Wednesday, April 04, 2007

Constructing Capitulation: February 2007

If ever there was a clear indication that the nation’s housing market and economy are headed for a hard landing, it had to be Wall Street’s bull rally on the back of yesterday’s “strong” NAR Pending Home Sales Index Report (PSI).

To shed some additional light on the reports findings I’ve created the following chart that shows the year-over-year percent change to the PSI since January 2006 (click for larger version).


Note that this chart is using the “not seasonally adjusted” PSI values as NAR doesn’t provide any more that the last 12 months of seasonally adjusted data.

I have been keeping my own spreadsheet up-to-date on a monthly basis but recently NAR changed their method of seasonally adjusting the PSI and that resulted in all prior months being revised.

Unless you want to pony up a few grand to the NAR Research for the data, we’ll have to stick with the unadjusted data.

Keep in mind that we are comparing year-over-year so the seasonal adjustment is not as necessary.

So, what we see in the chat is some substantial declines in pending home sales activity, especially toward the end of 2006 and into 2007.

Notice also that for January and February of 2007, pending home sales activity is actually accelerating to the downside.

To better illustrate this point, I have isolated the results of January and February of 2006 and 2007 and placed them next to each other for each region (click for larger version).


Remember, these declines are coming on the back of the substantial fall-off seen in 2006 so the continued and even accelerating weakness is a true sign of fundamental weakness.

So given this, why all the optimism on Wall Street yesterday?

The Census Department’s New Residential Home Sales Report showing more hideous results for the new home market including a 36.9% decline in sales in the Northeast region.

NAR’s Existing Home Sales Report showing that for single family homes, median prices have declined year-over-year in virtually every region while inventory and supply continued to surge.

The Census Department’s New Residential Construction Report showing a grotesque drop-off in demand for new construction homes. On a year-over-year basis, every region registered high double-digit declines to both permits and starts.

The Q4 2006 GDP final revision showed accelerating declines to fixed residential investment and non-residential investment depressing the overall GDP by 1.54%. Note, that this is well above the predictions by both Greenspan and Bernanke of housings effects on GDP.

The January 2007 results of the S&P/Case-Shiller Indices are continuing to show substantial declines to home prices in virtually every tracked market while housing futures continue to predict still further declines.

Bob Toll has already thrown in the towel on 2007 suggesting that the rest of the year is all down hill. This is especially important as the new construction market will continue to put pressure on the overall housing market as builders step up their efforts to get out from under their current predicament.

Furthermore, the Census Department’s Construction Spending report for February again demonstrated the significant extent to which private residential construction spending is contracting.

With the weakening trend accelerating, total contraction spending fell 15.12% while private single family construction spending declined by a grotesque 27.56% in February.

Key Report Details:

  • The seasonally adjusted annul rate of private residential construction spending has now dropped 15.5% from the peak set back in December of 2005.
  • Overall private residential construction spending dropped 15.12% as compared to February 2006.
  • Single Family residential construction spending dropped 27.56% as compared to February 2006.
  • The latest 15.12% year-over-year decline is the LARGEST percentage drop in 12 years and the greatest drop to date for this year and for this cycle.
The following charts show changes to construction spending (click for larger version):