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Monday, October 02, 2006

RE: Pending Home Sales August

Today NAR released its pending home sales index for August, which can be found here (pdf). Both the seasonally adjusted and the absolute figures were up slightly from July, 4.3% for seasonally adjusted, and 2.8% for unadjusted. Naturally this led to further Narrish predictions of a market which had hit its bottom and would straighten itself out next spring. The very real cost cuts are producing increases in sales (see the MRIS and DQ for a perspective) in many areas.

Unfortunately, these numbers don't show enough in the way of increased sales to support NAR's confidence, even if we blithely ignore the reality that an awful lot of people bought or refinanced under mortgages which they cannot repay. Before the market can stabilize, inventory is going to have to drop below six months worth, and we are a long way away from that. Housing permits and starts are beginning to come down, but we still have projects due to come on the market at the boom pace for six months to a year in many areas. Then too, many boomer retiree candidates had bought a second home early (in some cases four or five of them!), and will now be looking to unload. Some of them will not be retiring nearly as early as they had hoped, though.

In many areas, contract cancellations continue to rise, but the really bad thing about these numbers is the extreme weakness in the northeast and midwest. So what the last few months of data have shown is that the housing decline is truly national, which makes its expected impact upon the general economy far greater.

The south remains relatively strong, but of course it has the lowest median prices in the country and is relatively demographically advantaged because of the numbers of people trying to retire away from the cold and the high costs of other areas. And speculation in the south is tending to leave one area and go to another area of the south, such as from Florida to Texas. Escapees from the boomlets are tending to stay in the south too, so while I don't expect the south to be seeing much housing appreciation on average, it is relatively strong in comparison to other regions.

Year over year comparisons show how weak the pending home sales really were. Look at these seasonally adjusted numbers compared to the last few years :
Nationally:
August 2006: 110.1; January 2006: 118.6; All of 2005: 124.4; All of 2004: 120.9; All of 2003: 107.4
Northeast:
August 2006: 095.4; January 2006: 101.0; All of 2005: 108.6; All of 2004: 109.7; All of 2003: 101.0
Midwest:
August 2006: 093.8; January 2006: 114.3; All of 2005: 116.6; All of 2004: 118.6; All of 2003: 109.8
South:
August 2006: 126.8; January 2006: 129.4; All of 2005: 134.9; All of 2004: 126.8; All of 2003: 107.4
West:
August 2006: 112.7; January 2006: 120.0; All of 2005: 128.7; All of 2004: 122.9; All of 2003: 110.0

These figures just do not show a healthy market generating enough sales to absorb inventory. August numbers should be above, not below, January numbers, and August numbers should be higher than the yearly averages. Instead, the south has rolled back to 2004 sales, at best. The northeast and midwest are below 2003, and the west is at 2003. Not promising, especially since new homes are still coming on the market at approximately 2005 rates.

The pending home sales index is a pretty good sample comprising about 20% of actual contracts, according to NAR. But there's one that's even better, which is the MBA purchase money mortgage app survey, and that is not showing a resurgence of buyers. It has been showing a slight uptick - the four week average is up 1% - but it is still sticking about 20% below last year. Too little, too late.

What we will now see is the ripple-through effect on the broader economy. The housing boom was so big that it created its own wave of prosperity. The housing slump now appears big enough to create its own downdraft, and in the next six months will begin to place further pressure on home prices. The unsustainable mortgages will put a lot of pressure on people to sell in many areas, which will tend to pump up inventory.

The most significant effect of the housing boom was to create a lot of consumer spending on big-ticket items financed by borrowing against home equity or realization of equity through home sales. Obviously this will dissipate quite quickly as a lack of housing appreciation stops so many cash-outs, and in fact Bloomberg reported this morning that the September manufacturing numbers were lower than expected:
Manufacturing in the U.S. last month expanded less than economists forecast, suggesting the housing slump is extending its reach to other parts of the economy.

