As we noted Thursday, we had very strong existing home sales. But before you freak out about the Fed going to 6%, put this into context: After 5 months of decreasing sales, we had a nice bounce.

Call it a counter-trend rally. While I have believed since August 2005 that Real Estate is cooling off, this most recent data point is likely the result of stragglers finally getting to close loose ends from the prior few months sales.

Meanwhile, new home sales fell off the cliff, dropping 10.5% (seasonally adjusted) to an annual rate of 1.080 million. The WSJ reported the drop was "the biggest since an identical slide in April 1997 and the overall level of demand was the lowest since May 2003′s 1.078 million annual rate." 

Note, however, that any single month’s New Home Sales Data tends to be unreliable; stick with a moving average.

So where are we now in the Real Estate market? This certainly is not the start of a new super cycle. Inventory rose 5.2% near an all-time record, there is 5.3 months
supply (3.03 million). The 10.6% year-over-year price gain to $209,000 is a median (as opposed to unit price weighted average) — in other words, its skewed by the high end. The entry level has been priced out of the market for too many people, hence, the skewing of prices.

I do suspect that much of the inventory out there is not for real
– i.e, sellers seeing if they can top tick the market and get top
dollar, but not really entertaining many offers below their ask. These
are casual, rather than serious sellers, and their inventory is merely
tentative — and temporary.

Anecdotally, Real Estate  agents I have surveyed tell me the market is utterly dead — and at the start of Spring, typically the beginning of the home shopping season (if you want to be in a new house for the kids to start the new school year in September).

Underwater_1
And even more ominous for the macro economy, IBD reports that 29% of buyers in 2005 have zero equity in their house. The same is true for 9.4% of all mortgage borrowers. So while the sunshine crowd will tell you that homes are actually a savings vehicle, the reality for many home owners is quite different. (You are best off thinking about your house as a place to live that hopefully appreciates over the years — not an ATM or a savings account).

Also noteworthy: foreclosures are  on the rise.

Thus, the RE market has dropped from white hot to red hot to mid-plateau. We are now entering a period where the actual sellers — motivated, but not desperate — may start repricing their houses downwards. This is a process that may take some time, but do not be surprised to see 10% decreases in housing prices by the Fall.

This is unfolding pretty much on script.

The impact will show up in sentiment and in consumer spending over the next 18 months or so. As noted back in Janaury, as the Real Estate Souffle falls, it will beget a slow motion slowdown.

 

>

Sources:
Mortgage rates down a bit, delinquencies up
By Holden Lewis •
Bankrate.com, March 23, 2006
http://www.bankrate.com/brm/news/mtga/20060323a1.asp

New-Home Sales Tumble 10.5%;
Durable-Goods Picture Is Mixed

KEMBA J. DUNHAM
WSJ, March 25, 2006; Page A4
http://online.wsj.com/article/SB114320627985107436.html

Category: Economy, Federal Reserve, Markets, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

42 Responses to “New Real Estate Phase: Repricing Houses Downwards?”

  1. Ned says:

    check out Calculated Risk for a cool/scary chart on New Home sales and recessions. An eye opener!

    http://calculatedrisk.blogspot.com/2006/03/new-home-sales-and-recessions-part-ii.html

  2. Paul says:

    Although I lost the link, I was reading that more Americans are expecting a tax refund this year and of slightly larger size. Certainly those 0% equity folks are due a large refund because of mort interest deduction. The piece I read suggested this would put cash back into people’s hand, catch up on some of the defaults and put a little momentum behind the economy for a few more months.
    I’m not sure what to think or how much of an effect this is. Any thoughts?

  3. zack says:

    Can someone explain to me why PMI is a few pennies from an all-time high?

  4. emd says:

    “A Hard Rain’s A-Gonna Fall” – Bob Dylan

    (or maybe not)

  5. kdawg says:

    Sales down 29.4% in the western region but up 9.5% in Southern Calif. L.A. Times is reporting that So. CA is weathering this downturn better than other regions because of the diversity of the economy.

    I doubt that So. CA is going to be immune from this. Going back to the job creation of the last 4 years in So. CA, 1/3 in construction and 1/4 in R.E. finance. Also, So. CA lagged behind everyone else in the last downturn (circa 1989-1994).

    http://www.latimes.com/business/la-fi-homes25mar25,1,2429359.story?coll=la-headlines-business

  6. GRL says:

    I doubt that So. CA is going to be immune from this. (etc.)

