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Friday, December 28, 2007

Home Sales

New Home Sales from Census are here (pdf). I don't have a whole lot to say about this, because sales have dropped to the point at which the margin of error is very high. The month to month sales and regional sales are subject to such large revisions that they are relatively meaningless. The notable facts here is that YoY November national sales dropped 34.4% (SA), compared to a YTD YoY comparison which is down 25.4%. The rate of decline is accelerating.

See Calculated Risk for more, and here is a Bloomberg article quoting gloomy stats such as:
November sales were the weakest since April 1995.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991.
SA months of supply was 9.3, and NSA months of supply came in at 11.1. Neither forecast much of an environment for price increases, but they do strongly support the expectation that prices will continue to drop. The revisions to the New Home Sales report have been consistently downward for months, and so one would expect the same for this month's numbers. October's sales have already been revised from 728,000 down to 711,000, and will go lower still. The big change in this report is that generally each month's sales are reported as an improvement (only to be revised down later), and this month's report did not show that month-to-month improvement. The inventory figures on this report are also now useless because sales cancellations are not recorded, and cancellation rates have skyrocketed. So it is likely that real months of supply is higher - probably over one year's worth.

Needless to say, housing starts should continue to dwindle. One note here - as I predicted much earlier, real prime mortgage rates have dropped very low indeed. Those low rates plus declining prices and excellent negotiation power should be an incentive to buy for real prime buyers. Therefore I expected this report to be a little better than it was, and I am surprised. It may be revised slightly upward.

There are not enough real prime buyers (20% down, excellent credit) to stem the RE slide for at least a year more.

NAR's existing home sales report was released, and it contains sales through October. Extrapolating from existing sales, it does not appear that existing single family sales for 2007 can come in over 5,050,000, and probably will be lower. That compares to existing single family sales for 2004-2006 of 5,958,000, 6,180,000, and 5,677,000.

Condos are doing a little better in previous year comparisons. Extrapolating from sales through October, condo sales for 2007 should be below 740,000. That compares to existing condo sales for 2004-2006 of 820,000, 896,000, and 801,000. Condo sales are juiced by retirement age people who are downsizing or moving to retirement locations, and by affordability in some locations.

Unfortunately, condo months of supply is now at 13.1 months, compared to single family months of supply of 10.5 months. It is difficult to feel good about the market with numbers like that. One factor holding down overall condo supply is that many condo projects are being halted or changed to rental projects. Still, there is a lot more out there in the multi-family pipeline - far more, it appears, than can be absorbed by these sales rates.

With high new home inventory, and sky high existing home inventory, plus the hidden inventory of the cancelled/pulled homes, here's how it looks to me:
2008 new home sales somewhere in the range of 700,000-800,000 (supply approx 720,000)
2008 existing single family sales in the range of 4,650,000-4,750,000 (supply 5,200,000)
2008 existing condo sales in the range of 720,000 - 740,000 (supply 725,000)
The supply figures I provide are adjusted by minimal figures for additional forced sales in the case of existing homes, and by my estimate of cancelled/non-recorded new construction for new homes. Thus it appears that if no new homes were being built, we'd have our supply needs for 2008 already taken care of. Of course other homes will be built, and individuals will die (about 1% of the population at least), and people will transfer, etc. Generally at least 4% of the housing stock turns over every year.

I've written before about the very high vacancy rates for housing, which surely include some other inventory. More accurate figures would put current supply at about 2 million above the figures I have shown here.

So no possible housing recovery until, at the earliest, the very end of 2009, and more probably in about half the country it will be delayed until late 2010 or 2011. Consumer sentiment will be highly negative by 2009, though.

This is an extraordinarily ugly prospect, and it makes me believe that my sales figures above for existing home sales may be too high. As pricing drops, making decent loans becomes much harder, and credit qualifications (including downpayments) have to rise. That forces demand down. I don't think we can look for that much in the way of new household formation to boost demand because of wages and real costs. Most of the FTHB in the built-up areas wouldn't have occurred if credit qualifications had been reasonable over the last few years.

If you look at listing price data, it appears that Case-Shiller's appreciating cities are actually depreciating. Indeed, it appears that cities that had experienced early declines and seemed to be bottoming out have now resumed their downward price trajectory. Case Shiller is excellent data, but it lags and smooths list price changes.

I defy anyone to look at the list price data at Housing Tracker and make a case that a five percent downpayment is enough for most markets. Ten percent would give more security to potential investors. As the lagged reality slowly filters its way into the official data, credit standards must continue to tighten further.

10% may not be enough.

Sales commissions and other costs of transactions would eat up that margin of risk.

There is a reason that 20% was the traditional down payment.

Figure 7.5% of the transaction is eaten by commissions. With points, accrued RE tax, lawyer fees, appraisals. 10% is poof before the buyer moves in.

10% is needed in a flat market. 20% in a declining market where 10% is the max decline.

??? in a market where the bottom is not know.
It's not enough. It's just enough to give some reasonable offset for risk. People are going to think twice if they have to put down 10%.

