NARcasting The Future: February 2008

Today, the National Association of Realtors (NAR) provided their latest estimate of annual existing home sales for 2008 revising down their prior estimate to a 4.9 million unit annual pace for the first half of the year and revising up the estimate to 5.8 million unit annual pace in the second half.

Given the truly awful quality of forecasts provided by NAR economists, I’m going to stick with their estimate for the first half of the year giving them less room for egregious error.

As usual, the latest forecast comes with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their existing home sales forecasts for 2007 and now 2008 into a chart along with a list of prominent quotes supplied with each forecast.

12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

11/13/2007 Prediction: 5.5 million units.
Yun "In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment… 2007 will be the fifth best year for housing on record"

12/10/2007 Prediction: 5.67 million units in 2007, 5.7 million units in 2008.
Yun "The broad trend over the coming year will be a gradual rise in existing-home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007."

01/08/2008 Prediction: 5.66 million units in 2007, 5.7 million units in 2008.
Yun "A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008."

02/07/2008 Prediction: 4.9 million units.
Yun "Where builders have cut construction sharply, and in most areas with improving affordability conditions, we’ll generally see moderately higher home prices."

NARcasting The Future: November 2007

Today, the National Association of Realtors (NAR) released yet another downward revision to their outlook for existing home sales for 2007 along with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their forecasts for 2007 home sales into a chart along with a list of prominent quotes supplied with each forecast.


12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

11/13/2007 Prediction: 5.5 million units.
Yun "In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment… 2007 will be the fifth best year for housing on record"

Realtor’s Follies (A Slight Return)

Some of you may recall a post I wrote in September 2006 that chronicled the details surrounding the then President of the National Association of Realtors (NAR), Thomas M. Stevens, inability to sell his own home.

At that time, the house had an unchanged listing price of $1,450,000 and had been sitting on the market for just over 350 days.

Obviously, this was a bit embarrassing for both Stevens and the NAR as was made perfectly apparent during both a Washington Post article and a subsequent CNBC interview.

"Who knew last September how long this down trend was going to continue, … You need to adjust the price. . . . But I didn't do that. And my house is still on the market."

"What I should have done, was listened to my agent and cut the price by $50,000 to $100,000 early on, and the property would have sold last October. … I should have listed it a month earlier,"

Stevens, who is also the Senior Vice President of NRT, the nation’s largest residential real estate brokerage, continued to leave the price unchanged for months afterward which, combined with an obviously declining housing market, kept the property sitting vacant and unsold until sometime in early 2007 when the listing was pulled from the MLS.

At that time, I had assumed that the property had simply sold but was unable to verify that fact.

Now though, and thanks to the super astute fellow blogger AUA of DirectCurrent who recently found the house again on the market, it appears that it DIDN’T SELL… EVEN AFTER SIGNIFICANT PRICE REDUCTIONS!

Yes… You heard right… the house is STILL on the market (click for... listing, zillow, video, etc.) and now with a listing price of $1,285,000.

That’s roughly 766 days on the market and $165,000 of price reductions and STILL NO TAKERS!

This has got to be one of the best indicators of the truly phenomenal downturn the nation’s housing markets are experiencing.

Furthermore, if a sophisticated and leading residential real estate broker and former president of the National Association of Realtors can’t accurately price and sell his own home, then how can any member Realtor be trusted to “evaluate your situation?”

The Daily 2¢ - New Campaign, Old Scam

There just doesn’t seem to be ANY limit to the depths to which the truly underhanded National Association of Realtors (NAR) will reach in attempting to protect their own self interest.

Their new ad campaign, which apparently replaces last year’s ads promoting the absurd notion that “It’s a Great Time to Buy or Sell a Home”, shows (see ad above) what looks to be a 4 year old in a backyard swing with the title “Buying a Home is a Great Way To Build Long Term Wealth, There are Some Other Important Dividends Too”.

Along with the ludicrous “tug at the heartstrings” comes some “facts” to back up their claims ranging from “the value of a home nearly doubles every 10 years” and “the average homeowner has 36 times the wealth of the average renter” to the pièce de résistance… “the best way to evaluate your situation and options is to contact a Realtor”.

