Housing Bottoming ?

Some of the recent Housing data has been “encouraging:”

• Sales for existing homes rose in November for the second straight month;
• New single-family homes rose 3.4% in November (seasonally adjusted), following a 3.8 percent decline in October;
• Inventory backlog declined to a 6.3-month supply in November (from 6.7-months);
•  The 4 week average MBA purchase index has risen 12% since August.

However, it may be a bit premature to declare that housing has bottomed just yet. In addition to so many bottom pickers (the sheer number all but gurantees they will be wrong), the historical data simply doesn’t support so early an end to the downturn. I have a monster piece coming out on this very subject soon, contextualizing the rise and fall of housing this economic cycle. But until then, let’s consider a few details.

First, this is rather early in the traditional Housing cycle. According to research of out of Goldman Sachs, the past three cyclical declines (since 1960) saw New Home Sales dropping by over 50% on average. This fall off has occurred over a 26-53 month period.

Where are we now in comparison? Consider that the statistical top in housing activity was only 15 months ago (July/August 2005); Housing
starts are off by “only 20%” year-over-year. This suggests we could
still be very early in the downturn –at least relative to the prior housing cycles. And, we are still near 15-year highs in
terms of existing home inventory, and 13 year lows in home affordability. That suggests more price decreases to come.

We’ve discussed the new home cancellation factor also, running as high as 30-40% amongst some builders. (See: Home Buyers Back Out Of Deals in Record Numbers) Commerce does not report the cancellations, meaning sales are over reported and inventory under reported. This suggests the initial sales and inventory data will be revised.

Even more significant, the new permits, a gauge of future activity, has dropped off a cliff. That will help the inventory situation, but it implies a further dramatic slowing in activity into 2007.

With only 3 cycles as a frame of reference, there is no guarantee that the present housing boom and bust will fit neatly into these same parameters. But given the magnitude of the expansion, it would be surprising to see a mere year and half slowdown. We could very well be early in the Housing downturn in terms of both duration and depth.



One last thought on a related note: (apologies for the name drop)

I was chatting with the CEO of Coldwell Banker Real
Estate in the green room of Kudlow this week. In addition to pointing
out this remains the 3rd best year on record, he revealed a lot of
common sense with this statement: (I am paraphrasing)  “Price your house at a reasonable level and it will sell quickly. Overprice it, or assume its still 2005, and it won’t move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it . . .


End of Housing Slump Seems to Be Drawing Near
Signs of Stability Emerge In Mortgages, Home Sales,
Buoying Economic Prospects
WSJ, December 28, 2006; Page A3


Home Sales Rose 3.4% Last Month
NYT December 28, 2006


Homeowners Cut Prices, Drawing Some Buyers Back
NYT December 29, 2006


Mortgage Applications Index Rose 11.4%
Courtney Schlisserman
Bloomberg, Dec. 13 2006


Category: Data Analysis, Economy, Real Estate

Peter Gabriel – Solsbury Hill

Category: Music

St. Louis Fed’s Monetary Trends

Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation

Truck Tonnage Plummets

Category: Economy

Nasdaq Trend Break

Category: Investing, Markets, Technical Analysis

Media Appearance: Kudlow & Company (12/27/06)


Once more unto the breach, dear friends, once more;

Back in the studio tonite, at 5:30 – 6pm.  The topics will include THIS, as well as the market rally, Holiday Retail Sales activity, New Housing data, and of course, other more amusing economic data.

Guests include the forthright John Rutledge, and Art Laffer and Jim Huguet (author of Great Companies, Great Returns).   


UPDATE: December 27, 2006 7:20pm

A classic example of "leaving it in the locker room." No only did I only get in two wishy washy  sentences, but the best stuff came during the commercial breaks between segments.

We went over the long and short sectors, individual names, and nothing made it on the air.

Best line: the day I throw in the towel and flip Bullish, is the day you want to shor tthis market to all hell.    

Better luck next year


A few random thoughts about these items:

1) Its the last week of the year, volume is thin, and mutual fund are having some fun.

2) November’s new sales numbers are encouraging, but recall just how subject to revision this data is:

The Census Bureau counts a house as sold when the contract is signed. If a buyer cancels the contract, however, Census does not readjust the numbers. Thus, sales are overstated — and inventories understated — for the month the house is initially sold. (And when that house is sold, the reverse happens).

Note that the homebuilders have been reporting cancellations in the 30%+ area — you can see why these initial numbers are suspect.

3) The sharp 15.6% drop in mortgage applications reported by the Mortgage Bankers Association for purchase loan applications confirm implies that new Home Sales may be overstated.  Wait for the revised New Home data.

4) Lastly, the following email comes to us via a Lennar sales person — note that these homes are being sold, with add-ons, at greatly reduced prices, and in some cases, at a loss (click for email)

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Category: Media

The State of the Consumer, by the Numbers

Given our focus today on Retail sales this week, it is appropriate to reference another source of data on the consumer.

This commentary comes to us via Northern Trust’s Paul Kasriel. Paul is the Senior Vice President and Director of Economic
Research at NT, and I had the pleasure of meeting him (and Caroline Baum) at Bloomberg last month. He is the recipient of the 2006 Lawrence R. Klein Award for Blue
Chip Forecasting Accuracy.

His recent commentary focused on the Fed’s Flow-of-Funds data. It is rather insightful work into consumer debt and savings. Some of it might be a bit beyond the interest of many readers, so to make it more accessible, I did a little slicing and dicing. Here is my highly edited version, emphasizing The State of Consumer, by the Numbers:


Kasriel:  I love the Fed’s quarterly flow-of-funds report. It usually is the mother lode
of enlightening economic nuggets of information. And the Fed’s latest release on
December 7 of third-quarter data was rich with these nuggets.

The slowdown in
borrowing was due principally to the household sector: Chart 2 shows that after
hitting a post-WWII high of 14.6% in Q3:2005, household borrowing relative to
disposable personal income (DPI) dropped to 8.8% in Q3:2006 – the lowest since
7.6% in Q3:2001, when the economy was in a recession.

Notice in Chart 2 that
precipitous declines in this percentage tend to be followed by the onset of
economic recessions (indicated by the shaded areas in the chart).

Read More

Category: Consumer Spending, Economy, Inflation, Real Estate

Retail follow up

Category: Consumer Spending, Economy, Inflation, Retail

S&P 500 2% Correction?

Category: Markets, Psychology, Technical Analysis

Oh Holy Night New Orleans Style

Category: Digital Media, Music, Television