by Calculated Risk on 8/24/2010 11:30:00 AM

Earlier the NAR released the existing home sales data for July; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

Click on graph for larger image in new window.

Although inventory increased from June 2010 to July 2010, inventory decreased 1.9% YoY in July. The slight year-over-year decline is probably because some sellers put their homes on the market in the Spring hoping to take advantage of the home buyer tax credit.

Note: Usually July is the peak month for inventory.

This level of inventory is especially bad news because the reported inventory is already historically very high, and the 12.5 months of supply in July is far above normal.

The months-of-supply will probably decline in August as sales rebound slightly and some sellers take their homes off the market, but I expect double digit months-of-supply for some time - and that will be a really bad sign for house prices ...

A normal housing market usually has under 6 months of supply. The following graph shows the relationship between supply and house prices (using Case-Shiller).

This graph show months of supply (through July 2010) and the annualized change in the Case-Shiller Composite 20 house price index (through May 2010).

Below 6 months of supply (blue line) house prices are typically rising (black line).

Above 6 or 7 months of supply, house prices are usually falling. This isn't perfect - it is just a guideline. Over the last year, there have been many programs aimed at supporting house prices, and house prices increased slightly even with higher than normal supply. However those programs have mostly ended.

This is a key reason why I expect house prices to fall further later this year as measured by the Case-Shiller and CoreLogic repeat sales house price indexes, although I don't expect huge declines like in 2008. My expectation is further price declines of 5% to 10% on the repeat sales indexes.

Notes: The Case-Shiller house price index for June will be reported next week (really a 3 month average of April, May and June). We really want to see prices for July - and those will not be reported until the end of September. And once again the July numbers will be a 3 month average. So it might take until the end of October to see the price declines that are already happening in the housing market.

by Calculated Risk on 8/24/2010 10:00:00 AM

The NAR reports: July Existing-Home Sales Fall as Expected but Prices Rise

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.
...
Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply at the current sales pace, up from an 8.9-month supply in June.

Click on graph for larger image in new window.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in July 2010 (3.83 million SAAR) were 27.2% lower than last month, and were 25.5% lower than July 2009 (5.14 million SAAR).

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 3.98 million in July from 3.89 million in June. The all time record high was 4.58 million homes for sale in July 2008.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory increasing in the spring and into the summer. I'll have more on inventory later ...

The last graph shows the 'months of supply' metric.

Months of supply increased to 12.5 months in July from 8.9 months in June. A normal market has under 6 months of supply, so this is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will start declining.

Ignore the median price! Double digit supply and lowest sales rate since 1996 are the key stories.

I'll have more soon.

by Calculated Risk on 8/24/2010 08:47:00 AM

Last night I linked to an excellent article on the recent FOMC meeting by Jon Hilsenrath at the WSJ: Fed Split on Move to Bolster Sluggish Economy

From Economist's View: "It is Time for Bernanke to Stake Out a Public Position"

Tim Duy writes:

I understand why his colleagues appreciate Bernanke’s management style, and why the media likes to ooze quiet praise on that style, but shouldn’t he be showing some leadership in the public as well? After all, the Federal Reserve, last time I checked, was not a University economics department. It is not the same. As we like to say in academics, the disputes are bitter because so little is at stake. Not so for the Fed. As an institution, it serves the public directly, and much, much is at stake. Perhaps it is time for Bernanke to stake out a public position. How exactly does he view the current economic situation in light of his work on Japan? For many of us, that work points to a much more aggressive policy stance. Is this the direction Bernanke wants to take? If so, why is he dragging his heels? If not, then what is different? This is the conversation I want to see him have with the public, on the record. And the sooner, the better.

Mark Thoma discusses the pros and cons of Bernanke staking out a position and concludes:

[W]hen there is considerable uncertainty due to disagreement on the FOMC, the Fed chair needs to use the influence bestowed upon him or her by the Fed's institutional arrangements, set a firm course for policy, and resolve the uncertainly. That might mean having lots of informal discussions with other members of the FOMC to make sure their views get a fair hearing, and some back and forth in the process, but at some point the Fed chair needs to step up and lead. Right now is one of those times.

Paul Krugman points on the "modern version of liquidationism" that has crept into the FOMC discussions: Hangover Theory At The Fed

My guess is the Hilsenrath article is paving the way for QE2.

by Calculated Risk on 8/23/2010 08:55:00 PM

Jon Hilsenrath at the WSJ discusses the debate at the August FOMC meeting: Fed Split on Move to Bolster Sluggish Economy

A few key points:

There is a clear split on the FOMC between those who want the Fed to be more aggressive - because of the high unemployment rate and low inflation - and those that want to take no further action.

Because of low mortgage rates and more refinancing, the NY Fed projected that the balance sheet would shrink by almost $400 billion by the end of 2011 if they Fed did nothing. Earlier this year the estimate was $200 billion.

According to Hilsenrath, Bernanke "is determined to avoid mistakes of past central bankers that created devastating bouts of deflation". And that probably means QE2 - it is probably just a matter of when and how long the FOMC waits.

Note: Existing home sales will be reported tomorrow morning. Don't miss Lawler's Existing Home Sales: “Consensus” vs. Likely for a preview!

by Calculated Risk on 8/23/2010 05:24:00 PM

CR Note: This is from economist Tom Lawler.

Given the various state/local MLS sales reports available for July, it seems INCREDIBLY likely that existing home sales last month were down a boatload from June’s pace. Every local realtor report I’ve seen showed a drop in sales from a year ago, with most showing YOY sales declines over 20%, and some reporting sales declines of over 40% from a year ago. (See last page for “raw” data) Yet amazingly the “consensus” forecast for existing home sales in July calls for a SAAR of 4.65-4.66 million, which would be down just 9.3-9.5% from last July’s seasonally adjusted pace. Of course, since this July had one fewer business day than last July, that would imply a larger YOY decline in unadjusted sales, but only to about 10.5-10.7%.

