Housing Jitters

The economic data today that got the market in a lather was an increase in new home sales. The financial press picked up on an increase in seasonal adjusted numbers. This report should be taken with caution by investors. New home sales drives new construction, and normally lifts the economy out of a recession. We are not seeing such a recovery, putting in doubt any claims of a sustainable recovery.

The non-seasonally adjusted new home sales was only 38K. The lowest March on record is last year at 31K, only 7K different - and this year's increase was boosted by yet another Cash4GDP program, in this case a second run of the first time homebuyers tax credit, this time no longer limited to first-time homebuyers. All can play!  

Before the credit was reinstated in March, new home sales had been below last year. Compare the yellow bars with the bright red ones in the chart below. (Data and charts from CalculatedRisk.) The risk is when the program ends in April we fall below the 2009 level by more than the prior shortfall, as demand would have been pulled forward into March and April from sales that might have occurred anyway in May and June. 

 

The seasonally-adjusted number is 411Km - quite a difference, 10x higher, because it is annualized. (March usually is the best sales month, so the adjustment is less than a simple 12x.) Due to annualizing plus normalizing to prior years, a small increase in the non-adjusted numbers causes a large swing in the seasonal adjusted number. 

We see a jitter of a possible bottom in this next chart - or is it a mere sideways stall before a further decline, a triangle forming? Hard to generalize from this jitter to pronounce a housing recovery. You can see, however, how new home sales drove rapidly up even before the end of the prior recessions. Not this time. 

The seasonal adjustments add noise to the reports, and new home sales themselves are noisy numbers with lots of fluctuations that disguise the trend. Yesterday the S&P warned that the non-seasonally adjusted numbers were more informative. This chart shows how the seasonal adjustments (purple) are swinging wider and irregular changes (green) are becoming a bigger part of the S&P's Case-Shiller Index. The S&P believes that the increase in irregular changes is driving wilder seasonal adjustments, making them unreliable.

 

The bottom line is we cannot yet claim a recovery to the housing market. 

This next chart and accompanying analysis (from CalculatedRisk) shows a gap between the trends in new home sales vs existing homes. The initial gap was likely due to a flood of distressed sales. New homes could not compete. The big spike in existing home sales (blue line) was caused by the first homebuyer tax credit. 

 

The spike in new home sales (red line) was much smaller, and also came earlier. (New home data comes in when the contract is signed, while existing home data comes when the transaction is closed.) The second little red spike is happening now, ahead of a bigger blue spike. 

When the second homebuyer credit program expires in April, expect the new home sales to drop in May, and existing home sales to drop in July. The seasonally-adjusted numbers should exaggerate the drop, just as they exaggerated the impact of a slight rise. The timing will coincide with what I expect to be the Summer of Disillusionment with the economic recovery, after a pretty good reports of GDP growth in Q1 and Q2.  

Comments

[Hockthefarm]

There sure is enough blame to go around in the GS suit:

"Some of the people whose mortgages underpinned Mr. Paulson's wager were themselves taking a gamble -- that U.S. housing prices would continue to march upward, making it possible for them to eventually pay off loans they couldn't afford.

The Wall Street Journal identified homeowners in the Abacus portfolio by taking the 90 bonds listed in a February 2007 Abacus pitchbook and matching them with court records, foreclosure listings, title records and loan servicing reports. The bonds contained nearly 500,000 mortgage loans.

One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.

Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55% -- but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.

She defaulted in early 2008 and was evicted from the house in early 2009."

In the final analysis maybe GS and Paulson deserve a pass here. The folks that really caused the most damage are idiots like Ms Onyeukwu. Nice to see her parked at the curb sucking her thumb.

I'm not a lawyer, so I can't comment on procedure, but it seems to me that some smart guys got together, identified some clinical retards, and took their money. Pretty smart bet imo.
Hock

[trendlines]

Thanks for dissecting the US housing picture for us Yelnick.

Meanwhile, here's two charts on Asia & South East Asia:

http://trendlines618.blogspot.com/2010/04/asia-south-east-asia-birds-of-same.html

[Hockthefarm]

US housing priced in terms of gold:

http://www.chartoftheday.com/20100423.htm?T

Now that is a downtrend,
Hock

[trendlines]

Russell 2000 has been on a tear. 765 level is strong resistance, if it gets there. Here are the charts:

http://trendlines618.blogspot.com/2010/04/russell-2000-gunning-for-765.html

[Hockthefarm]

Good old Jeremy Grantham. Funny how he manages to let you know exactly what he's thinking with the written word.

And I think most understand government's track record of taking a mess and turning it into a huge mess.....

http://pragcap.com/grantham-bernanke-is-blowing-another-bubble

Hock

[Hockthefarm]

In the preceeding Grantham article, paragraph 2:

The massive bailout program...........and there is a long term cost in that.

