Pick a direction
Which way will the ejecta go?
Which way is the housing market going? Or is it going both directions at once?
Be in my benighted youth, when I was not going to college classes, we used to play very late night poker, and in those days, before the rise of Texas Hold ‘Em, the game of choice was Big Squeeze, six-card stud with a substitution, which my poker buddies thought offered the most range for skill (or at least complications). One could declare for high, low, or both, with half the pot going to each best declaring hand. With seven cards available, it was possible to go both ways, declaring for high and for low, and after showing two chips, one would look balefully at the remaining opponent and say, Pick a direction.
Judging by this jumble of statistics from MBA NewsLink, that’s the dilemma being presented by the housing and capital markets. Which way are they going?
A handful of reports demonstrate the continued volatility of the housing market.
Their first indicator is heading south:
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First American CoreLogic’s Home Price Index for October showed national home prices, including distressed sales, fell by 7.8% in October compared to a year ago.
Actual sales prices always lag the market, because it takes anywhere from two to twelve months to sell a house, and another interval for the house price to be recorded. By the time year-on-year house prices have stopped falling, the market will already be in recovery.
The second derivative is slightly more cheerful:
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While this reflected an improvement over September’s year-over-year price decline of -9.5% –
A year ago, prices had fallen at a rate of 9.5%; in the ensuing twelve months, the rate of decline dropped 20%, from 9.5% to 7.8% (7.8/9.5 = 82%). Although not much of an upward-bending curve, at least it’s not an acceleration. Nor is it a halt to falling prices:
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– on a month-over-month basis, national home prices declined by -0.7% in October compared the previous month.
Home prices fluctuations are seasonal. People buy their houses in spring and mid-late summer; activity declines in the fall and winter. We can expect prices to continue drifting down all winter, like the snow.
Is there reason to think the rate of price support is better than the raw figure? Yes, sort of:
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Excluding distressed sales, year-over-year prices declined in October by -5.8%.
I’ve score that as a down indicator – year-on-year prices are still dropping – but it’s evident the MBA Newslink people think it’s a positive sign, because the rate of decline of ordinary people selling ordinary houses was 30% slower (58/95 = 69%) than the same time last year. That’s not inherently implausible, and suggests that the bottom may be reached sooner than one might otherwise have concluded – but as we have no way of calibrating either figure, it’s mostly cold comfort.
Take cold comfort you’re not in hell already
Just as the preceding statistic was mildly less negative than the baseline, so too is this one:
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In September non-distressed sales fell by -6.3% year-over-year.
That’s a better rationale for optimism, if the rate of decline in prices for non-distressed sales was dropping even though the weather was getting colder. Does this mean that, except for the millions of houses held by banks, the rest of us are in pricing equilibrium?
Am I priced right?
First American CoreLogic Chief Economist Mark Fleming said the declines underscore the negative impact that distressed sales have on the Index, as distressed sales continue to decline at a larger annual rate than non-distressed sales.
Neither Fleming nor his hair are distressed
Banks and other real estate lenders are unwilling holders. They have multiple reasons to dispose of properties at a discount below even a depressed market.
I have an urgent need to dispose of something
“We are continuing to see improvements in the year-over-year home price change as prices have remained relatively stable since April,” Fleming said. “The additional government support for the housing market has stimulated demand and restricted supply in 2009.”
Correct. The multi-hundred-billion dollar stimulus bill enacted early in 2009 – how long ago that seems! – included, almost as an afterthought, a $7,500 first-time home buyer tax credit. Whatever one may think of it as macroeconomic policy, the homebuyer credit definitely boosted demand, to the point where it was extended when it first expired. Are we now permanently hooked on it?
“How these government supports are removed in 2010 and the moderation of pending inventory and negative equity will be critical to the continued stability of the housing market.”
The HPI forecast continues to predict declines in the short term followed by recovery beginning this spring.
Buyer demand always strengthens in the spring; whether it will be enough to turn around national home price averages will have to be seen. Further, the recession’s effects will vary greatly by state, as indicated by this bit of bad news:
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The 45 largest metropolitan markets are expected to decline an average of another 4.2% before bottoming in March. Declines will be driven primarily by the large levels of foreclosures in these areas, Fleming said.
