New Home Sales Highest in a Year, Inventory Measure of New Homes Lowest Since 2006
WASH POST --Sales of newly built homes rose to the highest level in more than a year while the supply of these homes dropped to new lows, according to government data released on Wednesday.Purchases of single-family homes rose 6.2% in October from September to a seasonally adjusted annual rate of 430,000, the Commerce Department reported. The jump was driven solely by the South, the largest new home sales market in the nation. That region, which includes the Washington, D.C. area, posted a 23% gain while sales in other regions slipped.
Meanwhile, the supply of new homes has plummeted to the lowest level in nearly four decades, a promising sign that supply and demand for new homes will soon fall in line and help stabilize home prices.
MP: The months supply of homes at the current sales rate fell to 6.7 months in October, the lowest reading since December 2006 (see bottom chart above), almost three years ago. The balance between supply and demand for new homes is returning to the conditions of a normal housing market, and the October inventory of 6.7 months supply is just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.
25 Comments:
Die, recession, die, die, die!
I find it fascinating that home starts are at their lowest in 6 months (granted "in 6 mos" is a weak metric) but sales are highest in a year. Are they expecting the worst?
Perhaps the dearth of new homes will soften the blow of the so-called shadow inventory of soon-to-be-foreclosed-upon homes.
With 23% of mortgages owing more than the houses they finance are worth, it's probably good we're not introducing new product into the market.
Calculated Risk has an interesting posting that some might find interesting as it relates housing inventory: House Prices: Real Prices, Price-to-Rent, and Price-to-Income
Ahhh, one more posting from Calculated Risk: The ratio of existing to new home sales increased at first because of the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties...
One wonders how the tax credit for new home purchases is affecting the chart, and what will happen when the credit expires? Will the effect be similar to auto sales with 'cash for clunkers'??
Also:
Rates on 30-year mortgages sink, match record low
Average rates on 30-year mortgages fall, matching record low reached in spring
Wednesday November 25, 2009
(AP) -- Average rates for 30-year fixed mortgages fell this week, matching a record low set last spring and more than a full percentage point below what they were a year ago, Freddie Mac said Wednesday.
Rates for 30-year mortgages averaged 4.78 percent this week, down from 4.83 percent last week and equaling the record low reached the week of April 30.
Interest rates began dropping last November, when the Federal Reserve began spending $1.25 trillion to buy up mortgage-backed securities in an effort to lower rates, loosen credit availability and bolster the long-suffering housing market.
The average rate on a 15-year fixed-rate mortgage fell to 4.29 percent, down from 4.32 percent last week, according to Freddie Mac. The 15-year rate hasn't been this low since Freddie Mac started tracking it in 1991.
Hey PeakTrader thanks for posting that article...
Here's the part I've never understood, points...
The fees part really sounds fishy to me but they are dropping:
The rates do not include add-on fees known as points. The nationwide fee for loans in Freddie Mac's survey averaged 0.7 point for 30-year and one-year loans. The fee averaged 0.6 point for 15-year and five-year mortgages...
On a related topic have people seen the articles that may help explain the mortgage problem. It turns out in their zeal for fees the mortgage companies got sloppy with their paperwork. Every so often a judge overthows a mortgage because of sloppy paperwork, or in the most recent case because the servicing agent made up numbers on what was owed. If consumers are expected to play by the rules mortgage companies need to also, in particular the ones about sending notes and changes of not owners to the courthouse.
The interesting question is although there was clearly fraud in the mortgage industry how much was fraud and how much was out and out incompetence? For that you have to blame the person at the top for creating a culture where incompetence was encouraged.
Juandos, points are additional money you pay to get a lower interest rate. It compensates banks both for prepayment risk and lost interest from the lower rate. If you plan to own your home for more than three or four years, it always makes sense to pay points when the cost is less than the net present value of the cash flow with and without points. Unless, of course, you can't afford to pay the points. It is preferable to refinancing later because that has a separate origination fee.
Rates will not ever get much lower than this. It's almost certainly time to buy a house in nearly any market. Even if prices fall in the next year (they likely will), the interest savings over many years will more than offset missing the trough.
