Thursday, August 27, 2009

Should we be excited about the July new home sales number?

The short answer is no. The July number was the worst July number since 1982; it just wasn't as bad as the June number, which wasn't as bad as the May number.

Everybody wants to know if we have hit bottom. There are three indicators suggesting we have--and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.

On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.

I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see. On the other hand, the nature of investor sales is actually a positive indicator: investors are buying with cash and renting out units at decent rates of return. This is very different from the borrow, buy and flip model from the earlier part of this decade.

FWIW, I would assign a subjective probability of .7 that we are at bottom. On the other hand, around 2005, I assigned a .35 probability that we were about to face serious trouble.

16 comments:

tumler said...

I generally agree that these numbers are tepid, even if they are in the right direction. This will be a weak recovery, but I think we are definitely in recovery. Prices matter less to me than units. Each one sold, regardless of price, removes a piece of inventory. And now, in most metros, the change (year over year) in new listing sis negative. So these sales clearly feed a housing recovery. Prices will follw, as they always do, with a six to twelve month lag.

Kenneth @ Dallas Real Estate said...

Great article and question. I've been speaking to my agents and I'm still not sure if anyone is excited about new home sales statistics that are out. In the DFW market, I'm still noticing rental market is performing much better than sales market. We are much better off as far as home sales are concerned compared to 12 months ago, but still not out of the hole...lots of work to do!

Ludwig said...

There's no doubt in my mind that we'll have significant and enduring overshoot.

I haven't seen anyone wrestle with the fact that we've had a finance driven economy that left the real economy to atrophy. Unemployment is going to rival or surpass GD I. Which means home prices will plunge as well. The largest part of our economy is retail/consumer spending, no? Feedback loop will drive spending into the dirt, and the stock market cannot help but to follow it down. All those with their savings/investments in the stock market will then be paupers. Unemployed paupers generally do not pay their mortgages.

James said...

It's funny how rising asset prices are always "good" and falling prices are always "bad".

Bubble good. Correction bad.

Anonymous said...

The standard financing model is based upon borrowing to buy, and then waiting for the loan to be inflated away. However, no economy can work if people buy things, and don't pay for them.

Anonymous said...

the vast majority of "recovery" is at the lowest of the low end. Bigger ticket housing is still not moving, and are the next big sector on the foreclosure radar. Recovery? It's limited, and in my opinion seasonal (summer, $8k govt incentive, pent-up rental investors). By this time next year, I think we'll be another 5-10% down overall market. How can we not be when over half of all mortgages will, at that time, be underwater?

Ralph D Bredahl said...

Lots of good info.
Thanks for taking the time to write it

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poker said...

In the DFW market, I'm still noticing rental market is performing much better than sales market. We are much better off as far as home sales are concerned compared to 12 months ago, but still not out of the hole...lots of work to do!