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Friday, May 25, 2007

April Home Sales: What A Mess

I'm somewhat disappointed by this month's reports. I know the New Home Sales report was trumpeted as wonderful, but the details did not bear that theory out.

Existing Home Sales were just pathetic. I sure hope I don't end up writing "grotesque" in a couple of months. A few numbers tell the story:
What can I say about these numbers? Bankers everywhere are opting for that drinking lunch. The real theme song for mortgage broker, lender and servicer conventions is now Jimmy Buffet's Wasting Away In Margaritaville. It's a good thing these modern buildings do not have windows that can be opened, because otherwise a horde of bankers would be jumping out the third and fourth floor windows (typically, such organizations have good long-term disability insurance). In case you think I'm being a hysterical redneck, let me quote Turbo's comment over on Calculated Risk:
At their peak, home prices were 6 standard deviations expensive from the historical cost of carry / rent ratio, so David you're right, in that centering a normal distribution on a fat tail event is fraught with risk. The history of bubbles suggests that a fat tail reversion to the mean follows a fat tail price gain, and worse, correlations practically go to one (or -1) in a crisis, meaning the best way to model risk is to hide under your desk and pray that you're one of the early ones to get a termination package before bankrupcy hits. I've really been a banker too long for my own mental health...
Yeah, yeah, yeah. The insurance companies are very unreceptive to benefit claims based on work-related mental problems, Turbo. Try "accidentally" throwing your desk through the window and then falling out. Much better odds.

The reason why the drop in sales by region is important is that median and average prices are much, much higher in the West and Northeast. By region, the most single family sales by far and away were occurring in the South, then the West, then the Midwest and finally, far behind, the Northeast. That pattern has now shifted in the slow market to the South, the Midwest, the West and the Northeast. So (groan) the areas hit hardest are the areas having the largest mortgages, meaning the correction in price will be concentrated there, meaning the average loss per delinquent loan is skewed to the high end.... Urk, gurgle, glumph (to quote Ms. Bullhardt when regurgitating the rock she just ate. It turns out that rocks and stated income mortgages don't digest well.)

For condos, the most sales were occurring in the Northeast, followed by the South, the Midwest, and then the West. However, median prices are highest in the West, followed by the Northeast, the Midwest and the South. Thus, the AIIEEE caused by condo sales in the West is due to the relative expected losses on those loans. In the South, the market has degenerated enough that people will just tend to buy single-family instead.

Now, keep the above firmly in mind, because we now come to the New Home Sales report. Almost everything you read in the press about it is wrong. For one thing, they are talking about seasonally adjusted numbers, and the seasonal adjustment is now distorting the numbers badly. If you looked at actual sales in the New Home sales report, a few highly unpleasant details popped out:
Now, no honest person looking at these numbers can believe anything but that an awful lot of standing inventory is simply priced too high for the demand in that market. You find me a $150,000 condo in Orange County or San Diego! These reports get massively revised, so it is too soon to fling the desks at the windows and jump due to this one report. However, I would not be buying homebuilder stocks. Heck, don't agree to take ownership even if they pay you to take them. There are going to be bankruptcies. What they seem to be doing is starting new communities, probably in different areas, in order to get some sales. They look slated to take some rough, rough losses on current inventory and land, and they are hoping to hold out as long as possible by getting cash flow in different areas.

There is not the faintest glimmer of a hope of a housing turnaround in either of these two reports. This market is EXTREMELY price sensitive. All the data shows it. This is very bad news for underwater home debtholders and whoever is holding payment rights to their paper.

For more background on the New Home sales report see CR's post here.

I have a friend out here (Washington state) that put her large home with five acres on the market last month. She's had no bites and I don't think a lot of traffic. The worst thing about this mess is that it is going to hurt folks who were not involved in all that flipping/investing nonsense. Under normal circumstances, she probably wouldn't have much trouble selling. Now, she may be in for a really long wait.
Teri, that's exactly right. When these speculative booms peter out, the normal buyers are caught with the rest. The difference is that most of them are in a better position to ride it out. But if some adverse event occurs that forces them to sell, they are forced to cope with downturn along with everyone else.
Teri; There's an old Wall Street saying: The bad trades force the good trades out of the market.
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