Pending Home Sales Index versus Existing Home Sales
Lots of people got excited about this week’s Pending Home Sales Index.
I have been arguing that the strong housing numbers of late are being misinterpreted and that excitement was misplaced. We still have a very slow recovery, and no turnaround.
I am speaking against my book, as we own several RRE properties that would increase in value if the housing market recovers.
Consider: The number of home buyers signing contracts to buy existing homes jumped nearly six percent in May. Bill King notes that “seasonal buying surge was particularly strong out west where the NAR’s Pending Home Sales Index jumped 14.5%. Investors are driving the market out West, racing to buy distressed properties and take advantage of today’s very hot rental market (according to CNBC).”
But also consider: The NAR was embarrassed when they were forced to revise years of housing data — they had been using bad data based on a very old baseline. They went many years without so much as checking their data. As Constantine von Hoffman of CBS commented: “Commerce Department revises its number quarterly and clearly says that these are preliminary – not definitive – numbers. It turns out the NAR hasn’t double checked its math in five years.” (How ridiculous is THAT?)
Let’s review what we do know about the NAR:
-In the 2000s, they overstated Existing Home Sales by 14%;
-Their Housing Affordability Index is worthless;
-They make absurd marketing claims (i.e., its always a good time to Buy or Sell a house).
So, they engage in relentless spin, and cook their books. What does that mean about their Pending Home Sales Index?
As King points out, “Pending Homes Sales used to correlate closely with Existing Home Sales. Since mid-2007, when the financial crises began, Pending Sales greatly exceed Existing Sales. Cancellation rates remain high, so pending home sales aren’t always reliable.”
Distressed properties in various neighborhoods make appraisals challenging. Lots of potential home buyers fail to qualify for mortgages. These events occur AFTER the contract is signed, but before the closing. They are reflected in the PHSI, and are the primary reasons for the huge gap between PHSI and EHS.
And the chart above clearly demonstrates all that. King observes “Pending Home Sales are 25% higher than Existing Home Sales – cancellations remain high when faulty seasonal adjustments and record warm weather skewed economic statistics to the upside in early 2012.”
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I got your housing recovery right here . . .
Source:
The King Report
Issue 4289
June 28, 2012
Category: Data Analysis, Real Estate, Really, really bad calls
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.
To me, it is not so much that an industry association spins its results to make itself look favorable but that those claims remain unchallenged and are simply repeated as fact that shows how far down the slope to mediocrity our news organizations have fallen.
I don’t think anyone is saying anything other than that the RE recovery will be long and slow. That said it’s hard to deny it hasn’t started to turn in much of the country. Even such an RE pessimist as BR must think so or he wouldn’t have hedged by including some RRE property in his book.
Amen Mr. Munn. Bloomberg interviewed Eric Cantor and 2/3rds of every phrase he used was either a half truth, purposeful disception or outright lie. The interviewer simply nodded and let him speak unchallenged.
Now out of touch with housing originations but wonder if the new (2 years) appraisal process, disclosures (more rigid rules for timeframes to deliver disclosures), etc. plus difficulties with contingent sales (contingent on the sale of the buyer’s current home), waiting for short sales to clear the seller’s mortgage holder, etc. explains most or all of the gap along with the stricter underwriting which you mention. Certainly muddies the picture.
BR,
2 questions: 1) why this issue? Of all the huge macroeconomic events unfolding, why is this the one that you chose to argue so vehemently? The NAR is hardly an economic power-house and of course they’re always going to spin the data in their favor. Their job is to create excitement about the housing industry. Your rant is a bit like making fun of the cheerleaders for the Cleveland Browns. So their team *stinks*…what are they supposed to do, just sit on their pom-poms until their team starts winning?
2) What will it take for you to admit you were wrong about housing? Pick a stat and a date. How about 1.5mm housing starts in 2013? How about existing home sales up 50% 2012 vs. 2011?
Not saying you’re wrong, just curious.
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BR: AS soon as I am wrong, I will admit it . . .
Via Redfin, I’m seeing prices in the far-out Chicago suburbs now listed below where they sold in 1998. Methinks that trend will eventually roll through the entire metro area here… Where will the bottom be? 1995 prices? 1992???