The fact that sales are up given subsidies, low prices and interest rates is not remarkable. The fact it's not much higher is indicative of a fragile economy. This is weakness, not strength. And don't buy speculative. House prices will remain stagnant for years. A house is a commodity, NOT an investment, except under the very best of circumstances and the risks are huge as you can observe.
No reputable economist is failing to mention the shadow inventory.
Housing starts have been negative over the year for three to four years now. No kidding inventory is evaporating. They're also selling at steep losses and banks are eating them. This is part of the great CRE collapse.
There is no sign of a construction recovery as far as the eye (ABI, permits) can see. Rising residential investment has always led us out of recession.
Juandos, Calloway is correct. However, homeownership has been the best way to build wealth (or equity) historically.
Dr Perry has shown the Housing Affordability Index (HAI) before. It shows, housing affordability fell from 1973-82 (which coincides with a bust phase in a long-wave business cycle). The HAI fell from roughly 150 in 1973 to 65 in 1982 (i.e. homeownership became less affordable). HAI peaked at 180 in Spring '09, and remains at an elevated level (165 in Sep '09).
Of course, the homebuilding boom, generally from 1995-06, created newer, bigger, and better houses.
Thanks Calloway and PeakTrader for the info and confirmation...
Not a home owner and never had the urge and never understood it...
Retty says: "Housing starts have been negative over the year for three to four years now"...
Is that the national picture or is it regional in your area?
The reason I'm asking is that though I've been reading many postings on this site and others they all seem to make down housing starts, housing sales, dropping prices, and so forth a national problem...
I keep wondering there must be parts of the country that AREN'T going through this...
Any ideas or info?
There's been a lot of coverage about the homebuilding boom taking place in four states, i.e. California, Arizona, Nevada, and Florida. However, Colorado had a huge homebuilding boom, at least in relative size.
In the '80s, there were few housing tracts around the Denver Tech Center (about 20 miles south of Denver). However, by 2000, the area was built-up with houses, high-tech buildings, and impressive malls, to the mountains in the west and to Castle Rock in the south. The houses were generally large and would be viewed as upper-middle class.
Also, Denver itself saw three new pro sports stadiums (the Pepsi Center, Invesco Field at Mile High, and Coors Field), a light rail system, the renovation of lower downtown, the first new international airport built in the U.S. in many years, an impressive central library (which held the G-8 meeting one year), a convention center, sidewalks and streets redone, etc.
Moreover, many housing tracts were built in Boulder county. I visited a former classmate in 2004. He bought a new house a few years before for about $170,000 and then refinanced it at a lower rate. He said it was worth over $250,000. It was a three bedroom two story with two baths. It also had a large den, living room, dining room, large kitchen, which the back door led to a very large backyard, and a large basement, along with a big hallway at the front door. There was plenty of room for a family of four, and could easily be converted into a five or six bedroom. There were several new housing tracts in the area, which was mostly a patchwork of small farms. He had to drive two miles to the nearest store, and then there were many stores and malls. He lived less than 30 minutes away from the university. It was a great deal (reflecting a high living standard), particularly compared to many of the older, smaller, and much more expensive houses in California.
The Housing Affordability Index is complete garbage. It's based on the assumption of a 20% down payment and a cap on mortgage payments to income which are both totally unreasonable under current circumstances in many markets.
The HAI has been above 100 since about 1983. What does that tell you? NOTHING. It tells you nothing about the buy-rent decision. There are few points in time where market conditions are right to make a house an "investment". It may serve as a store of value which is also a commodity, but few "investors" actually do the math of the total cost of ownership including property taxes, maintenance and improvements, interest on the loan, the opportunity cost of the down payment and difference between mortgage payment and rental rate, origination fees, search costs,moving costs, transfer fees, and realtor fees. Least of all do they take into account the fact that when they sell at a high, they are buying at a high. Also important, but seldom calculated, is the risk you face in owning rather than renting.