They are truly a desperate and reprehensible outfit.

What’s going to be next year’s campaign?

Possibly a cute little puppy being held firmly around the neck with snub nose pressed to its head and the tagline “Buy a home or this bitch dies!”

At this point, I wouldn’t be too surprised…

Am I alone in thinking that NAR’s attempts to persuade unsuspecting people into “investing” in a depreciating asset as large as a home, simply to serve the interests of their organization and its members is tantamount to fraud and should be prosecuted?

NARcasting The Future: October 2007

Today, the National Association of Realtors (NAR) released yet another downward revision to their outlook for existing home sales for 2007 along with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their forecasts for 2007 home sales into a chart along with a list of prominent quotes supplied with each forecast.


12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

NARcasting The Future: August 2007

Last week, the National Association of Realtors (NAR) released yet another downward revision to their outlook for existing home sales for 2007 along with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their forecasts for 2007 home sales into a chart along with a list of prominent quotes supplied with each forecast.


12/11/2006 - Prediction: 6.40 million units
Lereah "Most of the correction in home prices is behind us."

1/10/2007 - Prediction: 6.42 million units
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 - Prediction: 6.44 million units
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

Constructing Capitulation: June 2007

Looking back at June’s results (released in July) it safe to say that the weakening demand and an ongoing mortgage credit crisis are continuing to weigh heavily on the nation’s housing markets, sending them spiraling down yet another leg in this unprecedented housing decline.

The advance GDP Report for Q2 2007 continued to show a significant drag coming from the decline in residential fixed investment as well as significant revisions to past GDP results better demonstrating the pronounced effects this drag has had for the last four quarters.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The housing weakness also appears to clearly show up in retail sales as consumers pullback on spending for some of the most discretionary of goods.



The National Association of Realtors (NAR) released their fifth consecutive downward revision to their annual home sales forecast for 2007 putting the current outlook far below the “rose colored” initial predictions from the start of the year.

Homebuilder confidence continues to decline to near multi-decade lows with respondents indicating that estimates of “present” and “future” conditions as well as buyer traffic continues to slump.

The Census Department’s New Residential Construction Report which continued to indicate significant weakness in the nation’s housing markets and for residential construction showing substantial declines on a year-over-year basis to single family permits both nationally and across every region.

The Census Department’s New Residential Home Sales Report that, renewed declines, even accelerating in some regions, as well as significant downward revisions to last month’s results.

As with prior months, on a year-over-year basis sales are still declining in the double digits at 22.27% below the sales activity seen in June 2006.

NAR’s Existing Home Sales Report showing additional confirmation that the nation’s housing markets are continuing to experience weakness with EVERY regions showing considerable declines to sales as well as continued increases to inventory and monthly supply.

The May 2007 results of the S&P/Case-Shiller Indices are continued to show weakness for the nation’s housing markets with 15 of the 20 metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -11.06%, San Diego at -6.96%, Tampa at -6.67%, Washington DC at -6.34%, Phoenix at -5.55, Boston at -4.29% and Las Vegas at -4.10%.

Furthermore, comparing the last major downturn in the late 80s and early 90s to the current data may indicate that the current housing downturn is in its infancy with year-over-year declines only just having materialized in the last eleven months.


June's Pending Home Sales Report for June 2007 showing a continuation of the historic decline to residential housing on a month-to-month and year-over-year basis, both nationally and in every region.

The Census Department’s Construction Spending Report for June again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell -16.39% as compared to June 2006 while private single family construction spending declined by a grotesque -25.82%.

Key Report Details:

• The seasonally adjusted annul rate of private residential construction spending has now dropped 21.80% from the peak set back in February 2006.
• Overall private residential construction spending dropped -16.39% as compared to June 2006.
• Single Family residential construction spending dropped 25.82% as compared to June 2006.

The following charts show changes to construction spending (click for larger version):

Pending Decline: June 2007 Pending Home Sales Report

Last week, the National Association of Realtors (NAR) released their Pending Home Sales Report for June 2007 showing a continuation of the historic decline to residential housing on a year-over-year basis, both nationally and in every region.