Sounding like a broken record here, but the alleged inventory shortage is due to lenders refusing to foreclose because it is not in there interest to foreclose. Unlike Barry, I don’t expect a flood of foreclosures. This does not mean that the market has bottomed, just more can kicking that will come back to bite the current bottom feeders in the ass. (My apologies for so muc metaphore mixing.)
Lenders have no incentive to foreclose because they would then have to recognized their losses, even more so for second mortgages which get wiped completely. Servicers get to rack up fees that will get paid first when the house is finally auctioned or sold in a short sale. ZIRP makes it much easier for banks to carry non-performing mortgages just like the Japanese ZIRP are keeping their zombie banks alive despite the banks being full of bad loans.
See also Yves Smith piece this morning where she lambasts some bank apologists, but also mentioned what I am talking about where people in big houses haven’t paid anything since 2010, well before any moratoriums.
http://feedproxy.google.com/~r/NakedCapitalism/~3/VtK7zEA8AtA/quelle-surprise-fed-economists-side-firmly-with-bank-criminality-over-the-rule-of-law.html
Don’t know what will break the logjam. May happen when a few of these lenders are taken over by the FDIC or some other catalyst. Then we will see a lot more handringing.
[...] also has a great piece related to the “housing recovery” story noting that the NAR’s pending home sales index is defective as it relates to our current situation. In many parts of the country, sales are still falling through because of appraisal and mortgage [...]
Here’s an example: This home sold for $193k in 1999. It’s now listed at $191,900. I’m guessing the stainless steel appliances, granite countertops, finished basement and paverstone patio are all recent upgrades. Will it sell for $170k? http://www.redfin.com/IL/Lake-In-The-Hills/321-Clear-Sky-Trl-60156/home/17802243
“We still have a very slow recovery”
Quite possibly. However, it seems increasingly certain that we are at or above the bottom… which contradicts the view that there is more downside.
Personally, I think there will be some good upticks in the new home market this year. Yes, there are foreclosures, but those are not the quality, design, style or location that new home buyers want. Goodwill does not compete with Calvin Klein.
@wally: how many can afford Calvin Klein these days?
Mike,
“Sounding like a broken record here, but the alleged inventory shortage is due to lenders refusing to foreclose because it is not in there interest to foreclose.”
There’s always been some of that in some cases, with an attempt to modulate how many REOs hit the market (hence the ‘Shadow Inventory’), but there is no doubt there was a widespread pullback in foreclosures because of the potential legal exposure from the litigation by the states attorney generals.
“Unlike Barry, I don’t expect a flood of foreclosures.”
That’s already started. Now how much is put out on the market and when is another issue.
“@wally: how many can afford Calvin Klein these days?”
One thing about the recession is that those who were near the top were not much bothered by it. The thing that slowed custom house sales was fear of price declines, not inability to afford the cost. If that fear is gone, houses will be built.
speaking “against your book”? With all your comments about being data and fact driven, why would you have book that does not reflect your data and analysis driven opinions?
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BR: Can you not distinguish the difference between how you manage risk assets and how you live your life?
I live in a house and own a vacation property — neither of which were bought as investments.
It was not clear to me that the RRE properties you mentioned were your own lifestyle assets. Sounded like you were talking about your book of investments.
NAR -” The national association of people who will starve if you don’t buy a house”.
Plenty of people here in Florida who haven’t made a mortgage payment in 2 years and haven’t even had a notice of default yet – go figure…..
NAR comments (which I agree with) aside, I’ve spoken with several friends in the housing market as buyers here in the SF bay area and there is a froth at the mouth panic from buyers that they cannot get in to the houses they want. This is, by my read, only the case in areas where able buyers have been unwilling to pull the trigger (500K up to 1.5). Suddenly those potential buyers are willing to pull the trigger and it’s kind of amazing how fast housing prices have popped back. Some houses are actually going for above early 2007 levels and almost all houses in that range are seeing multiple offers. 5 miles away in the g-h-e-t-t-o the story is entirely different with community activists complaining that houses are being purchased by cash investors who do not need access to credit are beating out potential owners willing to pay the same or more money because there is no bank approval required. Those investors are just renting out housing stock with no improvements because the math pencils out. Neither of these look like recoveries to me.