Most of what you get in "profit" when you sell a home is just a rebate of money you already paid, and with a low rate of return. There are nonpecuniary benefits to owning a home, but people who push houses are usually ownly pushing their own commissions.
Juandos,
Yes, of course there are areas with significant new building just like there are employers in lots of places that are hiring.
Housing is local and you have to consider local economic, political, and market conditions. Few people have the means or desire though to conduct arbitrage between houses in different states.
Generally across more than 40 states, housing starts and permits have been negative compared to the previous year every quarter since around 2005, 2006 - longer in some places. The homebuilders did, in fact, shut things down prior to the collapse. That should have been a leading indicator for anyone who was paying attention.
You'll hear glorious news of starts picking up steam - mostly in areas of gentrification or pockets of economic growth. The overhang in the worst affected places is massive. It's compounded by falling rents and the supply of foreclosures and condos entering the market. That's the shadow inventory. Construction won't recover for years. It won't reach the precession peak in the next decade. If you're a construction worker, it's time to find a new line of work. I recommend nursing school.
Dexter, I dispute some of your data and assumptions. However, I agree there are benefits and consequences to homeownership. Nonetheless, the facts remain, homeowners tend to live in better homes than renters and accumulate much more wealth than renters.
The Basics
Why its smarter to buy than rent
The tax benefits help somewhat, but its the long-term gain in value that's crucial to building real wealth.
By Liz Pulliam Weston
MSN Money
Average net worth of homeowners vs. renters:
Annual income $80,000 & up: Homeowners average net worth $451,200; Renters average net worth $87,400
Annual income under $16,000: Homeowners average net worth $73,000; Renters average net worth $500.
(Incomes between $16,000 and $80,000 show similar results)
Article:
"When I bought my first house, for example, Southern California was experiencing its worst-ever real-estate slump. The property, purchased with two friends, lost about 10% of its value in my initial years of ownership, then recovered to post a 20% price gain.
Not bad, huh? Except after considering all my outlays for maintenance, repairs and insurance, and factoring in the tax benefits, I determined that I had barely broken even when compared with the rent I would have paid during those six years.
Had I invested my down payment in an index fund that matched the Standard & Poors 500 instead, I could have tripled my money in the same period.
The case has been almost exactly reversed with our current house: The stock market has basically been treading water for the past five years. But our home in the insanely hot Southern California market has more than doubled in value.
There's no way I could have predicted the performance of either market -- stock or real estate -- in advance."
Retty says: "Housing is local and you have to consider local economic, political, and market conditions. Few people have the means or desire though to conduct arbitrage between houses in different states"...
Hmmm, obvious now that you mention it...
Locally the only housing starts seem to be the ones being financed in part or in whole with federal dollars...
"Why its smarter to buy than rent"...
Not if you don't want to spend time and energy mowing the lawn PeakTrader...:-)
What happens when they take the housing market off life support?
If it's recovering organically because houses are more affordable, then why the tax credits and other freebies to home buyers?
It seems we're watching another bubble being inflated.
What data do you dispute, Peak Trader?
I haven't made any assumptions. I've called into question the assumptions of the HAI. Household balance sheets are in tatters. The disappearance of second liens, the shrinkage of conventional loans with 20% down, and the popularity of FHA demonstrate I'm right that most people don't have 20% to put down anymore.
Your statement about homeowner wealth is a classic reversal of causation. It is the people who are capable of generating income who amass greater wealth. These people are more likely to be home owners. Buying a home in no way, shape, or form increases your wealth building capacity when all the fundamental economic attributes I listed in great detail work against you. Your are putting chocolate frosting on a turd and calling it cake. Either buying a home net of ALL costs yields a higher rate of return than the alternative (renting and investing) or it does not. You have bought into the fallacious notion that renting is throwing money away and buying is building wealth. Perhaps you're a realtor who swindles people with this hogwash or perhaps you never bothered to do the math. You're inextricably attached to the false notions which created this housing bubble and define national policy to subsidize poor economic decision making. Buying a home is almost NEVER a good investment on its own merits. Tax deductions, government transfers and subsidies, and unsustainable growth have made it so, artificially. Even with those advantages, over 90% of people buy too high to make it pay.