The Institute for Supply Management's manufacturing index dropped to 52.9 from 54.5 in the prior month. A reading higher than 50 signals expansion. The index averaged 55.2 this year through August.
A reading of 52.9% is uncomfortably low, and if the October number is similar I suspect that the Fed will be cutting rates early in 2007. We will shortly begin getting September sales numbers, which I don't expect to be promising. Here's an example of what tipover looks like:

On NJ Real Estate Report a commenter posted a review of August numbers for Bergen county since 1995:
For Bergen County ONLY, here are the updated average & median price along with the number of homes sold and number under contract in August for the past 11 years. This is for residential SFH listings; this does NOT include Condos/Co-ops & Townhouses.

Year Avg$ Med$ Sold UnderContract
1995 $268,468 $230,000 539 458*
1996 $275,882 $230,000 726 563
1997 $288,687 $229,900 730 473
1998 $308,420 $245,000 806 539
1999 $344,744 $274,000 838 588
2000 $398,302 $294,900 768 619
2001 $418,846 $335,000 871 627
2002 $471,731 $380,000 838 611
2003 $530,431 $425,000 865 647
2004 $551,580 $469,000 777 664
2005 $669,531 $539,000 933 688
2006 $717,474 $535,000 670 613

Here is the same data as above but including Condos/Co-ops, Townhouses along with SFH.

Year Avg$ Med$ Sold UnderContract
1995 $247,620 $216,000 672 612*
1996 $257,598 $215,000 894 701
1997 $266,817 $215,000 902 617
1998 $282,075 $226,000 1029 736
1999 $310,101 $247,500 1087 779
2000 $352,890 $270,000 1018 891
2001 $380,208 $310,500 1138 862
2002 $424,039 $350,000 1109 844
2003 $479,323 $390,000 1140 895
2004 $494,282 $425,000 1066 973
2005 $597,332 $497,000 1301 986
2006 $635,755 $500,000 909 839

*1995 data may be incomplete as I believe this is the first year this data becomes available.
Okay, you say. These are flat numbers. The realtor's refrain of "No worries, folks, just move along" doesn't seem so unreasonable, does it? Well, as I have been writing for months, numbers cannot stay flat in this typoe of market, because the lending and buying has been based on the expectation of appreciation. Once that expectation is gone, you see a big step down.

Now here are the same sets of numbers for September:
For Bergen County ONLY, here is the average & median price along with the number of homes sold and number under contract in September for the past 11 years. This is for residential SFH listings; this does NOT include Condos/Co-ops & Twnhs.

Year Avg$ Med$ Sold UnderContract
1995 $265,464 $215,000 579 569*
1996 $252,048 $205,000 578 529
1997 $265,964 $218,000 656 611
1998 $297,774 $230,000 684 591
1999 $340,098 $259,000 608 439
2000 $392,537 $295,000 571 551
2001 $418,217 $325,000 545 423
2002 $494,848 $375,000 583 543
2003 $514,952 $407,000 762 645
2004 $544,765 $460,000 655 621
2005 $663,049 $520,000 684 590
2006 $649,997 $492,000 442 487 as of 10/2/06 9:35 AM EST

And here is the same data including Condos/Co-ops, Townhouses as well as SFH.

Year Avg$ Med$ Sold UnderContract
1995 $241,345 $200,000 721 689*
1996 $235,855 $190,000 705 690
1997 $250,638 $210,000 841 770
1998 $272,553 $218,000 886 755
1999 $299,183 $237,000 842 598
2000 $339,488 $260,000 803 770
2001 $368,705 $297,500 732 587
2002 $428,868 $342,000 828 774
2003 $458,021 $372,000 1039 908
2004 $478,034 $410,000 952 885
2005 $604,673 $490,000 946 832
2006 $580,683 $450,000 650 686 as of 10/2/06 9:35 AM EST

*1995 data may be incomplete as I believe this is the first year this data becomes available.
Don't think that this sort of thing won't produce some substantial changes in lending and appraisal practices next spring, because it will. Please see the DQ and MRIS links at the beginning of this post for further confirmation. They will shortly begin to show September numbers, and look very carefully at what they show if you have economic decisions to make.

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