“Sales of new single-family houses in December 2016 were at a seasonally adjusted annual rate of 536,000… This is 10.4 percent (±12.2%)* below the revised November rate of 598,000 and is 0.4 percent (±11.7%)* below the December 2015 estimate of 538,000,” according to the US Census Bureau and HUD.
The asterisk refers to the explanation of the statistical range of error. In short it says that December’s -10% number may not have been a decline at all, or it may have been a much bigger decline than that. I’ll go with what’s behind door number 2.
I’ll skip my usual song and dance about how awful seasonally adjusted (SA) data is when actual, not seasonally adjusted data (NSA) is readily available for easy analysis. I know it’s easy because I can do it. NSA data gives us facts. SA data gives us statiscal impressionism of what reality supposedly looks like
So as usual we’ll put on our green eyeshades, and get out our trusty ruler and pencil and draw a few lines to see just how the trend is progressing in this industry, which by the way, contributes just 1% of Gross Domestic Product. So it’s kind of much ado about nothing in terms of economic contribution.
But it has outsized importance as an economic and financial indicator. A change of trend in this business often gives us early warning that change is also coming to the financial markets. So a report of a 10% decline should at least raise our eyebrows. It made the mainstream media just a little hysterical. The Wall Street Journal’s headlines were pretty negative.
U.S. New Home Sales Drop Sharply in December
Last month’s fall of 10.4% from November was the steepest since March 2015
Reverting to form however, the Journal found a pundit who told everyone there’s nothing to see here. Everything’s gonna be alright. ““Home buyers are facing headwinds from higher mortgage rates and uncertainty about tax policy, but low existing inventory, near full employment, and rising wages are tailwinds that will continue to push new home sales higher in the year ahead.”
The Journal’s reporters added their own take that “economists expect new home sales to continue to increase this year as builders step up construction of single-family homes.” That’s right builders will build more houses because buyers will buy more houses. Or vice versa. Not much circularity or counterfactual thinking there.
The trend has continued higher since March 2015, so that doesn’t tell us much. We need to look at the NSA data on a graph to see what’s really happening in the single family home construction business.
The Census Bureau reports this data in tables, but it gives that data no mention of the actual data in the text of its releases. Hence the Journal and other mainstream financial news outlets are free to ignore it. Whenever the financial media has the opportunity to ignore important information, they jump at the chance with reckless abandon. It’s just too much work for them. Heaven forbid that they should gain and report real insights.
But that’s fortunate for us, because it allows us to fill the gap and put you one step ahead of the herd. As opposed to the annualized SA nonsense, which multiplies the inherent statistical error by 12, the Census Bureau reported actual sales of 38,000 units in December, +/- 2,660. That was a decline of 4,000 units from November, and unchanged from December 2015. So the actual change year to year was zero.
That’s not a decline of 10% as indicated by the reporting of the SA data. But make no mistake. ZERO is not good. It is an abrupt and sharp change of direction, which in recent months had been strongly higher. It suggests that the big jump in mortgage rates in November and December took a big bite out of sales. Ergo, any further increases in mortgage rates would be really bad news for the housing business.
That business is in a much more fragile state than appears on the surface and it poses a grave danger to the financial system as a whole. This just like 2005 and 2006 when the Great Housing Bubble (GHB) was topping out when nobody in the economic establishment knew it. As late as 2007, the great and powerful Oz himself, Ben Bernanke, proclaimed that any difficulties in housing were likely to be “contained.”
The funny thing is the countless thousands of ordinary people knew it. Maybe millions. I ran a message board website starting in October of 2000. By 2004 , just about everybody on my board and other bearish message boards seemed to recognize that we were in a housing bubble. I laid out the case in several analyses that I published. I was far from the only non-mainstream observer to do so. There were several well known housing blogs that did as well. Housing bears were laughed at.
It’s even worse today. Nobody is even paying attention to the latest iteration of the GHB, let alone thinking about whether its pending collapse will be contained are not. It’s at times of such sanguinity that we need to be paying the greatest attention. The mainstream economic consensus has been that 6% a year housing inflation is just fine and dandy. In fact they don’t even call it inflation. They call it “appreciation.” Inflation bad. Appreciation good.
So what if housing prices crossed the GHB peak in mid 2015! So what if the only reason that house prices are even minimally affordable at these levels on because the Fed has provided an immense subsidy that has artificially suppressed mortgage rates! Everything is gonna be alright.
Massive Fed sponsored artificial suppression of mortgage interest rates has driven the inflationary trend in house prices. When you buy a house the price you are willing to pay is a derivative of the monthly payment. As the interest portion of your monthly payments fell year after year, the maximum monthly payment you could afford and were willing to pay remained the same. So the principal portion of the payment rose. That part of the equation was expressed in the market as price inflation.
Now the mortgage rate trend appears to have reversed. An upside breakout in the 10 year yield above 2.6% would tend to confirm that reversal.
Mortgage rates are joined at the hip with the 10 Year Treasury. Mortgage rates may lag. The margin between mortgage rates and Treasury yields may narrow. But eventually mortgage rates will follow yields. At that point two things will happen. First, sales volume will dry up. And second, prices will fall at least in lockstep with the rise in rates, and even faster as market dynamics spiral downward.
The current state of the housing market may post an even greater threat to the financial system than the GHB did in 2006. This time, the Fed can’t lower rates to fight a crash. This may be the best opportunity to short housing stocks and ETFs for a long time. And because current conditions threaten the entire financial system, this may also be near the best opportunity to short the entire stock market as well.
The Census Bureau’s New Home Sales report is a treasure trove of information on not only sales volume and volume by price range and by region. It also has a history of prices going back to the mid 1960s all the way to the present. We’ll take a deeper dive into the charts and data in an upcoming post.
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