know what other homes in their neighborhood sell for.
So the positive effect from the small number of people who benefit from lower prices is tsunami tidal wave wiped out by the negative effect of all the owners who each realize the new comps have lowered their 'net worth' by that same amount and now compensate by cutting back on consumption.
It's just a numbers game.
Hey dryfly,
God bless you for trying, man, but somedays...I swear...it's like talking to fish.
CR Great article! In evaluating changes in trend for commodities I would usually look for improvement of at least two of inventory, prices and sales. In this case only one has improved so the weakening trend is clearly continuing.
"With help of inflation this will take 3-6 years of 2-3% of nominal decline. Inflation will do the rest of the job."
You're assuming wages will keep up with inflation. Rather big assumption these days, don't you think. If wages don't keep up with inflation housing becomes even less affordable which puts more downward pressure on nominal prices.
MaxedOutMama,
Yes I agree, home prices went up as high as they did because of a loosening of credit standards, which may have started in California, but quickly spread across the country. Some areas with stagnant wages, like the upper midwest, got the degradation without the jump in prices.
The increase in home prices due to falling interest rates was fully accounted for by mid-2003. The rise after that was due to fairy dust.
Dryfly:
Let's not confuse the issue. We both believe (and most every economist) the real estate market is crashing and accordingly a lot of new worth has been wiped away. We disagree about the impact to our economy a real estate crash will have.
Net worth tied up in real estate isn't necessarily a positive driver for the economy. It goes like this; investors are realizing that residential real estate should not be considered an investment but merely a place to live. These investors are putting what liquid wealth they have left back into the stock market and as a result companies have cash to grow. Based on the stock market's recent gains, it appears Wall Street agrees with me a lot more than it agrees with you, just look at the numbers.
fever,
From what have I it seems that retails investors are still staying away from the stock market.
The more pausible explanation would be that the yen carry trade is back and bigger than ever. Hedges fund are borrowing at rock bottom rates from Japan and buying US equities. This could would also explain why the yen has been so weak.
Stephanie Pomboy Presents: A Yen for Risk-Minyanville
I got somw clarification on the difference between the yr/yr change in home sales between the seasonally adjusted and non-SA numbers. Apparently the NAR uses the Census X11 seasonal adjustment factor with trading days and this year we had 5 Saturdays in Sept vs. just 4 last year. While Sat is usally the busiest day of the year for realtors to do showings, the closings usually happen on weekdays, thus with one less weekday, things looked better on the SA vs. the NSA basis. I'm not sure I quite buy it, since the extra Sat means there was an extra weekend day for realtore to go around and do showings, which should lead to better, not worse sales. However, it was not a case of intellectual dishonesty on the part of the NAR. However, I do think they should at least footnote this in their press release.
Net worth tied up in real estate isn't necessarily a positive driver for the economy. It goes like this; investors are realizing that residential real estate should not be considered an investment but merely a place to live. These investors are putting what liquid wealth they have left back into the stock market and as a result companies have cash to grow. Based on the stock market's recent gains, it appears Wall Street agrees with me a lot more than it agrees with you, just look at the numbers.
We aren't talking about investors, we are talking about my neighbors who own homes and precious little stock or any other liquid assets to buy stocks with - and there are thousands of them for every 'savvy investor'.
Last year they reasoned like this... "You hear the news, Bill & Mary sold their dump for 200 grand, do you believe that! Hell our home should be worth at least 50 grand more than theirs, we're RICH - let's go buy that boat... meet you at the bank tomorrow after work!"
This year... "Wow, Frank & Linda have had their place on the market for months, not a nibble... dropped price twice and still nothin' and now it's winter... Remind me, how much do we owe on that boat?"
I agree it will be 'good' to reallocate resources away from consumption (most housing is, after all consumption) and toward production (stock market is the spearhead of that process)... but it won't be painless & it won't be immediate.
In fact 'pain' is the mechanism (like touching a hot stove) that insures the correction in resource allocation happens. It reinforces what we all knew was right all along.
The future rewards then reinforces that reallocation.
But first we feel pain and all the Federal Reserve morphine in the world won't make the hurt completely go away.
The pain will be the slow down & possible recession driven by slowing consumption caused by people's personal disasters related to RE... it will effect them and everyone who USED to do brisk business with them.
As for the stock market... it is an inch deep and a mile wide at this point - a little early to say it will float many boats.