Additionally, the Northeast and Midwest regions have fallen back below 100 indicating that, seasonally adjusted, June’s home sales activity was BELOW the average activity recorded in 2001, the first year Pending Home Sales were tracked.

As usual, NARs Chief Economist, Laurence Yun takes a clumsy crack at false optimism insinuating that a bottom in declining demand may have already been reached and possibly even past.

“However, it is too early to say if home sales have already passed bottom, … Still, major declines in home sales are likely to have occurred already and further declines, if any, are likely to be modest given the accumulating pent-up demand.”

The following chart shows the national Pending Homes Sales Index since 2005 compared monthly. Notice that each year, the months value is decreasing consistently (click for larger version).

The following chart shows the year-over-year changes to the national Pending Home Sales index as well as comparing the latest results against the values seen in the peak year of 2005 (click for larger version).

The following chart shows the pending home sales index nationally and for each region tracked (click for larger version).

Note that in the above charts, I had to use the Not Seasonally Adjusted (NSA) data series as NAR changed the methodology for their Seasonally Adjusted (SA) series a while back and never republished the numbers. This is why none of the data appears to be breaking below a value of 100 because it’s the SA series that is now below 100.

Keep in mind the current pending sales decline comes ON TOP of last years historic fall-off so the continued weakness is a sure sign that the decline is not ephemeral.

Look at the June seasonally adjusted pending home sales results and draw your own conclusion:

• Nationally the index was down 8.6% as compared to June 2006.
• The Northeast region was down 2.4% as compared to June 2006.
• The West region was down 5.5% as compared to June 2006.
• The Midwest region was down 8.2% as compared to June 2006.
• The South region was down 12.7% as compared to June 2006.

So it appears that, year-over-year, contract activity is still dropping rather sharply with ALL regions continuing to show significant declines.

NARcasting The Future!

The National Association of Realtors (NAR) today released another downward revision to their outlook for existing home sales for 2007 along with another dose of truly preposterous spin.

In an effort to put their absurd bias into perspective I compiled all their forecasts for 2007 home sales into a chart along with a list of prominent quotes supplied with each forecast (click for larger version).


12/11/2006
Lereah "Most of the correction in home prices is behind us."

1/10/2007
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

Bust From The Past: June 2007

In a new and recurring post, Ill attempt to compare various housing trends from today’s housing bust to similar trends seen during past housing declines.

The method is simple, take data from the deceleration, peak and decline of past housing busts and overlay them with data from today’s results.

What we may see is that the data correlates well, giving us some sense on what to expect in the future for housing.

Of course, comparing data from different eras is not a perfect science leaving most Bulls to invariably raise the many tired “things are different this time” arguments, but surely there must be something to learn from this type of analysis.

At the very least, if over time the data continues to correlate well, we’ll see that and if it starts to diverge we’ll see that as well

For this first installment I plotted the S&P/Case-Shiller Composite Index comparing the deceleration and decline of home prices seen during the 80s-90s housing bust to the results we are seeing today.

What’s most interesting about this particular comparison is that it highlights how young the current housing decline is, having only posted three consecutive year-over-year (YOY) monthly declines to home prices.

The last cycle yielded nineteen consecutive months of YOY home price declines followed by an additional twenty two months after a short three month positive respite (click the following chart for larger version).

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are only nine months into a decline that, last cycle, lasted for roughly fifty four months during the last cycle (click the following chart for larger version).

Also, it appears that price declines seen during the current downturn are actually occurring faster, falling roughly the same amount during the first nine months as seen during the first fourteen months last cycle.

Another important note is that it appears we may be currently at the point in the down-cycle where prices drop most significantly in the smallest period of time.

During the last downturn, the next nine months produced 65% of the total decline to home prices seen peak to trough.

So it seems that we are likely only in the beginning stages of the home price adjustment and that, all things being equal, we may have to wait another few years for prices to set a bottom.

Weekly Mortgage Application Data

With all the news surrounding PIMCO's Bill Gross and the Treasury’s 10 year note yield spiking over 5%, now is probably a good time to start keeping track of mortgage rates and related data.