    I also live in SoCal and get the LA Times.
    The huge difference between 89-94 and now is that, in 89-94, you had the aerospace layoffs followed by the Northridge earthquake, in other words, a contraction in the real economy and in jobs, followed by a shock to the system that may have pushed some people who were teetering over the brink.
    This time, you don’t have the same economic conditions.
    There is an interesting discussion of the 89-94 real estate recession in SoCal, with a specific emphasis on its impact on the banking industry at the FDIC website, here:
    http://www.fdic.gov/news/conferences/2006_Economic_Outlook/artmc.html
    The very interesting conclusion is that the portions of bank portfolios most affected were the commercial and industrial (business) loans, not the real estate mortgage portfolio (which, BTW, the guy says is a growing portion of bank loan portfolios due to reductions in C&I lending brought about by reduced corporate demand for bank lending services as the corps go straight to the markets). I’m not sure that is anything more than a reflection of the fact that the overall economy turned south and dragged real estate down with it, but it could also reflect the fact that the house payment is the last thing people cut back on when they are in trouble.
    Also, just because SoCal lagged the rest of the country going into a recession last time says nothing about what it will do this time.
    Bottom line: No question, SoCal is overpriced, and no question that it is weakening, in the sense that houses are staying on the market longer and are being reduced (from $1.2 to 1 million). However, it is not yet clear that there will be the kind of massive economic contraction and reduction in home prices there was in 89-94.
    Also, it seems to me that a 29% drop in new home sales in the West seems kind of extreme and is perhaps a fluke. It would not be surprising at all to me to see that figure revised, with a comensurate change in the national figure.
    FWIIW.

  7. Emmanuel says:

    Mortgages, like human beings, go through predictable life stages: Sweet and sunny early years, followed by turmoil in adolescence, succeeded by a gradual mellowing in adulthood. Mortgages hit their troubled adolescence — and have their highest delinquency rate — in years three through five.

    This quote is a neat one from Bankrate. We are in the midst of many mortgages’ troubled teens. Default city, here we come.

  8. calmo says:

    Nice quote Emmanuel and the referrence to the Trillion dollar rollover in the next 18 months suggests it may be the ‘temper tantrum twos’ induced by the former Fed head, what’s his face.
    Good thing those at the margin are few (according to AG) and we won’t have to worry about the massive dislocation of RE or RE-related workers who might be starting to twiddle their thumbs as we type.
    I don’t see any public works programs (as per the UK) to bridge this transition with the current administration. So, the Big Picture might not be the defaulters but the labor dislocation. A long hot summer maybe.

  9. Larry Nusbaum, Scottsdale says:

    Emmanuel : “This quote is a neat one from Bankrate. We are in the midst of many mortgages’ troubled teens. Default city, here we come.”

    WHY WILL PEOPLE DEFAULT WHEN THEY CAN JUST RE-FINANCE, SELL (trade down) OR HANG TOUGH? DID YOU KNOW THAT THE AVERAGE LIFE OF A LOAN IN THE U.S. IS ONLY 3.2 YEARS?

  10. Larry Nusbaum, Scottsdale says:

    GRL: You are right about Southern California in the 1990-1993 recession when tens of thousands were forced to sell their homes all at once. Recall when there is talk of splitting the state in half and the big question was where to draw the dividing line?
    Florida and Las Vegas may experience a large drop-off as a result of the overbuilding and over-converting of condo projects.
    Here in Phoenix, where the economy is vibrant, new home sales have dropped off quickly. Existing home sales have not had a serious problem for those who are serious about buying and serious about selling.

  11. Leisa says:

    “WHY WILL PEOPLE DEFAULT WHEN THEY CAN JUST RE-FINANCE, SELL (trade down) OR HANG TOUGH? DID YOU KNOW THAT THE AVERAGE LIFE OF A LOAN IN THE U.S. IS ONLY 3.2 YEARS?” If the initial presumption is that people will default, default generally occurs after there has been a series of missed/late payments. Therefore, I offer a few points that might make your suggestions impracticable: (1) re-finance? Rates are going up not down; also if housing values are declining, then the re-fi will be at the new valuation. Likely there will be a gap. So throw that out as an option. Further, credit may not qualify them for a loan and if so, then they will get a credit risk, high interest rate loan. (2) Trade down–presumes that their credit would allow them to get a new loan. If they are having to consider this option, there is a high probability that there is a credit and/or valuation problem. Therefore, see comment (1) which is also compounded through their taking a beating on current home valuation which may result in a loan gap. They will have to finance that gap against another purchase. I surmise that most folks would find this difficult; (3) Hang tough–you can only do that so long as the homeowner and the lender can tolerate the current situation. Interest rates have increased impressively in the past year, moving from 5.5% to over 7%. That’s a high percentage if you are paying an interest only loan, have a payment of $1500 and now $1900.