Rates have already dropped so far that it's clear competition for loan volume will prevent a higher downpayment.
I like 20%

10% seems like 2 years rent, then Jingle Mail if the market heads South.
Yeah, but there's nothing worse than sitting on a degrading mortgage loan portfolio without making new loans to bring in some money to cover those losses....
More loans to cover the bad ones? Sounds Ponzi 'ish to me.

You're talking to the wrong guy. Take your lumps on the bad portfolio and move on.
The worst thing is to continue to make money losing loans.

Never the less, if you don't stay in the game, when things start back up, you will not profit.
Thank you MOM,there are real problems with the Data on existing inventory as well.Many EO's are simply not on the MLS,not just a few,many,and there are the continuing problems with DOM and unreported incentives that skew reported prices.last monthe median price in my town was up 24% YOY with 24 sales.we had one condo sell,two midprice homes sell,and the rest were $1m plus..."Median prices are up,the market has recovered!".
CF - a lot of these entities will end up bankrupt if they don't deal with homeowners.

We have reached the point at which the only way out of this is to make further bad loans (but better quality than the 2005-2007 vintages). Trying to suddenly go to traditional credit standards would be counter productive.

If the standard became 20% down, pricing would decline close to 40% nationwide, which would then require banks to demand 40% down. We'd then be right back to the Great Depression. There are almost no FTHB who can put down 20% as it now stands.

It's all about the FTHB, and it always has been. The key to lowering default ratios is to demand proof that your borrower can save, first, require a few months PITI reserves, and then to avoid high DTI loans. FICOs mean little when borrowers have high DTIs.

A borrower with a manageable DTI will continue to pay on a home loans even if the borrower is considerably underwater for a while, whereas a borrower with a high DTI will probably default unless that borrower has at least 10% equity.
Before we get too much off course here, remember the mortgage insurance.

So insurance will stand in for some of the down payment.

The buyer pays that insurance until he is 20% above water. Just like the good old days.

What happened to a great extent in the latest incarnation was that a second mortgage was done as the same time as the first to make it 100% financing.

So from a lender perspective, I want someone to have 20% skin in the game, insurance is a good substitute, but a second mortgage is not. I might make the owner put up 10% so I can sleep better.
I vaguely recall a comment about GSEs tightening up their criteria on mortgage applications by March of 2008. I don't know if it was the beginning of March or the end, but mostly it was that any applications had to be complete by then, so they are taking effect already. What I gather this means is that consumer demand will continue to fall off a cliff (can't qualify, ergo can't buy).

It seems that almost all paths point to a tightening of credit, low mortgage rates notwithstanding.
That's true. There is a December change and then the March change. The December change is in effect and the March change will be slowly setting in.

Next year raised underwriting standards will cut into demand further than we have seen this year.
Was checking the radio for Coming Year Predictions. Got an interview of lip-smacking glee predicting 200-400% inflation rates, Wheelbarrows of Worthless Government Fiat Paper (TM), Weimar Republic Hyperinflation (TM), Total Global Economic Collapse (TM), and New World Order (TM). (Oh, and Destruction of Coastal Cities in Natural Disasters -- GlobalWarmingGlobalWarmingGlobalWarming...)

Guy being interviewed gleefully predicting all this also "mentioned" his 40-acre self-sufficient survival refuge in rural Texas and GOLD GOLD GOLD GOLD GOLD.

Where does this leave those like you or me without our Self Sufficient Survival Refuge Well Outside Any City with shitloads of Gold and Silver Ingots under the mattress?
It's like the Rapture - only a few can be saved. Maybe the guy is pumping his gold?

I think we're both in the Land of Sanity. We neither believe that real estate will appreciate forever nor that its failure to do so will End Human Life As We Know It.

The Land of Sanity is a less dramatic but more productive place.
Maybe the guy is pumping his gold?

Possibly. There was a similar guy a couple years ago who got tagged as "The Hal Lindsay of Gold Futures".

But it's the same glee you get with the more wacked-out Left Behinders. The World is Ending, We're All Gonna Die, It's All Over But The Screaming, and:

1) I'm God's Little Pet, so He's going to beam me up before I'm inconvenienced. (Or I'm going to SURVIVE with my Survival Refuge while you all die!) Burn in Hell, HA HA!

2) We're all going to Hell, but (smug smug) I Knew What Was REALLY Going On (smug smug smug)...

Somebody described this type of Conspiracy Theory as "Left Behind for non-Christians".

More and more, I see the wisdom of Penn & Teller's BS! advice regarding 9/11 Truthers: "Push them down the nearest flight of stairs!"
think we're both in the Land of Sanity. We neither believe that real estate will appreciate forever nor that its failure to do so will End Human Life As We Know It.

The Land of Sanity is a less dramatic but more productive place.

"There will come a time when men will go mad. And they will lay hands on the sane among them, saying 'You are not like us! You must be Mad!'"
-- One of the Desert Fathers, as quoted by my writing partner
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