But that's ok. A home is a commodity we enjoy. I didn't buy my television set as an investment either. The only people who hawk houses as investments to "build wealth" are fools and crooks.
Dexter, some of your assumptions and data are false (e.g. about the HAI), and some are simplistic (e.g. the positive relationship between income and wealth, or income causes wealth).
The article below does the math between renting and buying:
Renting vs. Buying: The Realities of Home-Ownership-Get Rich Slowly
You may also want to see the article:
Housing Affordability at Record High
By CATHERINE RAMPELL
Economix
New York Times
(Dr Perry is cited below the chart)
I've explained the homebuilding boom before, which created real wealth at a time when the economy needed it.
@ Peak Trader:
So I go to find the exact wording of the assumptions underlying the Housing Affordability Index to tear you apart and what do I find:
The Housing Affordability Index is Worthless
A complete article explaining exactly what I was trying to tell you. The article states, succinctly, that the HAI was well over 100 throughout the biggest housing bubble in American history, except for one month.
The fact that people got INTO homes doesn't mean they were "affordable." The high default rates and foreclosure rates NOW prove that they were NOT affordable. The foreclosure crisis itself tells us the HAI is total BS!
The article lists all of the shortcomings I was going to tell you about and provides support for each.
1) The NAR methodology “assumes” a cash down payment of 20%.
2) The NAR “assumes” 25% of monthly gross income is available to pay for Mortgage Principle
and Interest.
3) The Index fails to consider FICO scores.
4) An increasing number of families no longer qualify for a standard conforming mortgage.
5) Non purchase costs of home ownership have risen dramatically.
So you "explained" the housing boom before. You can "explain" things repeatedly, but when you explain fallacies and falsehoods, you're not clarifying anything, you're only being annoying.
The "boom" was a "bubble". That's obvious now. The "real" economic growth was supported by massive levels of debt assets which are now, in front of your very eyes, evaporating from the flames of default.
The "affordability" which made the purchase of all those homes possible came from government intervention in the marketplace. GSE's purchased loans to provide liquidity. FHLB's gave loans to banks. Banks funded growth with "hot money" deposits searching for yield. Securitization added more liquidity to the market, not only spreading but obscuring the risk. "Affordable mortgage products" created by government to get low income people into high value homes underpinned the whole process.
Just because lots of people made lots of money doesn't mean there was self-sustaining activity going on.
Lend me $20,000 to buy a car to help out our economy. When I don't pay you back, console yourself with the idea that my purchase helped with durable goods manufacturing.
Oh, but you're out $20,000, so what does that do to the economy?
Hmmm, sounds like that pesky Broken Window Fallacy of economic growth again.
Buying a house does NOT NOT NOT build wealth. A house is a commodity, not an investment. It is a store of value. It often appreciates, but it DOES NOT OFTEN appreciate faster than alternative investments. If you could separate the investment function of a house from its commodity function, like stripping coupons from a bond, you would see that MOST OF THE TIME, the investment function is in default or underperforms other investments.
We observe people with houses having wealth because SURPLUS INCOME creates wealth and people with high incomes tend to buy houses.
I can just as easily say that people with recent model 7-series BMWs are "wealthy" because having the car proves they're wealthy.
You think that because a house appreciates and cars depreciate that that is the difference between the two. It's not. You are CONFUSED. You are incapable of separating the two functions of a house: investment, consumption.
You can take a look at the past 25 years and see houses as marvelous investments. It's an aberration! Those markets were subject to multiple bubbles and only people who bought at the best of times or in the best of locations (in hindsight) outperformed alternative investments.
Past returns are no guarantee of future performance
Dexter, someone could write a book explaining your false assumptions. So, I'm just going to present the facts:
1. Homeowners have much more net worth than renters, in all income categories.
2. Homeowners generally live in better homes than renters.
3. Houses are an appreciating asset (not a depreciating asset like autos).
4. The homeownership rate has been in an uptrend for decades.
5. Trillions of dollars were extracted by homeowners during the recent housing boom, including lower income homeowners, who really couldn't afford the houses, initially.
