Conspicuous Correlation: May 2007

Yesterday, the Commerce Department released their monthly Retail Sales Report for May which continued to show an interesting divergence between the weakening consumer spending on discretionary items such as electronics and home furnishings and the strengthening trend of spending on food, clothing and gasoline.

As in past months, I have isolated the primary discretionary retail sales categories into a single “discretionary” retail sales series, and then charted the year-over-year percentage changes since 2000.

I then added the year-over-year percentage changes of the S&P/Case-Shiller Composite index which broadly and accurately tracks single family home prices using data from Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington DC.

The result is a significant correlation between the deceleration, and now outright decline, of home prices and a deceleration and subsequent decline in discretionary consumer spending.

Given the strong correlation between the decline in housing values and consumers tightening their discretionary spending one may wonder why consumers are increasing spending on the other retail categories.

The answer, possibly, is that several of the remaining non-discretionary retail categories in addition to gasoline, primarily food related, may be experiencing some degree of price inflation but only time will tell.

The first chart (click for larger version) shows the complete discretionary series comparison from January 2000 to the latest reported months of 2007.

Note the precipitous deceleration and decline to home prices starting in January 2006 and the very well correlated decline in “discretionary” retail sales.

Also note that the latest decline to retail sales is easily the most significant and sustained seen since 2000, handily surpassing the decline that occurred during and preceding the 2001 recession.

The second chart (click for larger version) simply isolates the results from January 2006 in order to provide a clearer view.

Reading Rates: MBA Application Survey - June 13 2007

The Mortgage Bankers Association (MBA) publishes a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage has increased yet again reaching a peak for the year at 6.61% while the purchase volume increased 7.2% and the refinance volume increased 5.6% compared to last weeks results.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since January 2007 (click for larger version).

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since January 2007 (click for larger versions).

Homebuilder Hoedown!

Yesterday JP Morgan held their Basics and Industrials Conference bringing together, amongst others, a host of top homebuilding executives to present their outlook for the new home business going forward.

Many homebuilders shared some particularly revealing insights in an effort to set the record straight on issues ranging from the subprime meltdown to DR Horton CEO Donald Tomnitz’s use of the word “suck”.

During the Hovnanian presentation, CEO Ara Hovnanian talked at length about current and future land purchasing as well as his take on raising interest rates.

When asked about their prospects for new land purchases, Hovnanian answered:

“I can tell you our new land purchases are down to a trickle right now, we had been looking and the reality is again, we’ve seen every cycle, the land sellers are always the last to recognize the housing slowdown and hat typically has happened is that housing prices have come down first, and the land prices ultimately come down but they’re always trailing. While prices come down and terms come down, they never come down to equal housing prices till much later in the down-cycle.

When we do new land purchases, we have to make our threshold returns at current net-net prices after all incentives and concessions and net-net absorptions after all cancellations. Today, we’re finding very very few land parcels that meet that criteria and frankly, with the market in transition and without being very stable and now with our greater focus on cash flow, I can’t say we’re anxious to go out and buy some land right now.

We have probably gone from 20,000 (properties) to less then 1,000 that we have purchased in the last six months so it’s dropped dramatically and I don’t see that changing over the next six months.”

When asked at what point mortgage rates would begin to effect buyer ability to purchase new homes, Hovnanian responded:

“It’s hard to predict that, I can just say this, prices of homes have corrected dramatically that makes all housing a lot more affordable without a doubt. The lower the mortgage rates, obviously, the more helpful it is. Psychologically, I used to say over 8% was probably the point where it starts to become more harmful, today if long rates go over 7% I just think psychologically it may be more of a barrier but we’re a ways from that right now. I think we’ve got lots of things to worry about in the homebuilding business, personally I don’t think mortgage rates are high on my radar screen of big concerns. I just think that there are other risks or factors that we’re more concerned about than interest rates.”

Listen to the entire Hovnanian presentation here.

During the Toll Brothers presentation, Fred Cooper, Senior Vice President of finance and investor relations was asked about the outlook for impairment charges resulting from land write-downs for which he responded:

“In total we’ve had about $360 million in write-downs over the last three quarters, about $250 million of it has been on owned land and then $110 million on optioned land. Generally I think more of the write-downs have come on land that is less mature where they were put under option based on stronger market assumptions. … Most of the write-downs are on land that is relatively newer and we can’t really predict what the next couple of quarters will bring in terms of write-downs but if the market, in a particular community weakens, that could tip it over the edge. It’s very hard to predict and when we gave our guidance for 2007 recently on our call we said that we’re not able to predict future write-downs at the moment.”