  12. Larry Nusbaum, Scottsdale says:

    Leisa: I see you use the word “if” too many times.
    1) Long rates haven’t gone up that much. (about 6.25%)
    2) People can take a 40 year loan, an option arm or a 30 year fixed.
    3) Housing values have not declined.
    4) There are many interest only loans in which the rate is fixed for 3, 5 & 10 year periods.
    IF, IF, IF…………………….

  13. fred hooper says:

    Don’t let larry bother you, Leisa. Your reply to his rant was well thought out. What makes blogging so fun is that we can discuss issues and share information and facts, and occasionally we get to skewer some self-serving baffoon. You see, Larry is a real estate agent, and is currently writing a book on “how to get rich on real estate”, scheduled for release later this year, presumably after the real estate market resumes it’s meteoric 30% annual appreciation rate. He also worships the “highly regarded” chief spinmeister at NAR, David Lareah, who coincidentally has also written a book on “how to get rich in real estate”. It’s currently rated somewhere around 250,000 on the Amazon list. Larry spends his weekends sitting on open houses, or, if he doesn’t have a listing (a dubious achievement since there are nearly 40,000 of them in the Phoenix metro area), he can be found at the corner of Scottsdale and Camelback roads holding a big sign that says “THERE IS NO REAL ESTATE BUBBLE” on one side and “HOUSING PRICES HAVE NOT GONE DOWN” on the other.

    Facts are helpful when identifying the current trends in real estate, especially in Phoenix:

    One in three dollars of the economy in Phoenix metro is real estate related: http://www.azcentral.com/specials/special50/articles/1121houseintro21.html

    In addition, resales have dropped precipitously in the Phoenix metro area. “The 2006 year-to-date is 10,715, in contrast to 17,290 for 2005″: http://phoenix.bizjournals.com/phoenix/stories/2006/03/20/daily16.html

    Larry can probably do math and will find that this represents a decline of 38.0278% in YOY resales. You see, up until year 2000, larry was a wall street investment banker from San Francisco. Confused? Me too. I can only speculate that he saw the tech bubble coming and got out when the gettin’ was good. Far be it for me to question larry’s intentions, but one can only wonder why a MBA wall street investment banker would leave San Franciso to become a real estate agent in Phoenix. Oops, Scottsdale.

    Finally, the valley has experienced a huge increase in existing home inventory. According to the local MLS, the number of valley listings are fast approaching 40,000, an increase of nearly 400% over the level just 7 months ago. This does not include the FSBO inventory, nor does it include the new homes ready for occupancy or in the construction pipeline. “Here in Phoenix, the economy is vibrant” says larry, as he thrusts his chest forward. That being said, Larry concedes “new home sales have dropped off quickly”. I would guess that even in the 1993 southern California bust, the number of defense related jobs was far less a percentage of the economy compared to the 2006 Arizona economy.

    I expect a large number of real estate agents, mortgage brokers, construction workers and escrow officers are currently looking for new employment opportunities. Many haven’t listed their homes yet.. Good luck, larry. Go get ‘em.

    P.S. larry, TYPING THINGS IN ALL CAPS DOES NOT MAKE IT SO!!!!!!!!!

  14. Larry Nusbaum, Scottsdale says:

    “how to get rich on real estate”, – WRONG

    “Larry spends his weekends sitting on open houses,” – WRONG ( I am not a residential agent and commercial real estate is booming)

    NEXT! (I love posting in all caps)

  15. Larry Nusbaum, Scottsdale says:

    “The primary news of last year’s housing market was the rapid rise in the median home price from $194,000 in January to $260,000 in December. Since the record of $263,000 was set in September, the growth essentially stopped and by January the median price was $257,000. A slight re-emergence of price growth occurred in February as the median price hit $265,000, up from $200,000 in February 2005.”

    YES, FRED, THIS REPRESENTS A REAL “BUBBLE”.
    Btw, prices didn’t go down as inventories increased….

  16. Leisa says:

    Larry: I used “if” for it represents an appropriate qualification when one isn’t comfortable making blanket statements (in a fact free zone) with emphaticism. I fall into that camp. Housing prices, like all prices, follow supply and demand. Supply is starting to outstrip demand in certain areas. Prices will fall. (No “if” there!). Though you list many of the options…one can only get those options at a reasonable price with proper credit. For people in trouble because of either increasing interest rates–and interest rates are increasing materially over where they were even just a year ago, and that increase is about 20%–then your listed options are impracticable.