You should calculate the difference between buying and renting similar houses (you can use the example in the article above), e.g. using a 5% mortgage rate, the real appreciation of houses per 10 year period using historical data or an estimated value, historical data on inflation or an estimated value (including rising rents), and a 3% annual rise in income. Then tell me who'll be better off in 10, 20, and 30 years (you may also want to note we're in a structural bear market, i.e. the Dow Jones will likely trade sideways, between 7,000 and 14,000, for another eight or nine years, and currently it's in the middle of that range).
Keep dragging those red herrings around Peak Trader.
1. Again, you have the direction of causation backward and are confusing correlation with causation.
People have high net worth because they have high incomes. People with high incomes are more likely to buy houses. THE HOUSES DIDN'T MAKE THEM WEALTHY, THEIR INCOMES DID.
If they decided to live a bachelor life, rent, and NEVER buy a house, they would STILL be high net worth individuals.
2. Nicer houses are usually not rented because the negative cash flow can't be sufficiently offset by the rent. If people could afford to rent a nicer house, they could afford to buy a nice house.
But this point is IRRELEVANT to the buy-rent decision on a PARTICULAR house of fixed quality.
3. The question isn't whether houses appreciate. The question is whether they appreciate FASTER than alternative investments after all costs of ownership are included. Most of the time in most areas, they DO NOT.
People buy cars and art even though they depreciate. These are COMMODITIES people buy for their usefulness.
Houses are also a commodity. If you happen to have your house appreciate NET OF EXPENSES and faster than alternatives, that's a bonus. Your HEIRS will likely enjoy that bonus.
If you move into an apartment, you can live off the proceeds for a long time. But most of that "profit" is just a REBATE of principal, interest, taxes, and improvements you put into the house. In most cases, NONE of it is profit!
4. Homeownership rates are 100% IRRELEVANT. But let's dispel some myths.
a. Not all these people "own" their homes. They are merely living in homes with the right to sell. "Owning" does NOT mean your investment is paying off relative to alternatives.
b. Home ownership rates are inflated by government policies which distort buy-rent decisions. Taxpayer $$ are being used to put people into houses, a transfer from renters to owners which is not sustainable. The collapse of Fannie, Freddie, MBS purchases by the Treasury and the Fed, and the deficits of the FHA should be a clue for you.
c. Home "living-in-ship" entails DEBT, much of which is currently in default. This poses serious risks to our financial system. From all the foreclosures and delinquencies, it's obvious people could NOT afford their homes.
d. More home ownership is not necessarily a good thing. People have INDIVIDUAL optimal decisions of buy vs. rent. If we exceed the economic optimum home ownership rate, aggregate social welfare (and risk) falls.
5. Trillions of dollars of DEBT, not wealth, were extracted from homes in the form of HELOCs, Reverse Mortgages, etc. If people made money selling homes, the suckers who bought them lost money.
The prices were based on TEMPORARY and ILLUSORY home values caused by a BUBBLE, not a boom.
With those home values returning to what the economy can support, those credit lines have evaporated and trillions in equity was destroyed. Most of that debt is in DEFAULT. Have you looked at household balance sheets lately?
Historical data of house price appreciation is NO INDICATOR OF FUTURE PERFORMANCE. Every investment professional knows that.
I work as a financial adviser in Wealth Management. I do this for a living. I am a CFA charterholder. Every day I PROTECT my clients from crooks and fools like you.
Every get-rich-quick scheme has risks which are undisclosed. The schemers highlight the winners and hide the losers.
Every get-rich-sure scheme has costs which are undisclosed. The schemers never compare the Rate of Return to alternatives.
Most of my clients built wealth through businesses. They live in homes because they WANT homes. They didn't BECOME wealthy by owning homes. In fact, most of them bought or refinanced during the bubble and now I'm helping them recover from their bad decisions and repair their balance sheets.
If I knew who you were and what you did for a living, I'd find your clients and expose what a crook, fool, and liar you were.
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