Listen to the entire Toll Brothers presentation here.

During the DR Horton presentation, CEO Donald J. Tomnitz provided, as usual, many candid tidbits.

Discussing the fact that DR Horton had the lowest impairments for the industry, Tommnitz stated:

“I know we have been criticized by many for not having as many impairments, it’s amazing to even get criticized for, I think, operating perhaps a better company than other. But let me tell you a couple of reasons why I think we have had fewer impairments at least then others. One is, clearly I think we are more astute land buyers. Ok, you can look at that and say “Punk, you can’t prove that” well as we move through the market we’ll find out whether I’m right or wrong. I think the second part of that is that we have never done any JVs, we have inherited JVs so as a result we have always had a policy in our company of not doing deals that are too large for us. If we had a deal that was too large, we would pass. And many of the impairments are coming from deals that people did that were too big at the time.”

When asked about the effects of the subprime meltdown, Tommitz stated:

“I believe I’m correct in saying, when I was out in Phoenix last week, FHA is in the process of, in the next 60 days you’ll see them implement some new mortgages which basically are going to include 100% loans. I have no idea why they are going there but they’re going to include 100% loans. And as a percentage overall, if you talk to all of our division presidents, the subprime, alt-a scenario has been totally overblown by the media and we don’t believe its had a significant impact on our business.

What has had a significant impact on our business and what I think it’s going to take to get the homebuilding business back clearly on its feet is that we still have excess inventory on the marketplace. We have too many homes under construction that are unsold. I think all the builders are doing a great job in terms of starting fewer homes because that’s what we need to do.”

“I was in Phoenix, the level of existing homes that have been historically on the market in Phoenix has been about 25,000 right now in Phoenix it sits around 52,000. In Las Vegas it’s supposed to be about 20,000 it sits today at about 40,000. But we’re not receiving as much direct competition, as all of you would like to believe, from existing home buyers. And why? Because the investors bought homes from us. And they typically bought them at 100% financing. So, they bought a home from us at $270,000 that same home today we may be selling for $250,000. So, there are going to have to do one of two things. They’re either going to have to keep that home and rent it for the next two to three years till the prices come back up to $270,000 or they’re going to have to sell the home for $250,000 which is what we’re selling the home for today. I don’t know about you, but you can to Mr. and Mrs. America and there aren’t many people who can take that $270,000 and sell it for $250,000 and take a $20,000 check from their bank to the title company and close the transaction. So those existing homes are going to be leased because almost all of them have 100% financing on them or a lot of them do, especially the investor loans, so we’re not really competing with that inventory.”

Later Tomnitz talked a bit about his now infamous “Suck” comment.

“One of the reasons I don’t want to interview with CNBC is that they made a big deal out of a word that, after four years in the Army, raising two teenagers, riding Harley’s and being in the homebuilding business for a number of years I had no idea the word “Suck” was a cuss word (laughter) but for any of you ah… if that bothered you and I insulted you I apologize but it just didn’t occur to me. … What I wanted to say was that the homebuilding business is going to suck for the homebuilders in 2007, but it’s going to be a windfall for the homebuyers.”

Listen to the entire DR Horton presentation here.

Here We Go Again!: Harvard’s State of The Nation’s Housing 2007

Like the sound of a really underhanded and unethical, broken and tired record, Harvard’s Joint Center for Housing Studies has today released their 2007 State of the Nation’s Housing Report.

It’s important to keep in mind that this “outfit”, although unfortunately being festooned with the name of one of our country’s most prestigious universities, is directly funded by none other than our country’s greatest real estate industry institutions.

