I’ll let this soak in.
New development sales are significantly detached from the balance of the market. I selected average sales price to exaggerate the trend to make my point.
The above chart is a generic trend line for the seasonally and non-seasonally adjusted 20-City Case Shiller Index released today using the data from the release.
And here’s the same index that I time-shifted backwards by 6 months to reflect the “meeting of the minds” of buyers and sellers. More specific methodology is embedded in the following charts. By moving the index back 6 months, the changes in the direction of the index are in sync with economic events (reality). In my view this index has a 6 month (5-7) month lag rendering it basically worthless to consumers but perhaps a useful tool for academic research where timing may not be as critical. I’m just grasping here.
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And here’s a time-shifted trend line for the year-over-year change in the 20 city index. You can see that the pace of year-over-year price growth began to cool at the end of last year. Talk about the weather is still premature since the polar vortex occurred after the new year.
And here is the ranking by year-over-year changes for each city as well as the 10 and 20 city index. Dallas and Denver are no longer under water and Las Vegas, despite recent good news has a long way to go to get to the artificial credit induced high it reached in 2006.
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I always like to parse out press release of the NAR Existing Home Sales Report using their data but presented it with proper emphasis. I believe these charts are better ways to interpret the report results.
My two big rules: ignore seasonal adjustments and focus on year-over-year results. The consumer doesn’t know that the EHS report results are heavily adjusted rather than providing the actual results.
Since the annual sales figure is a multiplier of a monthly figure, why do we need to alter the actual numbers any more by adjusting for seasonality? Through recent periods like the possible expiration of the Bush tax cuts (end of 2010), the federal homeowners tax credit for new buyers and existing home buyers as well as the expiration of the fiscal cliff at the end of 2012, seasonal adjustments are subject to maddening skew.
For much of 2013, median sales price was rising at an annual rate of more than 10%…
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I took a look at the change in new development inventory versus re-sale inventory both by year-over-year change (quite dramatic) and number of units. Both categories bottomed out at the end of 2013.
These trends are based on Manhattan co-ops and condos which represent more than 98% of the “non-rental” market. Much of the new inventory coming online is located within the “luxury” market which is the top 10% based on price.
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The report we author for Douglas Elliman covering the Manhattan/Brooklyn rental markets was published today.
Back in February many observers of the Manhattan and Brooklyn rental markets were saying: “The Spread is Dead, Long Live the Spread!” Ok not really.
But there was a lot made of the fact that the difference in median rental price between the two markets narrowed to $210 from as much as $1,125 in 2008. Manhattan rental prices had stabilized at the end of last year as Brooklyn continued to see sharp gains.
But that was as close as it got. Since the beginning of the year, month-over-month Manhattan rental prices began to rise as Brooklyn started to level off.
Manhattan rents cooled last year as the sales market poached demand from record volume. I saw the decline was temporary. The excess purchase activity from several years of pent-up demand has largely been absorbed allowing rents to begin climbing again.
Brooklyn rents are beginning to level off as a result of all the new rental development entering the market soaking up demand.
With big swings in housing related trends over the past decade, long term patterns are called into question. When a long term trend seemingly changes direction, it is reasonable to point it out. As I opined previously, the housing industry often defaults to linear thinking. It’s not enough to point out a trend, it is better to proclaim that the trend will run indefinitely because consumer tastes have changed.
Here are a few examples of trends in the US housing market that are not trends:
Average New Home Sale Size
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When the housing bubble popped in 2006, shortly after it was pronounced that the multi-decades long trend would reverse it self. Yet the change was a purely short term economic shift as the entry level surged with the sharp decline in mortgage rates. After a few years, the trend of expanding sizes resumed. I’m not saying that the trend will run indefinitely larger, but it is important to look at why the average square foot began to fall in the first place. A harsh economic condition with a rapid rise in affordability prompted in a shift in the mix. And remember, this highly referenced metric reflects new homes which is only about 15% of normalized housing sales.
Here is the housing conversation on home sizes from 2007-2011.
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Perhaps one of the largest misinterpretations of consumer trends has been on the subject of homeownership. As is evident in the chart, the heavily documented push to higher homeownership played was a sudden burst rather than a long term gradual change. The surge in the trend was artificial, based on fraud and unsustainably loose credit conditions that where based on NOTHING. With the multiyear decline, we are beating ourselves up over the decline in the homeownership rate yet we are reverting to the mean since credit is unusually tight. In fact the median homeownership rate of 64.8 over the past 49 years is exactly where we are right now in 1Q14. Will the market overcorrect towards rental? Yes I believe it will until tight credit conditions resume to more historic norms.
Here’s terrific takedown of the homeownership metric by Jed Kolko, Chief Economist at Trulia.
Will the US become a nation of renters and micro-houses? If one makes those arguments out over the long term, I don’t know what compelling information those trends would be based on.
I read Mike Mulligan and his Steam Shovel nearly every night to my 4 sons when they were younger (probably an unnecessary qualifier). It was also my favorite children’s book as a kid.
So, many of the squares of the capital’s super-prime real estate, from Belgravia and Chelsea to Mayfair and Notting Hill, have been reconfigured house by house. Given that London’s strict planning rules restrict building upwards, digging downwards has been the solution for owners who want to expand their property’s square-footage.
This trend reflects the appraisal concept of highest and best use for the equipment despite the inherent wastefulness. Does it make sense to leave the equipment in the basement? With all the concern in the US about below grade empty oil tanks and the environment, I wonder how this practice is allowed, cost effectiveness aside.
