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Housing Time Bomb Goes Tick Tock Tick Tock

A couple of data points reported today marked a tick and a tock on the housing market clock. The Mortgage Bankers Association Mortgage Applications Index release was weak but not explosive. The FHFA (Federal Housing Finance Agency) monthly data on home sale prices was up, but meaningless.

The FHFA data is after the fact price data using paired sales of properties previously financed through Fannie and Freddie, which recently resold and were again financed by them. Given the lag in the reported data, the FHFA data is slightly more useful than the Case Shiller data, which suffers from use of moving average smoothing, but less timely than the NAR data, which has validity issues, and even less timely than real time listings data.

FHFA reported that sales prices in June were up 1.4% from May. That’s very nice, but that was June, and this is late August, and we already know from more timely listings data (see that prices probably peaked in July, as they normally do each year.

We also know from more than 5 years of historical data that while listing prices are typically about 10% above selling prices, they appear to accurately reflect the direction of the trend and changes in trend. Their biggest advantage is that they are available in real time. The other advantage is that the aggregated listings data is not smoothed, seasonally adjusted, or massaged by an organization that may have motive to make the numbers look better than they really are. It is simply an independent compilation of raw, individual listings data available publicly and updated daily on the internet through the NAR’s website.

Applying simple trendline analysis, and considering the fact that the usual seasonal peak is now behind us, we can see that the downtrend in house prices has yet to be broken. The next significant point will be this winter when prices normally hit their seasonal nadir. If prices in January hold above last January’s level, then we’d have a basis for calling a potential bottom in housing prices. However, a higher low would not be sufficient for a change in trend. Prices must break the downtrend line, and make a higher seasonal high before we can be confident that the lows are behind us.

Single Family Home Sales Prices Chart- Click to enlarge

The other data released today that’s also useful because it is so timely is the weekly purchase applications data from the Mortgage Bankers Association. On a seasonally adjusted basis, which is the only thing that the MBAA reports publicly, the index reached a record low for the week ended August 19. In actuality, applications were well above the record low, but about 7.3% below the levels of August 19 a year ago. To that extent, it was a record low for this date.

The fact that the NAR reported that cash sales now make up about 29% of the market is partly offset by the fact that 16% of NAR members report sales falling through as a result mortgage applications being rejected by lenders. Considering the offset, purchase mortgage applications may slightly understate current market demand. On the other hand, many cash buyers are investors, not owner occupants, and investors do not remove supply from the market. Considering all those factors, purchase mortgage applications are probably still a reasonably good indication of current effective housing demand.

Mortgage Applications Chart- Click to enlarge

Purchase Mortgage Applications (NSA) Chart- Click to enlarge

The actual, not seasonally adjusted, data suggests that the momentum of declining sales has leveled off. However, in order for the oversupply in distressed markets to be absorbed, that’s not enough. Sales must increase. That is largely dependent on household formation, which in turn is dependent on growth in full time jobs. And that’s not happening.

I connect the dots of all of the key housing and related economic data in the Wall Street Examiner Professional Edition Housing Update. An understanding of the US housing market is important not because the industry is important to the US economy, although that’s part of it. It is especially important because the financial system is so dependent on housing collateral, which neither the banks, nor the government owned GSEs, nor the Fed with its trillion dollar MBS portfolio, have even begun to mark down to market. They extend, pretend, and hope prices turn up before it’s too late. This is a time bomb that without a housing recovery, will keep right on ticking.

Get regular updates on the US housing market, and stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and begin your risk free trial NOW!


Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 


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