The following is the list of the center’s “supporters”:

• National Association of Realtors®
• National Association of Home Builders
• Fannie Mae Foundation
• Federal Home Loan Banks
• Freddie Mac
• Housing Assistance Council
• National Association of Affordable Housing Lenders
• National Association of Housing and Redevelopment Officials
• National Association of Local Housing Finance Agencies
• National Council of State Housing Agencies
• National Housing Conference
• National Housing Endowment
• National League of Cities
• National Low Income Housing Coalition
• National Multi Housing Council
• Research Institute for Housing America

Aside from that, I think the opening paragraph of this years farce says it all:

“After setting records for home sales, single-family starts, and house price appreciation in 2005, housing markets abruptly reversed last year. In 2006, total home sales fell 10 percent, starts tumbled 13 percent, and nominal house price appreciation slowed to just a few percentage points. Suddenly, it was inventories of unsold vacant homes that set records and homes in foreclosure that were making the news.

The length and depth of the current correction will depend on the course of employment growth and interest rates, as well as the speed with which builders pare down excess supply. But the longer term outlook for housing is more upbeat. Thanks in large part to recent immigrants and their native-born children, household growth between 2005 and 2015 should exceed the strong 12.6 million net increase in 1995–2005 by some 2.0 million. Together with the enormous increase in household wealth over the past 20 years, healthy income growth will help propel residential spending to new heights.”

It is simply astounding that given the opportunity to possibly present a measured analysis, especially in light of the plainly obvious fact that our nation’s housing markets are now in deep trouble having been grotesquely inflated by years of rampant speculation which has now all but vanished, this group continues to try desperately to fan the embers in hopes that the mania might reignite.

The reason this irks me so is that this is, unfortunately, a very widely read and important report to traditional media sources.

You will see this information reported everywhere today and this week and bits and pieces will be regurgitated over and over for the remainder of the year.

Yet it is a clearly inaccurate report which goes to great pains to either underreport or offset any possible existing and future negative outlook with absurd real estate industry jargon.

There are many great looking charts and some solid factual accounts but the conclusion is always the same, i.e. the outlook for residential real estate is strong.

While continuing to offer up superficially reasoned arguments for the strength of future housing demand such as immigration, Baby Boomer demographics and the aging if housing stock, the report never mentions that these factors, even if they were accurate, would be not be cause to speculate.

Here’s an excerpt from their Outlook for Homeownership:

“Looking past the current correction, homeownership is still clearly the tenure of choice. In addition, strong gains in income and wealth will favor ownership of both first and second homes.”

To put things in better perspective, just read at last years opening paragraph to see if you think their outlook then was accurate:

“The housing boom came under increasing pressure in 2005. With interest rates rising, builders in many states responded to slower sales and larger inventories by scaling back on production. Meanwhile, the surge in energy costs hit household budgets just as higher interest rates started to crimp the spending of homeowners with adjustable mortgages.

Nevertheless, the housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate.”

Bust From The Past: June 2007

In a new and recurring post, Ill attempt to compare various housing trends from today’s housing bust to similar trends seen during past housing declines.

The method is simple, take data from the deceleration, peak and decline of past housing busts and overlay them with data from today’s results.

What we may see is that the data correlates well, giving us some sense on what to expect in the future for housing.

Of course, comparing data from different eras is not a perfect science leaving most Bulls to invariably raise the many tired “things are different this time” arguments, but surely there must be something to learn from this type of analysis.

At the very least, if over time the data continues to correlate well, we’ll see that and if it starts to diverge we’ll see that as well

For this first installment I plotted the S&P/Case-Shiller Composite Index comparing the deceleration and decline of home prices seen during the 80s-90s housing bust to the results we are seeing today.

What’s most interesting about this particular comparison is that it highlights how young the current housing decline is, having only posted three consecutive year-over-year (YOY) monthly declines to home prices.

The last cycle yielded nineteen consecutive months of YOY home price declines followed by an additional twenty two months after a short three month positive respite (click the following chart for larger version).

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are only nine months into a decline that, last cycle, lasted for roughly fifty four months during the last cycle (click the following chart for larger version).

Also, it appears that price declines seen during the current downturn are actually occurring faster, falling roughly the same amount during the first nine months as seen during the first fourteen months last cycle.

Another important note is that it appears we may be currently at the point in the down-cycle where prices drop most significantly in the smallest period of time.

During the last downturn, the next nine months produced 65% of the total decline to home prices seen peak to trough.

So it seems that we are likely only in the beginning stages of the home price adjustment and that, all things being equal, we may have to wait another few years for prices to set a bottom.