What a great summation of the Obama presidency.

Hock

[DG]

The risk is when the program ends in April we fall below the 2009 level by more than the prior shortfall, as demand would have been pulled forward into March and April from sales that might have occurred anyway in May and June.

This is the essence of the entire panoply of strategies, isn't it? Pull forward every scintilla of economic growth from as far in the future as possible and put it on the sovereign credit card.

[DG]

Some updated charts.

http://yfrog.com/j7spydaily7px

trendlines, I think the count on the Russell is the same, at least in the bigger picture. There are some discrepancies on the wave count from the February low on the SPY and IWM, but overall, they are reflecting the same mass psychology. In fact, the IWM is outperforming the SPY by more than any time since the March 2009 lows. In my opinion, this is reflective of excess risk-seeking. The time to pour into small caps is at the beginning of a rally, not after it has been going for over a year.

If the SPX has leeway to go to ~1300 and I think it does, the Russell will surely follow suit and rise as well.

I still don't think any of it is Impulsive, though.

[Les]

The FHA also suspended the 90-day Flipper Rule last summer. As much as 20 percent of the existing home sales last fall are possibily redundant.

[Mamma Boom Boom]

Ask any builder if he can compete with the REO market. And by the end of the year there will be a 2 years supply of these little hot-cakes.

Want to buy a home builder?

[yelnick]

DG, "Pull forward every scintilla of economic growth from as far in the future as possible and put it on the sovereign credit card." Exactly! The Powers-That-Be hope they can somehow fool people into returning to normalcy. That passes for economic wisdom. It will be laughed it when future economists, not so caught up in the times, evaluate. 

When Ron Paul said that Obama was not a socialist, but a corporatist, it spurred some interesting commentary. A Marxist scholar opined that the US had become not the Glorious Socialist Paradise that he wants so desperately, but a Redistributive World Empire (aka Crony State Capitalism).  This is a thread of discourse completely omitted from the MSM since it isn't the morning talk piece of the White House, nor is it the patter of Sarah Palin picked up by Fox. But it seems to fit, as the State is pandering to big pharma, big insurance, big auto (go attack Toyota! help Government Motors!) and of course too-big-to-fail banks. 

The Cash4GDP gimmicks fit a mindset endemic to our political leadership which cannot even imagine a private economy picking itself up on its own. 

Sad indeed that Adam Smith's Great Commercial Republic has come to this. 

[DG]

Yelnick,

I think Palin just posted something on Facebook about "crony capitalism".

In any case, the strategy will work until it reaches the point where the carrying costs of debt outweigh the incremental current benefits of increasing the debt load, and all the entails in terms of interest payments and future taxes. There are also questions of whether or not there is enough demand to issue all the necessary debt.

I think this particular strategy was chosen, like many, because it is the least disruptive to the current elites.

[yelnick]

DG, funny story is that US treasury is almost out of cash right now. Tax refunds and very low collections. What happens if rate of new auctions is too slow to keep up with outlays?

[DG]

Yelnick,

Yes, I think that if you could really get inside the Fed and Treasury's head, you'd see that they were assuming that the private sector would pick up more than it has by now, leading to increased tax revenues and less need for debt issuance.

It all goes back to the Obama team's graph of where unemployment would be with and without the stimulus. That revealed their "worst case" scenario, in my opinion, and I wouldn't be surprised if they "sandbagged" the projection a little bit just to create a sense of urgency in getting the stimulus passed. DC was so bought in to the Keynesian nonsense that they couldn't fathom that over a year later we'd still be in the dumper with almost 17% U-6 unemployment and housing still on life support. They probably really thought U-3 would top out around 7.5%, they'd declare victory by keeping it under the 8% peak they'd forecasted and everyone would live happily ever after.

[Hank Wernicki]

4-24-10
7:00 PM PST
http://www.elliottfractals.com/marketview_interview.html
Neutral
LISTEN

[Chabazite]

'This is the essence of the entire panoply of strategies, isn't it? Pull forward every scintilla of economic growth from as far in the future as possible and put it on the sovereign credit card.' Yes DG, but it is strange how people act when the genie is out of the bottle. For example, in the UK I think the majority of people KNOW that we have to cut our public expenditure in order to better manage our sovereign credit card. But it is the one big issue which ALL parties avoid talking about like the plague. Perversely, during the current election campaign the two left of centre parties are really playing on people's jobs security as a major issue. 'Vote Tory (right of centre) and you will lose your job'. Sadly, whoever gets in will have no alternative but to cut back on public expenditure in a big way and that means thousands of public sector jobs. A double dip in the UK is (imho) a virtually certainty. Either the weight of debt will get us, or the surgery of cutbacks will likely prove fatal. But will the people accept what is charging down the line like a train? As we have seen in Greece that is highly unlikely. They bury their heads in the sand and hope in a Micawberish way that 'something will turn up'. It won't. My guess is this issue will hit the US after the elections this autumn. Sooner rather than latere. Even the sovereign credit card cannot go on forever.

