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Wednesday, November 01, 2006

Pending Home Sales For September

First, there are other housing related reports today. The first is that US construction fell in September, which the pundits did not expect. Overall construction spending was down 0.3%. Private residential was down 1.1%, while all private construction (residential plus commercial) was down 0.7%. Only government construction was up .9%. This is in comparison to August; in comparison to last year construction spending is still up 2.9%. Also, August construction spending was revised down 0.3%.

Second, MBA's Purchase Money Index dropped again. This index is now back at 2003 levels. This occurred even though mortgage rates are now dropping significantly, which is generally considered to be highly favorable for the mortgage market. In part this may be that ARM rates are rising as fixed rates are dropping, illustrating the dependency of many homebuyers on those lower ARM rates. Ignore the refi numbers when trying to evaluate the housing market; refinances are important for those who make money off mortgages, but don't tell you anything about home sales. Unless purchase money applications pick up quickly, things have gone badly sour. Affordability ratios are improving, but we don't seem to be seeing the response to that yet.

Pending home sales released by NAR can be found in detail here. If you haven't cottoned to it yet, NAR is blowing smoke in its press releases, and seems to be ever more creative when calculating its seasonal adjustments. The one thing this report does not show is a flattening market.

Non-seasonally adjusted figures by region:
National - 2003: 107.4; August: 120.1; September: 100.8; YoY change: -16.6%
Northeast - 2003: 101.0; August: 101.7; September: 84.4; YoY change: -19.6%
Midwest - 2003: 109.8; August: 105.8; September: 91.2; YoY change: -21.3%
South - 2003: 107.4; August: 134.7; September: 113.6; YoY change: -10.3%
West - 2003: 110.0; August: 126.5; September: 103.7; YoY change: -19.7%
To sum this up, I searched thoughtfully through the lexicon of econo-verbiage. Slackening? No. Easing? No. Softening? No. Settling? No. Stabilizing? Most certainly not, especially when read in conjunction with the current MBA figures. I had to leave the charted territory of verbal descriptions, and after much internal debate over "no bottom yet" and "gawdawful", finally settled on "no bottom yet".

"Gawdawful" looks to be arriving around March, although all bets are now off. You see, the big question has been whether prices will roll back to 2004 or 2003 in 2007, and these numbers seem to be pointing toward 2003. That is reinforced by the MBA Purchase Index.

We have now moved into the realm of second-order effects, such as declining construction revenues and jobs reinforcing housing weakness. The big question was whether rising affordability (coming about as a result of declining home prices and/or declining interest rates) could insert enough demand into the market to help cushion those effects, and so far we aren't seeing that new demand, whereas we are seeing a general weakening in the economy more quickly than we had hoped. Sometimes the sequence of events makes a difference, and in this case it surely does. It's important to have the cushion in place before impact - afterwards, it makes little difference.

The northeast is another very bad leading indicator. We knew the west was doomed to problems, because the west just has terrible concentrations of risky loans which are now failing earlier and earlier. But this sudden, drastic downturn in northeastern demand is an exceptionally bad leading indicator. Demand there has rolled back lower than 2003, and housing values are high in the northeast, so falling prices there have more of a net impact there than in the south or the midwest.

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