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Housing Indicator Review – Pending Home Sales- No Hype, Just the Facts

Is the latest episode of the long running US housing bubble saga actually coming to an end? From the way the NAR reported that pending home sales  had a year to year decline you would think so. The only problem is that that was not true. Their actual PHI index was 91.4 in September. That compares with 90.4 in September 2012. As far as I can tell that’s a 1.1% increase, which isn’t good, but it’s not a decline.

The NAR compared two fictional seasonally adjusted numbers, both from the exact same time each year, making a seasonally adjusted comparison inappropriate. They managed to finagle that into a year to year decline. Dow Jones Marketwatch reported a year to year decline without further comment in an example of how financial “journalism” simply regurgitates industry PR without further comment or qualification. Where is the interest in the facts?  Bloomberg, to its credit, reported the facts accurately in this case. “The Realtors’ report showed purchases rose 1.1 percent from September 2012.” However, they are just guilty of misrepresentation at times. I won’t let them off the hook just because they got this one right.

The NAR reported a seasonally adjusted headline decline of 5.6% month to month  in September. That was a lot worse than economists’ consensus expectations of -1.3%. Economists fooled again! Who’d a thunk?

The seasonally adjusted headline number may or may not represent reality. It isn’t the actual number. It’s essentially an idealization based on a few years of past performance for the same month, based on the assumption that an average of the past is “normal.”

The actual index plunged 21.1% in September on a month to month basis. That sounds awful, but is it really? Since this is an unadjusted number, in order to judge whether this represents exceptional weakness we must compare it with past Septembers. The average change for September over the prior 7 years was a decrease of 14%. A year ago, September was down 19.8%. This month was much weaker than average and slightly weaker than last September.

Keeping this weakness in context, excluding September 2009, which was goosed by the first  Federal housing tax credit subsidy this September had the largest sales total since September 2006 which was just after the housing bubble peaked. While sales did slow, the overall level was still better than any year since 2006 where there wasn’t a government subsidy.

Were rising mortgage rates to blame for the slowdown in September, or was it something else? First, rates actually fell steadily after Labor Day. I suspect that the month long buildup to the government shout down and all the media hysteria surrounding it, may have shaved a couple of points from sales. If so, those buyers would have come back in the past 10 days since the budget deal was done. November data will be the first full month where the data is not negatively impacted by the shout down. If my suspicion is correct, then the number should snap back then. October may even be “less bad” than September.

Historically, rising rates have stoked an inflationary psychology in housing, motivating people to buy now to beat both rising prices and rising interest rates. That psychology was probably at work through August with prices rising nationally on average at the rate of nearly 17%. But that has cooled to 10.8% annually according the latest data from Dataquick as of October 24 representing closed and recorded sales for the previous 4 weeks.

Electronic real estate broker Redfin reports real time contract data collected from MLS services in 19 major metropolitan markets. That data showed September contract prices up 15.9% year over year. These are very large, more active markets and may not be representative of the nation as a whole. Dataquick’s data is more comprehensive, but less timely since it only counts closed and recorded sales, similar to other national indexes.

With the slowing of sales volume, the inventory to sales ratio rose sharply in September. The inventory to contracts ratio stood at 6.0, up from 4.8 in August. This month’s reading only tied September 2012 at a record low September reading for that ratio. If sales bounce back in October-November, tight inventories will continue to impact the market, driving the price bubble and possibly restricting the number of sales. If demand rebounds from the soft September, a larger increase in inventories would be required to put a lid on the price gains.

Existing Home Inventory/Contracts Ratio- Click to enlarge

Existing Home Inventory/Contracts Ratio- Click to enlarge

The data shows that there’s been a stutter step in Bubble Junior. We don’t know yet if the cause is buyer fatigue, or fears triggered in September by the approaching government shout down along with the attendant media hype. The deal to end the shout down didn’t come until October 16. October data will be interesting to see if there’s any rebound in sales. November will be the first full month not adversely impacted by the Federal budget shenanigans.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, 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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