The official statement released on new home sales today read like this:
Sales of new single-family houses in April 2017 were at a seasonally adjusted annual rate of 569,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.4 percent (±10.5 percent) below the revised March rate of 642,000, but is 0.5 percent (±11.3 percent)* above the April 2016 estimate of 566,000.
That’s not good, but of course, it was wrong because it was based on a seasonally adjusted monthly number. That was multiplied by 12 to get to an annualized figure, thus magnifying the error in the monthly number by 12x.
Briefing.com reported that the consensus estimate of economists had been for a gain of 605,000. Economists were, as is the case more often than not, overly optimistic. In market terms we call today’s report “a miss.” The only thing that missed, aside from the seasonal adjustment, was the economists’ forecasts.
As always, we are only concerned with the actual reported numbers, not seasonally adjusted (NSA). It’s bad enough that the data is based on such a tiny survey sample that the margin of error is 11%. Compounding that by an arbitrary seasonal adjustment multiplied by 12 is nonsensical. We can determine easily enough how good or bad the month was by comparing the actual monthly change with the same month in years past. We also look at the annual growth rate to see if it is stable, rising, accelerating, decelerating, or falling.
Those two sets of numbers tell us everything we need to know about the state of the market. We then plot the actual data on a chart, giving enough time perspective to allow us to see with our eyes just how things are progressing. Even if thinking about numbers makes our eyes glaze over, it’s pretty easy to understand a trend when it’s plotted over enough time.
The actual data tells us that sales fell by 7,000 units in April, to 54,000 from 61,000 in March.
This is based on contracts signed, so it’s as close to real time data as we can get on the housing market. The NAR’s Existing Home Sales (actually, closings) has a lag of about 2 months after contract signings. Case Shiller is even worse. It uses a 3 month average of sales recorded at County Courthouses. By the time it’s published, it’s 5½ months behind the contract signings. The NAR’s pending home sales is close to real time as we can get for existing homes, in terms of reporting contract signings. But it’s not as timely as the new home sales survey. This is as good as it gets at giving a heads up on changes in the market.
The news isn’t good, but we’ve been expecting the numbers to start breaking down as home price inflation has way outraced household wage and salary gains. So how does a drop of 7,000 stack up with the ghosts of Aprils past? It’s atrocious. This is the first time April has seen a decline, at all, in at least the past 11 years. That period includes the housing crash from 2007 to 2010. April was never down before last month!
Was it the calendar? April only had 20 business days this year versus the usual 21-22. But when was the last time a new home sales office was closed on the weekends? Sure, some reporting may have been delayed until May 1, but enough to account for a 22% difference in performance between last month and April 2016. Not likely.
Similarly, the year to year change was a decline of -1.8%. OK, so maybe a few sales did leak into May. But this is a crash in the growth rate. In March, the year to year gain was 22%. Except for December, the market was running at double digit percentage gains for the whole past year. No, my friends, something is rotten in Housingville.
Here’s a picture of the sales trend since the housing crash began to form a bottom in 2009. Fear not, I’ll get to the long term perspective in a follow-up report. This chart shows the actual monthly sales along with April sales each year and the 12 month moving average. I have added the 30 year mortgage rate at the bottom to complete the story.
Sales trended higher since 2011 with the help of 2 long periods of mortgage rates falling to all time lows. This was in spite of stagnant household income and rapidly inflating home prices. When mortgage rates popped in 2013, sales fell, but when mortgage rates started falling again, sales rose from 2014 to 2016.
This time, when rates popped in the 4th quarter of last year, sales surged instead of falling. We identified this at the time as the buying panic that often occurs when the rate cycle first turns up. Except now there’s no reservoir of demand waiting in the wings. Buyers were already maxed out on their income qualifying ratios thanks to 5 years of rapid home price inflation. As sale prices rise from here, even if mortgage rates merely stay stable, there will be fewer buyers who can afford to buy. Not only would we see lower sales, but in order to maintain market share, builders would need to drop prices. That is exactly what happened in April. Prices dropped 4% year to year.
There’s a wealth of data in the Census Bureau’s new home sales report which tells us volumes about not only the state of the housing industry, but gives us important clues on the overall health of the US financial markets. We’ll cover some of that in my next couple of reports.
The data we’ve seen so far suggests that the ending of the echo housing bubble has begun. Demand is exhausted. 5 years of housing inflation has made the value of mortgages look whole again. The back of that inflation is breaking. Any decline in housing collateral from here value will bring on another round of crisis in mortgage finance, which will infect world financial markets yet again. This time the central banks will have few tools to stave off ultimate disaster.
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