The Mortgage Bankers Association (MBA) publishes a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

In fact, it was this very data series that former Federal Reserve Chairman Alan Greenspan cited last October when issuing his now obviously wrong “Worst may well be over” forecast.

“I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out,”

As we all know, especially those of us living in the bubbliest areas, our housing markets are now especially rate sensitive.

We have come through an unprecedented era of home price inflation that, toward the end of the up-cycle, resulted in an equally historic decline to affordability forcing many buyers to seek the lowest possible (initial) interest rate loan products in an effort to stretch their buying power.

In many ways, we have painted ourselves into a corner where equilibrium between price and demand has only been reached through the help of extraordinarily low interest rates.

One should remember that it was not long ago that 7.0% on a 30 fixed rate mortgage was considered very attractive and even low by historic standards.

Furthermore, there is likely not an economist out there that would deny that 30 year fixed mortgage interest rates could climb above 6.5% or even 7.0% or beyond in the coming years or even months.

Is it really likely that rates will permanently stay in the low 6’s?

Probably not, and unless incomes make some significant strides, it seems that any move up in rates will surely result in a move down in housing demand and prices.

To that end, Ill periodically post the following charts that track the MBA application data and average interest rates.

The latest data is showing that the average rate for a 30 year fixed rate mortgage has now reached a peak for the year at 6.35% with the refinance volume declining measurably to the lowest level since the first week of January.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

Ill expand these charts to span back much farther in later posts so you can get a better perspective on where this data was through the latest cycle so be sure to check back.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since January 2007 (click for larger versions).

Constructing Capitulation: April 2007

Not only did April’s results show further weakening of the nations housing markets, it also provided definitive proof that the housing decline is having a significant and undeniable negative impact on the overall economy.

The latest preliminary GDP report confirms that the historic decline to residential fixed investment continues weigh heavily the US economy with GDP registering a mere 0.6% for Q1 2007 a fact now not so underestimated by the Federal Reserve Chairman Bernanke.

“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.”

“The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply.”

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The housing weakness also appears to clearly show up in retail sales as consumers pullback on spending for some of the most discretionary of goods.

The recent National Association of Realtors Pending Home Sales Report, a forward-looking indicator, confirms that demand for existing homes continues to trend down as seen in the following chart (click for larger version).

Note, that the Pending Home Sales data shows that demand for existing homes has been steadily trending down, a fact that is more obvious if you compare the latest results to the peak results seen in 2005 shown below.

The Census Department’s New Residential Construction Report showing continued weakness to both permits and starts that, when smoothed and averaged, clearly indicates and predicts an accelerating slowdown.

The Census Department’s New Residential Home Sales Report that, while vexing traditional media sources, clearly showed a decline in sales activity for new homes priced at or above $300,000 while also showing a significant jump in sales for new homes priced below that, especially below $200,000.

There now is ample evidence to suggest that the pricing trends for new homes that was established during the historic run-up are now in the process of reverting as homebuilders slash prices to counter slumping demand.

NAR’s Existing Home Sales Report showing continued uniform weakness in sales activity resulting in year-over-year declines for every region and across every home type as well as many significant declines to median selling prices.

The March 2007 results of the S&P/Case-Shiller Indices are continuing to show substantial declines to home prices in virtually every tracked market while housing futures continue to predict still further declines.

In a recent conference call, Bob Toll, CEO of Toll Brothers (NYSE:TOL), offered a conflicting point of view to Treasury Secretary Paulson’s optimistic outlook on housing.

“I think what that indicates is that most new homebuilders that are large, the public homebuilders, their average product goes anywhere from about $250K up to us which is about $700,000 so obviously the increase [in sales] is taking place below our space. Which means that we’re not out of the woods yet. I took with surprise yesterday and it’s now confirmed today by this analysis when the secretary of the treasury said that we’ve got the hard times pretty much behind us I wondered how many communities he had and where he got that information but I now understand that the information he got hadn’t been pealed away, I guess, to show that it was $150,000 housing. So I would say that we have not got the bad times behind us yet though it could be… you never know.”

Furthermore, Toll Brothers reported $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% in the second quarter of 2007.

Finally, the Census Department’s Construction Spending report for April again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend continuing, total residential construction spending fell 14.41% as compared to April 2006 while private single family construction spending declined by a grotesque 25.60%.