  17. Larry Nusbaum says:

    Leisa: Has there ever been a bad time to buy and own real estate in the last 70 years? Given the past 70 yeaar history, would you rather have tried to time the stock market or buy and hold real estate.
    I am not questioning your prediction because I make none. There is simply no history to fall back on that suggests a bubble in the housing market.
    There are always people in trouble (whn they lose their jobs). The economy is fine, right now.

  18. Larry Nusbaum, Scottsdale says:

    “Finally, the valley has experienced a huge increase in existing home inventory. According to the local MLS, the number of valley listings are fast approaching 40,000, an increase of nearly 400% over the level just 7 months ago”

    Actually, Fred Hooper, it’s about 36,000. And, the number of actual closings are running about 300% ahead of last year……..”ooops”

  19. slg says:

    “Has there ever been a bad time to buy and own real estate in the last 70 years?”

    Yes. Seattle, 1981. Tri-Cities, WA, 1986.

    Lost money both times when we had to sell.

    And Bay Area, 1990.

    My sister’s family, same.

    Real estate does go down. And if you don’t think so, you simply don’t know what you’re talking about. Read some of that history of “the last 70 years” that you bandy about so confidently.

  20. Larry Nusbaum, Scottsdale says:

    sig: Please tell me the value of any of those properties today:___________________________
    I bought my SF house in April of 1990. That was a short-term top. Real Estate comes back and goes up in time. NT, JDSU, CIEN, LU, ENRN, will not.

  21. Larry Nusbaum, Scottsdale says:

    sig: Over those 70 years, the median home price in the US has not declined once, year over year.

  22. Larry Nusbaum, Scottsdale says:

    Buy and HOLD real estate. Not “trade” it.

  23. slg says:

    Oh, get real! People have to move because of job changes, or promotions, or whatever. “Buying and holding” real estate is just not realistic for real working people in the real world. It’s like buying stocks in 1929 and waiting for the (nominal) value of the Dow to return to the same level–in 1954. Can’t wait that long.

    And that also ignores the alternative investements that you could have made–and profited on–while waiting (tap, tap, tap) for it to come back.

    And that’s nominal dollars, too. No inflation factored in. E.g., we sold a rental in North Las Vegas in 1990 for what we could have gotten in 1980, during the previous bubble. Did we break even? No.

    Been there, done that, got the T-shirt, Larry. You’ve got a reality check coming.

  24. slg says:

    And re that rental: would we have done better to have sold it in 1980 and put the money into stocks (which everyone hated at the time)? You betcha!

  25. Larry Nusbaum, Scottsdale says:

    slg: If you lost money in real estate, for whatever reason (you didn’t have to sell) blame yourself. If you are predicting a real estate bubble (like everyone has for the past 5 years) someday you’ll be right. It will dip down after years and years of gains and you’ll be posting from you apartment making your landlord wealthy.

  26. Larry Nusbaum, Scottsdale says:

    “You’ve got a reality check coming.”
    TELL LARRY ABOUT THE COMING REALITY:

  27. Larry Nusbaum, Scottsdale says:

    slg: Please tell me the value of any of those properties today:___________________________
    (SECOND REQUEST)

  28. slg says:

    Um, Larry–so you say it’s ok to sell real estate? Sometimes? ‘Cause it might go down ’cause you’re at the top? Gosh! Whoda thunk?

    And no, I don’t live in an apartment. We timed our current home purchase considerably better (though I can’t claim it was anything but luck).

    And reality just happens. It doesn’t have to be “told.”

  29. Larry Nusbaum, Scottsdale says:

    Um, Larry–so you say it’s ok to sell real estate? Sometimes? ‘Cause it might go down ’cause you’re at the top?

    AND, WHEN IS THE”TOP”? IT’S BEEN THE TOP FOR 5+ YEARS, NOW………………AND, NO, I DID NOT SAY “SELL”.

  30. Larry Nusbaum, Scottsdale says:

    Seattle, 1981. AND, TODAY?
    Tri-Cities, WA, 1986. AND, TODAY?

  31. slg says:

    Oh, and the value of the properties today is of absolutely staggering irrelevance, because it requires calculating inflation (which I frankly don’t have time to bother with) and because it requires calculating the decades of carrying costs involved (ditto) and because it requires calculating the opportunity costs of the alternative investments (ditto again).

