Friday, May 25, 2007
April Home Sales: What A Mess
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:
Single Family inventory is up to (AIIEEEE) 8.3 months supply at the current rate of sales. This means further hefty price drops are in the works.
Condo/Coop inventory is up to (gasp, choke) 9.5 months. Ditto on price drops.
The decline in condo-coop sales is concentrated in the West, with the South making a strong run for the Condo Collapse title (-18.% & -10.5%).
The decline in single family sales is concentrated in the West, but the Northeast is battling past the Midwest to achieve a pretty decent second place finish in the SFR Fright Night contest (-15.0%, -9.0%, 7.7%).
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:
- Despite the large quoted gain in sales, there is still a high drop YoY (over 10%).
- The only gains by region MoM were in the Northeast (7,000 - 9,000) and the South (41,000 - 52,000) - therefore the big drop in median prices everyone's talking about is mostly due to regional price variations.
- In terms of the price brackets, the gains were concentrated in extremely low price brackets (see page 4 of the pdf release):
- <$150,000 (7,000 - 17,000)
- <$200,000 but >= $150,000 (17,000 - 22,000)
- About a third of reported sales occurred for not-started homes, which category accounts for only about 15% of reported inventory, which really means less than 10% of actual inventory. THEY ARE NOT CLEARING WHAT'S ALREADY BUILT.
- YTD new home sales are down sharply in the West (-32.4%). In the Northeast, YTD home sales are reported up, but there are so few new home sales that it is not statistically significant. We cannot truthfully know whether new home sales rose or fell in the Northeast.
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.
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