Continued drops in metropolitan areas are likely due to continuing job losses. As I’ve written elsewhere, we aren’t going to start growing significant new households until we reverse the trend on job losses.
That’s why the MBA anticipates this green shoot:
However, improvement in both levels of inventories and unemployment are projected to prevail in the spring of next year, resulting in an average year-over-year appreciation of just under 1% by October for these metropolitan markets.
To some degree, the MBA is cheating, for this new datum is a projection, not an observation. I’ll give them a green arrow, but only a small one. Meanwhile, back in reality, the pain is settling in our industrial joints:
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The index said
As I’ve previously written, home price drops arose for three distinct reasons: economic weakness (
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Over the next six months, large declines in the HPI are predicted in
Because these are only projections, they get a smaller arrow, as do these:
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Cities projected to experience the strongest recovery in 2010 are primarily concentrated in large urban areas of
Just in case you were interested in bigger-picture perspective, here’s a measure of how far prices have dropped:
First American CoreLogic said including distressed transactions, the national HPI has fallen -30.1% from its peak in April 2006. Excluding distressed properties, the national HPI has fallen -21.5% from the same peak.
We will also give a small down arrow to the state leading the way down:
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When distressed sales were included,
Time for some good news?
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A separate report, the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate
If this trend holds, it’s the most encouraging news yet, because it will signal that people who are in a position to wait have decide they can afford to buy more housing. As markets are conversations between people who eventually tell each other the truth, such movement is meaningful.
The increase in home buying by current homeowners came at the same time that both first-time homebuyers and investors reduced their activity, the report said.
We can put numbers on this hopeful sign:
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The latest survey showed that existing homeowners accounted for 41% of home purchase transactions in November, a sharp increase from 38% in October.
That’s the thing about percentages, they always add up to 100, so if existing homebuyers are a bigger percentage, someone else must be a smaller:
Meanwhile, the proportion of home purchases tied to first-time homebuyers slipped from 47% in October to 45% in November.
Is the first-time homebuyer credit reaching a point of diminishing returns? That wouldn’t be such a bad thing at all.
“Statistics are showing the effect of Congress’s delay in extending the home buyer tax credit and then its eventual extension,” said Thomas Popik, research director for the Campbell/Inside Mortgage Finance Survey. “First-time home buyers started to lose interest in October when it appeared that Congress wouldn’t extend the credit. When the credit was finally extended in early November, current homeowners jumped at the new opportunity for a tax credit on their home purchases.”
Nor would this:
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Investors also saw their share of reported home purchases drop, falling from 15% in October to 14% in November.
Investors are an important part of the ecosystem, but they are prone to overextension and illiquidity, and when they are — as they were – they contribute to downward price pressure. That’s why their supersession by occupant owners is positive news:
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Home buyers also increased purchases of non-distressed property activity, the report said. The latest survey found the share of non-distressed property home purchases jumped from 58% in October to 63% in November. Existing homeowners tend to purchase non-distressed properties.
As with other statistics, the story emerging is of the overhanging inventory having been blown off. It has gone to its great non-reward, become REO or rental or whatever it will be, and is no longer cluttering up the active marketplace for buyers.
There is still a lot of supply to deal with:
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A separate report from First American CoreLogic put the pending supply of residential housing inventory, referred to as “shadow” housing inventory, at 1.7 million units in September. The figure includes estate owned by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent.
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Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago.
The statistic is deceptively short, because new inventory is always coming in to the supply. Ask any small business owner if they notice the difference between 75 day receivables and 100 day receivables.
It takes all the billing you can do to stay within 75-day receivables
The months’ supply measures how quickly the inventory will run off given the current sales rate.
At least it’s going in the right direction:
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The visible supply of unsold inventory was 3.8 million units in September 2009, down from 4.7 million a year earlier. The visible inventory measures the unsold inventory of new and existing homes that are currently on the market.
A very promising statistic. More than 900,000 homes have been absorbed somehow. We have a long way to go, but that’s a big dent in the unsold backlog. That’s why the last statistic is the most hopeful:
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The visible months’ supply fell to 7.8 months in September 2009, down from 10.1 months a year earlier.
At that rate, we should be back to full equilibrium by September, 2010.
If we’re still alive, that is
