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Housing Picture No Darker

The article is an excerpt from the Wall Street Examiner Professional Edition Housing Update for subscribers. Scroll to the end for the subscriber link to the complete report.

Housing data for this month suggests that the usual seasonal uptick in prices has ended. Data is mixed as to whether the seasonal decline that normally occurs from July to February might be showing some improvement in the rate of decline. It is clear that the trend is not worsening, but not clear whether it is improving. Determining that could take another 6-9 months.

Contracts continue to fall out at record rates as insolvent banks blow up deal after deal in the mortgage process due to appraisals being too low, or buyer credit too weak. On the other hand, there continue to be lots of cash buyers in some markets as prices reach rental investment value. Those markets are probably near a price low if the employment picture doesn’t worsen. That’s not a bet we can make at this point. Full time employment remains dead in the water and at risk of turning negative again at any time.

Mortgage Applications

The closest thing to a real time housing market activity index is the Mortgage Bankers Association Mortgage Purchase Index. Last week the MBAA announced a change in methodology, rebenchmarking their data under the new method to January 2011. Continuous historical data is no longer available. I have compared the old data for the past 9 months, to the new data. The direction of the movements are the same, and the variance appears to be random, ranging from zero to approximately 6%, with the new data, mostly lower than the old. Over the long haul this should not have a material effect on this chart. I will continue to compile and chart the data on a continuous basis, keeping in mind the difference between the period.

Mortgage Applications Index Chart- Click to enlarge

The not seasonally adjusted data is available on Bloomberg. While they make note of the rebenchmarked data, they do not discuss whether the 5 year chart is adjusted. The current chart shows applications virtually unchanged versus a year ago but down 49% since the tax credit scam peak. Notably, the seasonal peak has typically been in May or June. This year, it appears to have come in April. Taking into account both the fallout rate, and the percentage of cash buyers, sales in September are probably running about even with last year at very low levels. The market does not appear to be worsening, but that’s a long way from recovering.

One thing that continues to stand out is that persistently declining interest rates have had absolutely no impact whatsoever in stimulating demand. The Fed is, as usual, delusional if it truly believes that Operation Twist will help stimulate the housing market, even if it does succeed in pushing down mortgage rates, an assumption which I suspect will also be proven false. Yields are already higher than the day the program was announced. The Fed will actually begin swapping the paper on October 3. Perhaps it will keep mortgage rates from rising, perhaps not, but regardless, it will have no impact on housing demand.

The NAR reported on September 21 that cash sales accounted for 29% of all transactions in August, unchanged from July, down from 32% in July of 2010, but up slightly from 28% in August 2010. Prior to 2010 the NAR did not routinely report all cash purchases since they were not a significant part of the market. With so many cash sales now, it would seem that the mortgage purchase applications index would be understating market activity, but the NAR reported that 18% of NAR members reported contracts failing during the month, mostly due to low appraisals or credit denials. Cash sales are often vulture investor purchases that do nothing to solve the supply demand imbalance. Only an increase in occupancy can achieve that, and that variable is dependant on employment.

Both the high percentage of cash sales and apparent slowing of the downtrend in mortgage purchase applications suggests that the market may be near a demand floor. That could change if the number of total full time employed persons begins to decline again. I will continue to monitor that data monthly in these reports.

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