Weekly Mortgage Application Data

With all the news surrounding PIMCO's Bill Gross and the Treasury’s 10 year note yield spiking over 5%, now is probably a good time to start keeping track of mortgage rates and related data.

The Mortgage Bankers Association (MBA) publishes a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

In fact, it was this very data series that former Federal Reserve Chairman Alan Greenspan cited last October when issuing his now obviously wrong “Worst may well be over” forecast.

“I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out,”

As we all know, especially those of us living in the bubbliest areas, our housing markets are now especially rate sensitive.

We have come through an unprecedented era of home price inflation that, toward the end of the up-cycle, resulted in an equally historic decline to affordability forcing many buyers to seek the lowest possible (initial) interest rate loan products in an effort to stretch their buying power.

In many ways, we have painted ourselves into a corner where equilibrium between price and demand has only been reached through the help of extraordinarily low interest rates.

One should remember that it was not long ago that 7.0% on a 30 fixed rate mortgage was considered very attractive and even low by historic standards.

Furthermore, there is likely not an economist out there that would deny that 30 year fixed mortgage interest rates could climb above 6.5% or even 7.0% or beyond in the coming years or even months.

Is it really likely that rates will permanently stay in the low 6’s?

Probably not, and unless incomes make some significant strides, it seems that any move up in rates will surely result in a move down in housing demand and prices.

To that end, Ill periodically post the following charts that track the MBA application data and average interest rates.

The latest data is showing that the average rate for a 30 year fixed rate mortgage has now reached a peak for the year at 6.35% with the refinance volume declining measurably to the lowest level since the first week of January.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

Ill expand these charts to span back much farther in later posts so you can get a better perspective on where this data was through the latest cycle so be sure to check back.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since January 2007 (click for larger versions).

Constructing Capitulation: April 2007

Not only did April’s results show further weakening of the nations housing markets, it also provided definitive proof that the housing decline is having a significant and undeniable negative impact on the overall economy.

The latest preliminary GDP report confirms that the historic decline to residential fixed investment continues weigh heavily the US economy with GDP registering a mere 0.6% for Q1 2007 a fact now not so underestimated by the Federal Reserve Chairman Bernanke.

“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.”

“The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply.”

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The housing weakness also appears to clearly show up in retail sales as consumers pullback on spending for some of the most discretionary of goods.

The recent National Association of Realtors Pending Home Sales Report, a forward-looking indicator, confirms that demand for existing homes continues to trend down as seen in the following chart (click for larger version).

Note, that the Pending Home Sales data shows that demand for existing homes has been steadily trending down, a fact that is more obvious if you compare the latest results to the peak results seen in 2005 shown below.

The Census Department’s New Residential Construction Report showing continued weakness to both permits and starts that, when smoothed and averaged, clearly indicates and predicts an accelerating slowdown.

The Census Department’s New Residential Home Sales Report that, while vexing traditional media sources, clearly showed a decline in sales activity for new homes priced at or above $300,000 while also showing a significant jump in sales for new homes priced below that, especially below $200,000.

There now is ample evidence to suggest that the pricing trends for new homes that was established during the historic run-up are now in the process of reverting as homebuilders slash prices to counter slumping demand.

NAR’s Existing Home Sales Report showing continued uniform weakness in sales activity resulting in year-over-year declines for every region and across every home type as well as many significant declines to median selling prices.

The March 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.

In a recent conference call, Bob Toll, CEO of Toll Brothers (NYSE:TOL), offered a conflicting point of view to Treasury Secretary Paulson’s optimistic outlook on housing.

“I think what that indicates is that most new homebuilders that are large, the public homebuilders, their average product goes anywhere from about $250K up to us which is about $700,000 so obviously the increase [in sales] is taking place below our space. Which means that we’re not out of the woods yet. I took with surprise yesterday and it’s now confirmed today by this analysis when the secretary of the treasury said that we’ve got the hard times pretty much behind us I wondered how many communities he had and where he got that information but I now understand that the information he got hadn’t been pealed away, I guess, to show that it was $150,000 housing. So I would say that we have not got the bad times behind us yet though it could be… you never know.”

Furthermore, Toll Brothers reported $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% in the second quarter of 2007.

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

With the weakening trend continuing, total residential construction spending fell 14.41% as compared to April 2006 while private single family construction spending declined by a grotesque 25.60%.