Given the exceptional profits of London property development, why bother with the expense and hassle of retrieving a used digger – worth only £5,000 or £6,000 – from the back of a house that would soon be sold for several million? The time and money expended on rescuing a digger were better spent moving on to the next big deal.
You really need to read the book.
The NAR released their Pending Home Sale Index today for April which aggregates signed contract data for the month. It is generally 2 months closer to the “meeting of the minds” between buyer and seller than their existing home sale report, that is based on closed sales (and 4 months faster than Case Shiller).
Pending Home Sales Index is not “forward looking”
In my chart above, and if you know me, I hate seasonal adjustments (SA) in housing data so this chart uses NAR’s reported numbers without adjustments. NAR always frames this release series as “forward looking” when it really is “less backward looking” because it is based on contracts, not closed sales. The end of May report reflects April contracts, half of which were probably signed in Late March. With a 2 month spread between contract and closing dates, this report is the most recent US housing market snapshot but nothing about it is actually “forward looking.”
With all the weather talk and mixed housing market messaging over the last month, this release brought us a broad range of interpretation, from “plunging” to “edging higher.”
Well, which is it? Or could it be both? Yes it can. We just need context.
According to Housingwire (uses SA numbers): Pending home sales plunge 9.2% in April So much for that post-winter, pent-up demand
Pending home sales for the month of April plummeted 9.2% compared to April 2013, the National Association of Realtors reported Thursday.
Contracts signed to buy existing homes increased 0.4% in April compared to March 2014, but that’s coming off three months of flat sales blamed on cold weather.
The expectation had been for at least a 2% gain month-over-month.
According to Diana Olick at CNBC (uses SA numbers), Pending home sales up just 0.4% in April, missing expectations
Warmer weather and higher expectations failed to cause a meaningful surge in home sales.
Signed contracts to buy existing homes increased just 0.4 percent in April, according to a monthly report from the National Association of Realtors (NAR). The expectation had been for at least a 2 percent gain sequentially.
The Realtors’ so-called pending home sales index is now 9.2 percent lower than April of 2013.
What’s going on?
If you look at the above chart you can see that last year’s pending home sales were surging up until May 2013, their highest level in 3 years (since the federal homeowner tax credit program as part of the stimulus). The surge in contracts in the first half of 2013 was born out of consumer fears that rates were going to rise. In addition, all the pent-up demand accumulated during the two year period preceding the US election and fiscal cliff deadline was released into the market. Many fence-sitters became decision-makers.
This winter’s harsh weather could have delayed buyers and we should be seeing this uptick in activity by now. We probably are seeing it but it no match for the year ago surge in activity but now the market is being characterized as weak or weakening. The problem with that description is it assumes that 2013 was a normal trend of an improving market. Well it wasn’t.
So yes, sales are down from the 2013 sales surge anomaly and the weather time-shifting buyers forward further into spring this year was no match for it. In fact, I suspect the next month will show the same type of “weakness” and the PHSI results probably can’t show real improvement at least until June.
I wondered what would happen if their index result was pulled back by 6 months to see how it lined up with a couple of significant housing milestones (purple vertical lines). The most recent housing milestone was last year’s Bernanke speech that resulted in the spike in mortgage rates in May-June of 2013.
In the modified trend line (dotted blue) housing prices surge up until mortgage rates spike. This is clearly more logical than the actual index showing housing prices surging for six months after the mortgage rate spike.
In the earlier milestone in April 2010, the adjusted index (dotted blue line) immediately begins to slide after the April 2010 signed contract deadline passed to qualify for the federal homeowner tax credit as part of the stimulus plan. Yes, that’s exactly what happened on the front lines.
I’m going to call this new methodology “time-shifting a housing index.” From an historical perspective, this is a much more useful and reliable trend line. For the near term, it places the CS HP 6 months behind the market without any relevance to current conditions. Then again, the S&P/Case Shiller Home Price Index was never meant to be a monthly housing indicator for consumers as it is currently used by the media. It was originally created to enable Wall Street to hedge housing but never caught on because of the long time lag and therefore the eventual ability of investors to accurately predict the results.
The top chart is fairly self-explanatory but here’s the math again:
Contracts Assumes 90 days between closing date and “meeting of minds” between buyer and seller i.e. 75 days from contract to close +15 days to signed contract from “meeting of minds.”
“Meeting of Minds” Moment when buyer and seller agree on basic price and terms, usually a few weeks before contract is actually signed i.e. May 2014 Case Shiller Report = December 2013. The optimal moment to measure housing.
Here’s a regular chart that has a longer timeline, with and without seasonal adjustments (you can see that seasonal adjustments are essentially meaningless.)
[Source: NAR, click to expand]
Last week we were given another dose of housing news – housing sales didn’t go negative for the first time in four months (m-o-m) as inventory continued to expand and prices kept rising. Even though mortgage rates are down to what they were shortly after the rate spike last spring, it’s not stimulating much of an increase in sales activity (translation: no correlation between housing prices and mortgage rates). I still refer to Nick Timiraos’ epic post of charts last month. Lower sales will continue to expand inventory and take the edge off of price growth.
Looking back over 2013 – the housing market wasn’t “recovering” – prices were rising from the perfect storm of tight credit, sentiment that things were getting better, surviving the fiscal cliff and threat of rising mortgage rates. The market was rebounding off a low point that had nothing to do with fundamentals. I still think we will see some improvement over the next several years but it will be nominal until the economy shows real improvement i.e. jobs, income and credit.
Removing all seasonal adjustments, here’s what the key NAR US Existing Home Sale metrics look like to me:
UPDATE Here’s a wonky explanation from the Federal Reserve Bank of San Francisco of the existing sale slow down in their Economic Letter.