Key Report Details:

• The seasonally adjusted annul rate of private residential construction spending has now dropped 15.41% from the peak set back in December of 2005.
• Overall private residential construction spending dropped 14.41% as compared to April 2006.
• Single Family residential construction spending dropped 25.60% as compared to April 2006.

The following charts show changes to construction spending (click for larger version):

Existing Home Sales Report: April 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing continued and uniform weakness of the nations housing markets.

Without missing a beat, the new “fill-in” Senior Economist Lawrence Yun continues to suggest that the weakness is indicating stabilization.

“We’ve been anticipating slower home sales because many subprime loan products are no longer available … In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community. Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to scare buyers into action with the threat of increased interest rates.

“Long-term financing remains favorable, but interest rates are rising … Although some buyers have a wait-and-see attitude regarding home prices, they should consider that rising interest rates later this year could offset a lower sales price when you get down to the monthly payments.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Sales are, in fact, down in EVERY region with the majority of declines in the double digits.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their April 2007 report.

Particularly notable are the following:

• Majority of median prices are down.
• ALL sales are down.
• ALL Inventory and Months Supply show HIGH double digit increases on a year-over-year basis.

BNN - MUST SEE TV!

Today brings six great additions to the BNN lineup, most notably, a Nightly Business Report interview with Federal Reserve’s Michael Moscow in which he admits, in so many words, that the housing decline has been more significant than the Fed had anticipated last year.

“As we move through this year, I would expect to see the housing market stabilizing, but no one can say exactly when that’s going to happen. I had thought it was stabilizing toward the end of last year as well and then we had some numbers that turned out to be worse than expected.”

Watch Moscow backpedal on BNN!

Next up there is News Hour interview with Treasury Secretary Henry Paulson in which he states that the US has experienced a “major” housing correction that was inevitable after years of historic gains. “That correction has now been significant, we think it is near the bottom, it will take a while to work its way through the system.” Unfortunately, Paulson only reiterates the same guidance he offered last year prior to the housing market taking another major leg down.

Watch Paulson call the bottom again on BNN!

Then there was Bernanke’s latest take on the subprime meltdown. Although Bernanke underestimated the extent to which the mortgage market would slide, he continues to present an optimistic outlook.

“How will developments in the subprime market affect the evolution of the housing market? We know from data gathered under the Home Mortgage Disclosure Act that a significant share of new loans used to purchase homes in 2005 (the most recent year for which these data are available) were nonprime (subprime or near-prime). In addition, the share of securitized mortgages that are subprime climbed in 2005 and in the first half of 2006. The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

Watch Bernanke talk containment on BNN!

Next, we have an excellent segment where Marc Faber, founder and managing director of Marc Faber Ltd outlines all the assets, sectors and regions in which he sees bubbles. In an era of historic liquidity, it’s not surprising that there are price bubbles in virtually every asset. Faber suggests that “everything will come down and massively so.” Additionally, Faber sees the whole global bubble scenario resulting from the inflation of the US housing bubble.

“The global liquidity was fueled largely from the American current account deficit, coming largely from the trade deficit, coming largely from US consumption, which was driven from the asset inflation in the US, most notably the housing market.”

Watch Faber talk Bubbly on BNN!

Next, Mortgage Bankers Association Chairman John Robbins discusses the subprime meltdown suggesting that the extent of the mess has been “oversold”. While pointing the finger squarely at predatory lenders for their obvious role in the current meltdown, Robbins adeptly downplays the possibility of any spillover and grater effects on the general economy.

“[the subprime meltdown] is certainly not expected to cause any great pain to the financial markets and shouldn’t bleed over to a great degree.”

Watch Robins spin on BNN!

Finally... Want to get cash out of your home without those pesky monthly payments and interest charges?

This CNBC segment features a new home equity product from Rex and Co. that allows homeowners to “borrow” against the future value of their home. That’s right! You get cash now, no payments and when you sell, you return the favor.

Watch and learn at BNN!

Starting to Apply Logic

Can there be anything funnier than watching CNBC correspondents struggle to make sense of economic data?