Key Report Details:

• The seasonally adjusted annul rate of private residential construction spending has now dropped 15.41% from the peak set back in December of 2005.
• Overall private residential construction spending dropped 14.41% as compared to April 2006.
• Single Family residential construction spending dropped 25.60% as compared to April 2006.

The following charts show changes to construction spending (click for larger version):

OFHEO Home Price Index: Q1 2007

Last Friday, the Office of Federal Housing Enterprise Oversight (OFHEO) published their Home Price Index (HPI) data for Q1 2007 showing continued deceleration of home price appreciation in most regions as well as outright declines in many states and metropolitan areas.

The current installment shows declines to the East North Central and New England census regions as well as to 25 states (using “purchase only” data) including Michigan, Massachusetts, Californian, and Florida and a whole host of Metropolitan Statistical Areas (MSA).

I have updated my OFHEO HPI Charting Tool by both updating the data as well as adding some additional features that make the tool more powerful but first, I should mention some background on the OFHEO HPI.

The OFHEO HPI series is formulated from home purchase and refinance information collected from Fannie Mae and Freddie Mac and as such suffers slightly from some basic limitations of the data.

First, Fannie and Freddie mortgages are subject to conforming loan limits which eliminates huge portions of data that are particularly relevant given the current bloated state of home prices.

A great percentage of home purchases made in the last decade, especially in the bubbliest areas, were made with Jumbo loans that, by their definition, exceed the Fannie-Freddie conforming loan limits and as such are not included in the OFHEO data.

Also, data from mortgages made for the purpose of refinance are also included which may have a tendency to skew the HPI series.

Fortunately, OFHEO now produces “Purchase Only” indices (i.e. HPI indices derived only from home purchase mortgage data only) for all census and states statistical areas.

In general, because the “Purchase Only” indices are based on home price changes from only home purchase transactions, they tend to show a greater degree of deceleration and/or decline than the complete data indices and may be a better indicator of the overall state of each particular housing market.

Although it’s generally recognized that the S&P/Case-Shiller (CSI) home price indices are more accurate than the OFHEO indices, OFHEO offers data for over 400 different census, state and metropolitan statistical areas compared to only 20 major metro areas for the CSI.

The OFHEO HPI Charting Tool allows you to visualize the HPI data as well as compare data from different areas.

Additionally, the tool now fully supports the “Purchase Only” data as well as allowing you to “normalize” the data in order to make a true comparison from one area to another.

To illustrate how to use the tool, I will build up a simple chart that compares the data from the New England census division, Massachusetts, and the Boston-Quincy and Cambridge-Newton-Framingham Metropolitan Statistical Areas (MSA).

For the following chart (click to jump to the tool itself), I added the New England census division to the chart by going to the “U.S. Census Regional Division” section and “checking” New England and also “un-checking” the United States.

Then, in the section of checkboxes just under the “Update Chart” button, I checked the “Show Complete Index”, “Show Purchase-Only, Seasonally Adjusted Index (if available)” and “Normalize using base of 100” checkboxes.

Finally, I constringed the date range a bit by going to the “Date Range” section at the bottom and selecting “1991” in the first dropdown and then clicked the “Update Chart” button.

Other than the over 150% increase in New England home values seen since 1993, this chart shows that the “purchase only” index has seen a more significant increase that the “complete” index and appears to have declined more since the peak.

To get a better sense of what has gone on since the peak, let’s constrain the date range even more, by setting the starting year to “2000” in the first drop down found in the “Date Range” section at the bottom and then clicking the “Update Chart” button.

Now you can clearly see that there is a significant difference between the “purchase only” data and the “complete” data as the “complete” data series has decelerated but has not yet registered an actual decline compared to the “purchase only” data which peaked in Q1 of 2006 and has declined steadily ever since.

Since the “complete” data seems less then perfect, lets “un-check” the “Show Complete Index” checkbox found at the top and “check” the Massachusetts checkbox found in the “States and District of Columbia” section and then click the “Update Chart” button.

We can see from this chart that Massachusetts actually peaked in Q2 2005 and has been trending down ever since as well as the fact that the extent of the decline seen in Massachusetts far surpasses that seen by the New England region as a whole.

