Here’s what Bloomberg had to say about this morning’s reported jump in pending home sales (signed sales agreements).
Pending sales of U.S. existing houses unexpectedly jumped by a record 10 percent in October, indicating the industry at the center of the last recession is stabilizing as the job market improves.
Allow me to phrase this as delicately as I can.
That’s… just… horseshit.
Let’s focus on the actual, not seasonally adjusted number. In my housing updates in the Wall Street Examiner Professional Edition I convert the Realtors’ Pending Home Sales number to an actual number equating the index to the existing home sales number for the month that will be released late in the month. This number rose by 35,500 units or 9.2% m/m. Sounds good, right? Not so much when considering that September’s level of 385,500 is the worst September level in the past 15 years, including being the worst September since the housing collapse began in 2006-07.
Where does that leave the October number? At 421,000 it is the worst October since the housing collapse started, and the worst October level in the past 15 years. How is that recovery? To me, it looks like a dead cat bounce from an atrocious level in September, a simple reversion to trend, and a weak trend at that.
What about seasonality? Arbitrary seasonal adjustment factors produce a specific but entirely fictional number that almost always results in a false impression that conditions are better or worse than they actually are. Still, seasonality must be considered. The best way to do that is to compare the current month with the behavior of a representative sample of recent years.
As it turns out, October is typically an up month. This year’s gain of 35,500 compares with a gain of 29,000 last year. There was a gain of 40,500 in 2007 when the overall market collapse was in its infancy but the pundits were declaring their first of many false bottoms, and a gain of 77,000 at the tail end of the bubble in 2006. October 2008, at the nadir of the first wave of the housing crash, only saw a drop of 7,000. In the overall scheme of things, this year’s bounce from catastrophically low levels looks like nothing more than reversion to trend from weaker than trend.
Another point made by some pundits was that this uptick results in a big improvement in the inventory to sales ratio, which is more horse manure. At the current level, the inventory to contracts ratio (which due to contract fallout is always better than inventory/closed sales) stood at 9.18 units available for every unit sold. That’s still terrible. In normal markets this ratio is between 4 and 5. There is a seasonal pattern which usually peaks at the end of the year. In October 2005, the ratio was 4.9. The current level is not materially better than October 2007 at 10.11, and October 2008, at the worst point of the economic collapse, when the ratio hit 10.16. This year’s level is materially worse than last year’s 6.6. How is that recovery?
Clearly it isn’t. This doesn’t even consider the shadow inventory of 7 million units (according to Fitch). That’s nearly double the current existing homes for sale inventory. As the chart shows, this month’s downtick leaves the ratio either on or above trend, depending on how it is measured. The trend remains negative.
The best indicator of real time housing demand comes straight from the Mortgage Bankers Ass. in the form of the Mortgage Applications Index. I include a long term chart in the in the Wall Street Examiner Professional Edition housing updates.
As the mainstream media dutifully reported this week, that index has had a little bounce in recent weeks as fence sitting buyers got panicked into the market by the rise in mortgage rates over the past month. That may sound perverse, but it’s actually typical market behavior. After a long period of declines in mortgage rates during which prospective buyers sit on their hands, it is normal for a wave of them to come into the market upon signs of an upturn in rates. The problem is that this is not sustainable. If rates continue to rise, fewer people will qualify and fewer people will find payments attractive enough to entice them to enter the market. If rates begin to decline again, people will go back to sitting on their hands, motivated to stay on the sidelines by falling prices. In other words, this blip up in demand is likely to be followed by another demand vacuum.
The rise in demand in November will again show up in next month’s NAR data on pending home sales. So far, that rise, like the rise in contracts, has only been a move from an extreme below the trend back to trend. The trend is still very much down. Until we see a string of numbers that are above the downtrend lines, it is ridiculously premature to conclude that the housing industry is stabilizing. Prices will not truly stabilize until the massive inventory overhang is whittled down by a sustained rise in demand.
So far, in spite of the wishful thinking of Wall Street pundits and their infomercial conduits, there’s been no real indication that that is occurring. If that is about to change, it will begin to show up in the mortgage applications as a sustained breakthrough of the downtrend lines followed by an upward curl in the 52 week moving average. However, that still may not be enough to make a dent in the second part of the equation, that is, supply. We’ll need to keep and eye on both elements in the months ahead. I am not about to call a bottom, or even “stabilization” until I see facts that suggest that demand is on a sustained growth path sufficient to reduce the supply overhang, and that those two factors are sufficient to stop the current second crash wave now under way in housing prices.
It is that crash in prices that threatens the very survival of the financial system because it threatens the market with yet another wave of defaults and foreclosures. If that were to occur, the Fed and already overburdened sovereigns might be powerless to forestall systemic collapse.
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