With so many state and/or local MLS publicly reporting YOY sales declines massively higher than that, how can the “consensus” be as high as it is?

Click on graph for larger image in new window.

Even if an economist were willing to put out a forecast for existing home sales, but were unwilling to actually “do the work” in compiling local sales data, one would think that that economist would look at the pending home sales index – which plunged by 29.9% on a seasonally adjusted basis from April to May, and then fell by another 2.6% from May to June! How would these drops be consistent with a monthly seasonally adjusted decline of just 13.2% - 13.4%? Well, er, uh … they aren’t! One forecaster (no names!), after hearing about the local sales data, suggested that the NAR “just won’t” publish a sales number that low, and will probably “smooth” the number over the next several months!!! I very much doubt that!!!

So … where does the “consensus” come from, and why does it appear to be so far off?

Well, as best as I can determine A LOT of the economists surveyed for various “consensus” forecasts often don’t really know much about many of the statistics they are asked to project, but are still quite willing to be in such surveys. In the case of home sales, very few track local sales data, but surprising quite a few also don’t look at pending sales either! And for some others that do, they are often reluctant to project “really big” changes – they don’t feel comfortable being an “outlier” – and figure that if they get the direction right, well, THAT’S pretty good!

Below is a table showing the YOY % decline reported by various realtor organization/MLS/others. Where state realtor associations and/or other organizations show a full-state total, I don’t show individual areas separately. Note that for some areas the YOY growth reflects a preliminary count for this July vs. a final count for last July, and I try to take this into account in coming up with my own forecast.

Right now all of the incoming regional data in my view appear to be consistent with the NAR reporting a seasonally adjusted annual rate for existing home sales in July of 3.95 million. I’ve been a bit uncomfortable about the forecast because it is so far below consensus; however, that’s what the incoming data suggest!

If existing home sales come in as I expect, existing home sales (unadjusted) in the first seven months of 2010 will be up about 7.6% [compared to] sales in the first seven months of 2009.

August sales will probably come in pretty weak as well, however; while my early read suggests that the NAR’s pending home sales index will show a seasonally adjusted gain from June to July of around 5%, that would still leave the index about 19% below last July’s level.

So… what did we learn from the home buyer tax credit? (1) “if you pay them, they will come”; (2) if there is a deadline, they will rush to meet the deadline; and (3) when the deadline is over, sales will fall WAY below trend!

Some folks still like the tax credit, because (a) it helped “stabilize” home prices (short term it does appear to have); (b) it would help reduce excess inventories (for new home sales it did, but existing inventories have kept increasing); and (c) it would “generate interest” in the housing sector. On the latter score, the stabilization of home prices and reports of earlier strong sales DID appear to generate interest in housing – but mainly from previously “discouraged” sellers who decided to put their homes on the market (in many cases again) – which appears to be the major reason why active listings have INCREASED despite the tax-credit “goose” to sales!

YOY % Change, Home Sales, July 2010
.Alabama	Birmingham	-30.0%	Huntsville	-32.5%
.Arizona	Phoenix	-21.9%	Tucson	-33.1%
.California	Whole State (new and resale)	-21.9%
.Colorado	Denver	-26.6%	Colorado Springs	-23.4%
.Connecticut	Hartford	-49.1%
. DC	All of DC	-18.4%
.Florida	Northeast Florida	-12.8%	Mid-Florida	-10.5%	Southeast Florida	-9.1%
	Pensacola	-29.2%	Naples	-20.9%
.Hawaii	Oahu	-3.4%
.Idaho	Ada County	-24.0%
.Illinois	Chicago Metro	-25.0%	Peoria	-36.8%
.Indiana	Whole State	-28.8%
.Iowa	Whole State	-43.8%
.Kansas	Kansas City	-36.9%	Wichita	-34.0%
.Kentucky	Louisville	-22.0%	Lexington	-32.4%
.Maryland	Whole State	-17.1%
.Massachusetts	Whole State	-31.6%
.Michigan	Detroit metro	-19.4%	Ann Arbor	-17.0%	Kalamazoo	-36.4%
.Minnesota	Whole State	-40.8%
.Nebraska	Omaha	-46.1%
.Nevada	Vegas	-18.6%	Reno	-24.8%
.New Hampshire	Whole State	-32.4%
.New Mexico	Albuquerque	-27.1%
.New York	Long Island	-31.6%	Greater Hudson Valley	-37.2%	Dutchess County	-36.8%
.North Carolina	Charlotte	-11.5%	Triangle	-31.0%	Fayetteville	-20.9%
	Asheville	-25.5%	Wilmington	-19.8%
.Ohio	Toledo	-28.1%	Akron	-26.0%
.Oklahoma	Oklahoma City	-33.3%
.Oregon	Portland	-29.0%
.Pennsylvania	Pittsburgh	-6.0%	Lehigh Valley	-41.7%
.South Carolina	Whole State	-16.1%
.Tennessee	Nashville	-23.1%	Memphis	-28.5%	Knoxville	-25.3%
.Texas	Whole State	-25.4%
.Virginia	Greater NoVa	-19.7%	Hampton Roads	-20.7%	Roanoke Valley	-36.6%
.Washington	NW Washington	-18.7%
.Wisconsin	South Central Wisconsin	-43.1%	Milwaukee metro	-48.6%

CR Note: This is from economist Tom Lawler.