But something about this chart seem to run counter to the basic expectation that Massachusetts has the “hottest” real estate markets in New England, namely the fact that the New England data seems to peak at a higher value than the Massachusetts data.

This is because the chart is showing the two data series in “normalized” mode which, for simple comparison purposes, adjusts all the data on the chart to start with a base value of 100.

With the normalization feature you can compare two totally different data series and get a sense as to the relative changes they have made over the same time period.

In order to get the “real” view of the data, simply un-check the “Normalize using base of 100” checkbox and click the “Update Chart” button.

Now you can see that Massachusetts home prices have appreciated to a greater degree than the New England region as a whole.

But since we really do want to make a relative comparison across different data series, let’s continue with the “normalize” checkbox checked.

Now, lets add the Boston-Quincy and Cambridge-Newton-Framingham Metropolitan Statistical Areas by selecting “Boston-Quincy,MA” and “Cambridge-Newton-Framingham,MA” in the first and second drop downs found under the “Metropolitan Statistical Areas and Divisions” section then click the “Update Chart” button.

Now you can see that Boston peaked in Q1 2006, and Cambridge peaked in Q3 of 2005 while all data series declined steadily throughout 2006 and continue to decline today.

You can follow these general steps with any state and set of areas and do particularly interesting comparisons by “mixing and matching” completely unrelated areas.

Pending Home Sales: April 2007

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for April 2007 showing a continuation of the historic decline to residential housing on a month-to-month and year-over-year basis, both nationally and in every region.

Additionally, the Northeast, Midwest and West regions have fallen back below 100 indicating that April’s home sales activity was BELOW the average activity recorded in 2001, the first year Pending Home Sales were tracked.

Proving that not every shill economist can bluff economics data with the deftness of the “late great” David Lereah, the new “fill-in” NAR Senior Economist Lawrence Yun blatantly presents false outlook.

“It looks like we may be leaving a period of market disruptions, and for the past two months the pending home sales index has been similar in year-ago comparisons, which means home sales might ease but should be fairly stable in the months ahead,”

Similar to year ago comparisons!!?

I suppose, if you call 10% year-over-year decline for each of the last two months similar.

Yun then goes on to suggest that the subprime meltdown is over and the “disruption” has played itself out.

“In April, existing-home sales declined in part because some subprime lenders went out of business and disrupted the market, but the impact appears to be diminishing and mortgage applications have risen in the last month,”

Keep in mind the current pending sales decline comes ON TOP of last years historic fall-off so the continued weakness is a sure sign that the decline is not ephemeral.

Look at the April pending home sales results and draw your own conclusion:

• Nationally the index was down 10.2% as compared to April 2006.
• The Northeast region was down 15.4% as compared to April 2006.
• The West region was down 11.7% as compared to April 2006.
• The Midwest region was down 4.4% as compared to April 2006.
• The South region was down 10.4% as compared to April 2006.

So it appears that, year-over-year, contract activity is still dropping rather sharply with ALL regions continuing to show significant declines.

GDP Report: Q1 2007 Preliminary

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q1 2007 GDP Report showing truly anemic growth of 0.6% weighed down by, amongst other things, continued weakening to fixed residential investment.

Major praise has to go to Professor Nouriel Roubini for his accurate forecasting having called this deceleration to GDP well in advance as well as virtually nailing the actual figure earlier this month in his post on the “growth recession” while the advance GDP report suggested that growth was closer to 1.3%.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a decline of 15.4% since last quarter while shaving .87% from overall GDP.

Housing continues to be, by far, the most substantial drag on GDP subtracting an amount roughly surpassing to the contributions made by ALL non-durable goods including food, clothing, gasoline, fuel oil.

Keep in mind that the initial GDP reports are highly revised so it seems likely that the coming report (Q1 final) will further capture the historic housing market weakness seen in the first three months of 2007.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The Fed For The Record: May FOMC Minutes

The Federal Reserve Board yesterday released the minutes of the May Federal Open Market Committee (FOMC) meeting erasing any doubt that they had initially underestimated the significance of the current housing decline.

From yesterday’s released minutes:

“The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply.

Nevertheless, most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.

Participants remained concerned that the housing market correction could have a more pronounced impact on consumer spending than currently expected, especially if house prices were to decline significantly.

