Tuesday, July 28, 2009

A Few Comments on Housing Reports

by Bill McBride on 7/28/2009 03:43:00 PM

This is very different for me ...

First, if I've let a little hubris slip into my recent posts, I apologize. My goal is to be the most humble blogger in the world (an old joke).

Second, I am not an investment advisor and I do not offer investment advice. I try to provide some hopefully useful data with sources - especially concerning real estate - and then add my own analysis. Nothing here is intended as investment advice.

Please keep the above in mind ... and although I rarely discuss investing, I'd like to quickly explain why I went mostly long in my own portfolio in late February and early March. Several readers can vouch for my change in view (like Brian and Michael). I only share my investment ideas with people I know - and who I know are responsible for their own actions.

Sentiment in February and March was for a Great Depression II, and it was clear to me that several key indicators were about to change: auto sales, single family starts and new home sales were three I mentioned frequently on this blog. I figured when that data changed, the sentiment would change. Buying at the time was difficult. And yes, I'm still long (although that could change at any time, and I will not disclose it).

The reason I bring this up is the Case-Shiller report today really bothered me. To be more accurate, the reporting on the Case-Shiller report bothers me. As I mentioned earlier today, there is a strong seasonal component to house prices, and although the seasonally adjusted Case-Shiller index was down (Case-Shiller was reported as up by the media) - I don't think the seasonal factor accurately captures the recent swings in the NSA data.

I have no crystal ball - and maybe prices have bottomed - but this potentially means a negative surprise for the market later this year - perhaps when the October or November Case-Shiller data is released (October will be released near the end of December). If exuberance builds about house prices, and the market receives a negative surprise, be careful. Just something to watch later this year (I will post about house prices, but I will not mention the possible impact on the stock market in future posts).

And a few comments on the reporting today. The WSJ reported: Home Prices Post Monthly Increase, Data Are Latest to Signal a Bottom in the Property Market

The Case-Shiller index of home prices in 20 metropolitan areas, produced by Standard & Poor's, rose 0.5% in May from the month before, the first increase after 34 straight months of decline.
No mention that they are using the NSA data. And this would be a weird housing cycle if residential investment and house prices bottomed at almost the same time. See: Housing: Remember the Two Bottoms!

And from MSNBC: Crescenzi: Case-Shiller Supports Risk Assets
If there’s one indicator that investors are likely to embrace as their yardstick for the housing market predicament it is the Case-Shiller home price index. This is the index that turned lower in 2006, presaging the eruption of the credit crisis. Its apparent stabilization hence marks a turn in the housing dilemma.

Although a plethora of data have pointed to stabilization in housing of late, only the Case-Shiller index has the power to sway doubters, chiefly because it captures trends in the subprime mortgage market better than other indicators.
Like I said, I could be wrong about prices ... but this is the kind of information that is being disseminated by the MSM, and that means a negative surprise is possible.

Not to just pick on the MSM reporting. I was sent (by several readers) a housing analysis yesterday. It was some sort of weird mash up between the excellent David Rosenberg and some blogger. The charts are great, but the analysis is sometimes inaccurate. The "research" made comments like this for the NAHB HMI: “Sales outlook is stuck at 26, and anything under 50 is a contraction”. Not correct. The NAHB index is a sentiment indicator and doesn’t indicate contraction. Any number under 50 indicates more builders view sales as poor than good. See this chart - the index moves with new home sales and housing starts. And another example: "Architectural billings Index slipped five points last month to 37.7 - a sign residential construction is just bouncing along bottom". The ABI is primarily for non-residential construction.

I'm not trying to pick on or embarrass any particular publication or blogger. But it helps to know your sources. And I could be wrong about prices; we will know when the October and November data is released (a six month wait!)

Best to all. Now back to my regular posts ...

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