  32. Larry Nusbaum, Scottsdale says:

    Real estate is not for everyone, slg, as you have demonstrated. Sorry to bother with you. Good luck.

  33. Larry Nusbaum, Scottsdale says:

    “Over those 70 years, the median home price in the US has not declined once, year over year.”

    I JUST LOVE READING THAT………….

  34. Larry Nusbaum, Scottsdale says:

    And that’s nominal dollars, too. No inflation factored in. E.g., we sold a rental in North Las Vegas in 1990 for what we could have gotten in 1980, during the previous bubble.

    BUBBLE? WHAT BUBBLE? WHEN?

  35. slg says:

    Dodging the points I brought up that any serious investor would consider is more eloquent than ANY OF YOUR CAPS. (And do you really not know how to show italics in html?)

    There will (probably) be a time to get involved in real estate again. But it’s not now.

    But catch that falling knife…

  36. Larry Nusbaum, Scottsdale says:

    “But catch that falling knife…”

    I guess to you, real estate is about single family houses in Washington and nothing more. You read there is a bubble and therfore you do what? Nothing?

    There will (probably) be a time to get involved in real estate again – YES. AND, YOU’LL WATCH IT PASS.

  37. Larry Nusbaum, Scottsdale says:

    btw, you didn’t bring up any “points”……

  38. Larry Nusbaum, Scottsdale says:

    slg: you are way too serious and way too emotional.

  39. slg says:

    “YES. AND, YOU’LL WATCH IT PASS.”

    All caps again, huh? Very convincing! But having been around the block a time or two, I’ll take that risk.

    “I guess to you, real estate is about single family houses in Washington and nothing more.

    ??

    “You read there is a bubble and therfore you do what? Nothing?”

    Yes I am. I’m not buying right now!

    “btw, you didn’t bring up any “points”"

    Go reread my post about “opportunity” and “carrying” costs. I should have added “transaction” costs, too.

    “slg: you are way too serious and way too emotional.”

    ???? You’re not even consistent. If you’re not “serious” about a major purchase like real estate you have no business doing it. But I suppose that sellers would rather that buyers be “emotional.”

    Overall, Larry, you’ve really managed to convince me that now is not the time to buy!

  40. Larry Nusbaum, Scottsdale says:

    Buy what, slg? Houses? Office condos? Strip centers? Multi-units? And, where? California? Arizona? Boston? Florida? Or, is all real estate the same to you?
    I do not “convince” people to buy or sell. The cycles run 7 years and this one has run it’s course.
    People are spooked and many are selling. Do you want to wait until everyone is buying to get back in? OK. Then, wait until they ring the bell………….

  41. d. says:

    LARRY:

    GOOD FOR YOU IF YOU’RE A PRO AND YOU CAN TIME THE MARKET AND HOLD ON TO EVERY PROPERTY THAT TANKS BECAUSE YOU KNOW THAT IT WILL BOUNCE BACK SOME DAY BECAUSE YOU HAVE THE CASH OR SOME BANKER LOVES YOU.

    GRANTED, YOU CAN ALWAYS MAKE MONEY IN REAL ESTATE BUT THEN AGAIN IN ANY PYRAMID SCHEME (OUR ENTIRE ECONOMY IS A PONZI SCHEME) THERE ARE A FEW WINNERS AND MANY LOSERS.

    YES, OVER THE LONG TERM REAL ESTATE HAS PROVEN ITSELF A GOOD INVESTMENT (IF YOU CONSIDER INFLATION + 1% A GOOD RETURN) BUT THERE ARE A LOT OF PEOPLE WHO DON’T HAVE A LONG TIME TO GO. A LOT OF PEOPLE ARE GOING TO LOSE BECAUSE OF THAT. FOR MANY REASONS THEY WON’T BE ABLE TO CARRY MULTIPLE MORTAGES LIKE YOU CAN WHILE WAITING FOR A REBOUND.

  42. Larry Nusbaum, Scottsdale says:

    “FOR MANY REASONS THEY WON’T BE ABLE TO CARRY MULTIPLE MORTAGES LIKE YOU CAN WHILE WAITING FOR A REBOUND.”

    LOL! A rebound? From what? Prices have been going up and are holding steady (in my market). The morgages are paid by tenants. No?
    If you think that the “ENTIRE ECONOMY IS A PONZI SCHEME”, then you have nothing at stake and nothing to risk and nothing to worry about. I’ll get you some water for your bunker d(ope)