The Committee thought that the statement should reiterate the view that the adjustment in the housing market was ongoing, but that nevertheless the economy seemed likely to expand at a moderate pace over coming quarters.”

It’s important to keep in mind that as recently as the January meeting, the Fed was talking stabilization ala Bob Toll and The National Association of Realtors.

From the January FOMC minutes:

“The decline in residential construction continued to weigh on overall activity, but some indications of stabilization in the demand for homes had emerged.

Residential construction activity remained quite weak late last year, but home sales showed some tentative signs of stabilization.

Inventories of unsold homes remained considerable although they ticked down in December for the second straight month. The most timely indicators of home prices, which are not adjusted for changes in quality or the mix of homes sold, pointed to small declines.

In their discussion of the major sectors of the economy, participants noted that the housing market showed tentative signs of stabilization in most regions.”

Additionally, looking back just one year, it seems obvious now that the Fed initially choose to hold a very optimistic outlook for an obviously speculative and historically overheated housing market.

From the May 2006 FOMC minutes:

“Anecdotal information pointed to some cooling of housing markets.

That cooling was especially noticeable for high-end homes and for houses in markets that previously had experienced the steepest appreciation.

Data on home sales, permits, and starts on the whole likewise suggested that activity was gradually diminishing.

Some reports indicated that speculative building of homes had dropped off considerably, but inventories of unsold homes still seemed to be expanding.

Although fresh comprehensive data were not available, home prices on average appeared still to be rising, but at a slower pace than over the past few years.

Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for some households and erode mortgage loan performance for some lenders.

Nonetheless, the household sector seemed likely to remain in sound financial condition overall.

On balance, consumption spending was viewed as most likely to expand at a moderate pace in coming quarters.”

Paradoxically, the latest sentiment caused Wall Street to rally apparently on the notion that the Fed is “out of the way” in terms of interest rate hikes and soon may even lower rates in an effort to soften the blow of the housing decline.

It’s important to keep in mind that the leadership at the Fed has, on several occasions, outlined very clearly that they do not intend on stepping in to preserve specific asset prices particularly homeowner equity.

The following excerpt was taken from a speech given by Federal Reserve Governor Donald L. Kohn in March of 2006 titled “Monetary Policy and Asset Prices“.

“Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk. Whatever might have once been thought about the existence of a "Greenspan put," stock market investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy.”

“The same considerations [as was given to dot-com stock holders] apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions. Our actions will continue to be keyed to macroeconomic stability, not the stability of asset prices themselves.”

S&P/Case-Shiller: March 2007

Today’s release of the S&P/Case-Shiller home price indices for March continued to show weakness for the nation’s housing markets with thirteen of the twenty metro areas tracked reporting significant declines.

Topping the list of decliners on a year-over-year basis was Detroit at -8.38%, San Diego at -5.97%, Boston at -4.86%, and Washington DC at -4.78%.

Additionally, both of the broad composite indices showed accelerated declines slumping -1.88% for the 10 city national index and -1.36% for the 20 city national index resulting in the first negative appreciation on an annual basis since the 1990-1991.

To better visualize the results use the PaperMoney S&P/Case-Shiller/Futures Charting Tool and be sure to read the Tutorial in order to best understand how best to utilize the tool.

Gettin’ Down with Toll

Toll Brothers (NYSE:TOL) reported Q2 earnings results last week confirming a $119.7 million of pretax write-downs that served to depress their net income by an astounding 79% as compared to Q2 2006.

Additionally, Toll yet again reduced its expectation for the maximum number of homes delivered for 2007 from 7300 homes last December to 7000 in Q1 now to 6900.

During the conference call, CEO Bob Toll uncharacteristically offered very little optimistic sentiment even offering some skepticism regarding recent Treasury Secretary Paulson’s “market bottom” outlook and the recent up-tick in the Census Department’s New Home Sales.

“I think what that indicates is that most new homebuilders that are large, the public homebuilders, their average product goes anywhere from about $250K up to us which is about $700,000 so obviously the increase [in sales] is taking place below our space. Which means that we’re not out of the woods yet. I took with surprise yesterday and it’s now confirmed today by this analysis when the secretary of the treasury said that we’ve got the hard times pretty much behind us I wondered how many communities he had and where he got that information but I now understand that the information he got hadn’t been pealed away, I guess, to show that it was $150,000 housing. So I would say that we have not got the bad times behind us yet though it could be… you never know.”