[Chabazite]

'The Cash4GDP gimmicks fit a mindset endemic to our political leadership which cannot even imagine a private economy picking itself up on its own'. Frankly, neither can I!
- I am sceptical that western economies will ever be able to generate sufficient wealth to sustain themselves in future. We have become addicted to credit fuelled growth, and that has simply overwhelmed the kind of innovation and development which could lead to genuine wealth. Basically whatever the private ecomomy delivers, its too little and too late.
- The timescales are not commensurate with political timescales. Four or five years is too short and Cash4GDP programs are the easy 'fix' which make things look good in the short-term (but which only make things worse in the long-term). They are certainly not commensurate with technology lifecycles which may take decades to come to fruition.
- Our corporate captains are not prepared to take the longer-term risks whilst short-term performance is required by shareholders. Ask many of them what their share price is and you will get an instantaneous answer; ask them who their customers are, or what their customers value and you are more than likely to get a blank stare and response. Believe it or not!!! I know this to be the case!

[DG]

"Yes DG, but it is strange how people act when the genie is out of the bottle."

I'm not sure it's "strange" per se. "Public choice" economics actually predicts this very phenomenon, right? Whenever there is a successful attempt at wealth redistribution via political means, we find that the costs are diffuse and the benefits are concentrated.

The best example I can think of here in the US is our National Endowment for the Arts. On a per capita basis, the cost is less than $1/year to fund it. However, the number of people who benefit from it is quite small, so the average grant recipient basically is able to earn a living as an artist due to the government's ability to collect that $1/year per person. Who do you think is going to raise a larger stink about cutting funding to this program and try to lay a guilt trip on the cheapskate taxpayers who don't want to pony up a $1?

Since almost every government program has a similar structure and every beneficiary of those government programs considers their benefits sacrosanct (and employs a phalanx of lobbyists to protect them!), nothing gets cut. Multiply this by hundreds and hundreds of programs and soon the costs to the taxpayers becomes quite visible. In my opinion, every "argument" about why the "government has to do X" is actually just a rationalization of the need for people who enjoy "doing X" and want to do it for a living to do it on the government payroll because it is a task the private sector would not support for long.

There are also elements of "free riding" in all of this, prisoners' dilemmas and probably other game theoretic issues I can't think of right at the moment.

Point being that ALL of these current behaviors could have been (and were, if you go back to the origins of these entitlement programs and the debates surrounding them) predicted. The problem was that the culmination of these issues was always in the future. Well, the future is now.

"I am sceptical that western economies will ever be able to generate sufficient wealth to sustain themselves in future. We have become addicted to credit fuelled growth"

Agree. It is important to remember that, on a percentage basis, the private sector was more indebted than the public sector when this crisis began. The policy response from the public sector to bail out the private sector creditors from overlending to private sector debtors didn't solve the problem, though. It merely socialized the losses and privatized the gains.

What should have happened was the banks going bankrupt and being taken over by better managers. Yes, there was the potential problem of whether or not there was enough capital available to recapitalize the banks after they recognized their losses, but I'm pretty certain that private interests could have raised enough capital to make the transition. The voice in the debate who made the most sense was Luigi Zingales out of the University of Chicago. Of course, he wasn't intellectually-compromised by having bank lobbyists and friends on Wall Street importuning him to funnel taxpayer dollars to cover their losses.

Biggest bank robbery in history.

[Mamma Boom Boom]

Chab, it's time for people to realize that the free market economy, in the USA at least, is gone. It is stuck on life support until the day it blows up. And that could be next year or 20 years.

[Chabazite]

DG, Mama - Interesting comments. Thanks. Chab.

[yelnick]

Chab, the West can certainly generate huge wealth again. The UK and Europe are in a bit of a quandary. They have grown slower than the US for 30 years. But the US can do very well if allowed to. Sucking 40% of US profits into Wall Street won't get us there (historical avg is 10-12%, the vig that is necessary to grease the skids of commerce). I wouldn't generalize from the period from 1998-now, since US policy switched from real growth to credit growth.

[Thrill]

DG, I have been reading this blog for only 4-5 months now but that last post about everybody's sacrosanct entitlements was the most incredibly well-written piece I've seen! IT IS EXACTLY THE REASON WE'LL SEE A DOUBLE-DIP! Who knows about the timing, it could occur at Dow 35,000, but what good is that if you celebrate with a $100 Budweiser?
Thanks Yelnick for the best economic blog in cyberspace! I'm not sold on Elliott Wave theory completely yet, but am enjoying learning more about it here. You guys are great!