Friday, June 01, 2007
Pending Sales Compound The Misery
Pending home sales is a large sample that predict existing home sales several months in advance. These are contracts which have been signed but have not yet closed. In this environment, it is reasonable to expect the close ratio to extend out a month or too further, but so far this year it appears that less of the pendings are actually closing, so these numbers, bad as they are, may actually be a bit overoptimistic.
The seasonally adjusted April Pendings numbers are so ugly that I won't discuss them. The actual numbers are bad enough:
YOY:More disturbingly, MoM sales in the West dropped a staggering, heart-thumping 12.2%. In one month. We are in the middle of a truly historic housing and mortgage "event". This is not a good kind of event. April pendings would be expected to relate to existing home sales in May, June and July. July sales last year were the pits. To understand the significance, pending sales in the west last year went from 106.2 in April to 124.7 in June, so this is an additional 8.4% off last year's low, and it forecasts a very bad peak season in the west - considerably worse than last year.
MoM, Northeast sales dropped 8.5%. The trend in the northeast is similar to the west, but is less sharp.
We are nowhere near equilibrium, and at these sales rates, we are going to continue to see rising inventories. This is truly shocking. Homebuilders that had a lot of investment in the west are in deep trouble. The trajectory in the south is normal, but just at a lower level than last year. The midwest eked out a small increase MoM & YoY (0.3% & 6.7%). But the number of homes sold in the midwest is very small.
Nationwide, in one month ACTUAL pending sales dropped 0.6%. Even in a down market, we should be seeing some increase in these numbers.
Only question I have is: do you really find this "shocking"?
For year after year:
* huge numbers of mortgages were provided to unqualified people would couldn't pay *any* mortgage over time
* huge numbers of toxic mortgages were made to people who could have paid *some* mortgage but not these
* huge numbers of houses were bought by "investors" hoping for a flip, and many are now stuck selling at a loss or walking away
* prices zoomed into impossible territory in many areas (impossible to repay using avg pop. income metrics)
* builders kept building in large numbers
Now all this is coming unwound: huge foreclosure numbers, subprime almost gone, ALT-A under pressure, std mortgages not useful for current pricing levels/verified incomes, flippers trying to sell and desperate, prices starting to fall has spooked the few remaining qualified buyers, etc., etc.
IMO it'll keep falling/dropping for a long-time. I thought this was all pretty predictable some time ago, so I wonder why you find this shocking? I find it highly expected.
I have been accused of undue pessimism. I did expect a disproportionate decline in the west due to credit tightening. But this is a very sharp adjustment way beyond the expected. If people understood these numbers a lot of the big builder stocks would be crashing right now. This is not bad news, it is double-bad bottom-falling out news. Alt-A smackarooney news.
Big chunks of the west are very dependent on housing for jobs. This looks to be a negative feedback cycle accelerating out there.
The FNMA change in credit standards will have more of an effect on the rest of the country. So that's a kick in the teeth coming this summer.
Believe me, Frank, I expected the market to go down. I expected (and still expect) it to cause a recession beginning in 2007 and becoming quite severe in 2008. I expect no recovery in the worst areas until after 2010. But I did not expect this, and we are just moving into the first target-rich zone for foreclosures.
Standard Party Line -- "Just sold in your area for more than yours! Prices have nowhere to go but UP UP UP UP UP! Buy now or be priced out forever! Don't be Left Behind!"
And half a dozen junk-mails offering me Second Mortgages and Home Equity Loans; same Party Line as the above.
Headless Unicorn Guy
I wonder how many younger people still believe? I bet quite a few do.
It sure has. I bought my present place right when the prices bottomed completely (at about 25% of present prices) back in '97.
And it wasn't because of some slick market timing or master plan, either. Just plain dumb luck. I was forced to sell & flee my old place because of a corrupt homeowners' association. (Never underestimate the role of dumb luck.)
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