When asked about the April year-over-year comparisons getting less negative Toll suggested that favorably comparing against a year that “stinks” is not what he’s looking for.

“As you get further in to a down market, in terms of length of time, the comparisons are going to get better. So that, ultimately, if we stay here for a long period of time, you will see that April sales equaled April sales last year. That’s not what we’re looking for of course. So, I think the statements are a little misleading. The comparisons are good but what you’re comparing to stinks so that’s why your getting unhappiness expressed by the public home builders.”

Ivy Zelman, analyst with Credit Suisse First Boston tweaked Bob Toll in a minor skirmish over Toll’s interest in buying additional land.

Toll: “I would hope that we would increase the land portfolio somewhat from where we are now, we are actively looking and trying to buy… We have raised thresholds because we can and I think we should operate more prudently, more carefully than we did when the market was going up.”

Ivy: “You don’t feel that having almost a 10 year supply of land is enough?”

Toll: “Well, we hope that it’s not 10 years Ivy.”

The complete conference call can be listened to here.

Here are some of the interesting data points from the Q2 release:

Second Quarter Results

• Net income was $36.7 million down 79.0% compared to Q2 2006.
• Pre-tax land write-downs totaled $119.7 million up 897.5% compared to Q2 2006.
• Earnings per share declined 66.7% as compared to Q2 2006.
• Total revenues were $1.17 billion down 18.75% compared to Q2 2006.
• Net signed contracts were $1.17 billion down 25% compared to Q2 2006.
• Quarter end backlog was $4.15 billion down 31.6% compared to Q2 2006.
• Signed contracts was 2031 down 14% compared to Q2 2006.

Current 2007 Projections

• Deliver 6100 – 6900 homes (prior estimate 6000 – 7000).

Crashachusetts Existing Home Sales: April 2007

This week, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for April 2007 showing further weakness to the regions residential housing market.

Along with the release, MAR President Doug Azarian continued to maintain an optimistic outlook on the trend.

“The housing market continued to trend in a positive direction for the month of April … While the number of detached single-family homes sold was down, the 1.7 percent decrease year-to-year was the lowest we’ve seen in the month of April for the past three years. … With inventory levels decreasing and interest rates still low, demand should continue to keep prices stable through the end of the spring home buying season,”

Probably the most notable data-point of the report is the continued increase of the average “days on the market” resulting in an increasing monthly supply.

Although the total residential inventory is lower now than in April of 2006, the sales pace is continuing to slow.

It’s important to remember that we are again seeing year-over-year sales declines “on the back” of last years historic sales drop-off indicating truly fundamental weakness.

This is inevitably resulting in climbing inventories that for some towns, such as Concord, are exceeding last years levels while many other towns continue to simply trend upward.

Use the PaperMoney Inventory Tracker to follow your town’s daily inventory as well as visualize the inventory changes that have occurred over the last year.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

April’s Key Statistics:

• Single family sales declined 3.5% from March and declined 1.7% as compared to April 2006
• Single family median price increased 0.3% from March and declined 2.3% as compared to April 2006
• Condo sales declined 0.7% from March and increased 0.7% as compared to April 2006
• Condo Median Price declined 1.6% from February and increased 2.6% as compared to April 2006
• The number of months supply of residential properties stands at 10.0 months.
• The average “days on market” for single family homes stands at 150 days.
• The average “days on market” for condos stands at 143 days.

Existing Home Sales Report: April 2007

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing continued and uniform weakness of the nations housing markets.

Without missing a beat, the new “fill-in” Senior Economist Lawrence Yun continues to suggest that the weakness is indicating stabilization.

“We’ve been anticipating slower home sales because many subprime loan products are no longer available … In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community. Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to scare buyers into action with the threat of increased interest rates.

“Long-term financing remains favorable, but interest rates are rising … Although some buyers have a wait-and-see attitude regarding home prices, they should consider that rising interest rates later this year could offset a lower sales price when you get down to the monthly payments.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Sales are, in fact, down in EVERY region with the majority of declines in the double digits.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their April 2007 report.

Particularly notable are the following:

• Majority of median prices are down.
• ALL sales are down.
• ALL Inventory and Months Supply show HIGH double digit increases on a year-over-year basis.