I’m sure there is but still, it’s pretty humorous.

Wednesday's New Residential Construction Report really threw them for a loop as it reported a “surprise” jump in national housing starts while also showing a somewhat expected decline in national housing permits.

Various CNBC “Realty Check” segments were dedicated to this supposed anomaly finally culminating with a Diana Olick blog post titled “Starting to Defy Logic” with some of the following text:

“The permits number makes more sense, down nearly 9%, which seems to say builders get that if they build a house right now, it’s going to be hard to sell. But I have to go back to the starts number. What’s up with that? What are these builders thinking??? Every expert I talk to, and trust me I talk to a lot, from Wall Street analysts, to DC industry wonks, tells me that until the builders get their inventory under control, any recovery in the housing industry is going to stall. There’s demand out there, but not that much!”

Well, looking at the data the way Diana views it (look at the following chart and click for a larger version), there’s no wonder she’s having difficulty.

What we can learn from this view is that permits, starts, and completions are very seasonal and volatile data series.

Also, looking at the materials released by the Census Department, not only are there large margins of error, but there are various other distortions that are introduced into the data when it’s compiled.

In order to shed a little better light on what’s going on with permits through completions, Ill go through the steps I took to clean up and chart the data resulting in a much more sensible view.

First, there is one distortion present in the headline permits versus starts and completions that needs to be factored out, namely the fact that not all starts (and subsequent completions) require a permit.

On average roughly 2.3% of projects are started without a permit resulting in there always being a slight disconnect between permits and overall starts and completions.

Fortunately, the Census Department releases two additional series of starts and completions that are compiled ONLY from permit issuing places that can be used to make an apples-to-apples comparison between permits, starts and completions.

Next, as you can see in the prior chart, these series are very erratic and seasonal and also subject to many revisions so instead of attempting to compare the actual series, I smoothed things out a bit by calculating the 12 month moving average for each series.

Keep in mind that we are working with the “raw” unadjusted data series so as not to incorporate any additional smoothing provided by the Census Departments seasonality adjustments.

Notice now that we have a much clearer, “noiseless” view of each data series that reveals their obvious trends.

Now, it’s important to remember that these three series are not simply independent time-data series but are, in fact, three logically related and dependent series.

In the process of a building project, first you get the “permit”, next you “start” building, and finally you “complete” the project.

For this reason, one must adjust expectations prior to reading a newly released Census Department report to account for the true nature of the data published simultaneously each month.

In general, permits “lead” starts by roughly a month so this month’s permits are for next months starts.

By the same token, starts lead completions by roughly six to eight months (it takes that amount of time to build a house) so this month’s starts will complete at least a half a year from now.

Because of this, it would be helpful, for comparative purposes, to shift the starts back one month, and the completions back roughly six months.

This way, you can see that permits are “indicating” next months starts result and starts are indicating the result for completions six months from now.

It’s important to keep in mind that this is not a perfect science as there are many factors that can limit the effectiveness of this kind of manipulation.

For example, its likely that the time between getting a permit and starting a project could be less than a month so in many cases, permits and their subsequent start might occur in the same month.

Additionally, the average amount of time between starts and completions may change over time so comparing a lengthy data series with one time adjustment (either 6 or 8 months but you can’t use both) may exhibit times where the completions correlate well with starts and other times when it does not.

That being said, for the series I’m working with, shifting seems to work fairly well.

As you can see in the prior chart, the series are not only smooth, but now very easy to relate.

Except for being an “order of magnitude” separate, the three series are following a very predictable trend, each one leading and indicating the future of the next.

Regarding the order of magnitude, Ill provide more analysis on this phenomena in a later post but I think for now it’s safe to say that cancellations are playing a role.

For now though, Ill factor out the order difference between each series by normalizing the data to a base of 100 as well as restricting the dates a bit.

Notice that now there is a very clear, consistent and obvious relationship between permits, starts and completions.

The trend is not at all enigmatic as CNBC made it out to be but, in fact, very logical and orderly.

housing+bubble housing bubble realtor national+association+of+realtors NAR lereah economy recession interest+rates mortgage loan ARM lenders bernenke greenspan

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