In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, June 25, 2012

Home Sales Reports: What Matters

by Calculated Risk on 6/25/2012 12:18:00 PM

After the existing home sales report for May was released last week, I saw several cautionary comments focused on the decline in sales in May (from 4.62 million in April to 4.55 million in May). The key number in the existing home sales report is not sales, but inventory. It is visible inventory that impacts prices (although the "shadow" inventory will keep prices from rising).

When we look at sales for existing homes, the focus should be on the composition between conventional and distressed. Total sales are probably close to the normal level of turnover, but the composition of sales is far from normal - sales are still heavily distressed sales. Over time, existing home sales will probably settle around 5 million per year, but the percentage of distressed sales will eventually decline. Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. Look at inventory and the percent of conventional sales.

However, for the new home sales report, the key number is sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts).

It might be hard to believe, but earlier this year there was a debate on whether housing had bottomed. That debate is over - clearly new home sales have bottomed – and the debate is now about the strength of the recovery. Although sales are still historically very weak, sales are up 35% from the low, and up about 24% from the May 2010 through September 2011 average.

Some people think housing will recover rapidly to the 1.2+ million rate we saw in 2004 and 2005. I think that is incorrect for two reasons. First, I think the recovery will be sluggish - 2012 will probably be the third worst year ever. Second, the 1.2 million in annual sales was due to an increasing homeownership rate and speculative buying. With a stable homeownerhip rate, and little speculative buying, sales will probably only rise to around 800 thousand at full recovery.

With existing home sales around 5 million per year, and new home sales around 800 thousand per year, the “distressing gap” in the graph below will be closed.

Distressing GapClick on graph for larger image in graph gallery.

This "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through May. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven't been able to compete with the low prices of all the foreclosed properties.

This gap will eventually close, but it will probably take a number of years.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

New Home Sales increase in May to 369,000 Annual Rate
New Home Sales graphs

New Home Sales increase in May to 369,000 Annual Rate

by Calculated Risk on 6/25/2012 10:00:00 AM

The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 369 thousand. This was up from 343 thousand SAAR in April. Sales in February and March were revised up.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Sales of new single-family houses in May 2012 were at a seasonally adjusted annual rate of 369,000 ... 7.6 percent above the revised April rate of 343,000 and is 19.8 percent above the May 2011 estimate of 308,000.
New Home SalesClick on graph for larger image in graph gallery.

The second graph shows New Home Months of Supply.

Months of supply decreased to 4.7 in May from 5.0 in April.

The all time record was 12.1 months of supply in January 2009.

New Home Sales, Months of Supply This is now in the normal range (less than 6 months supply is normal).
The seasonally adjusted estimate of new houses for sale at the end of May was 145,000. This represents a supply of 4.7 months at the current sales rate.
On inventory, according to the Census Bureau:
"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."
Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

New Home Sales, InventoryThis graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was at a record low 43,000 units in May. The combined total of completed and under construction is at the lowest level since this series started.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In May 2012 (red column), 35 thousand new homes were sold (NSA). Last year only 28 thousand homes were sold in May. This was the fourth weakest May since this data has been tracked. The high for May was 120 thousand in 2005.

New Home Sales, NSAEven though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 353 thousand SAAR over the first 5 months of 2012, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too. This was a very solid report and above the consensus forecast.

Chicago Fed: Economic growth slower in May

by Calculated Risk on 6/25/2012 08:40:00 AM

The Chicago Fed released the national activity index (a composite index of other indicators): Index shows slower economic growth in May

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.45 in May from +0.08 in April. ...

The index’s three-month moving average, CFNAI-MA3, decreased from –0.13 in April to –0.34 in May—its third consecutive reading below zero and its lowest value since June 2011. May’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.
This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed National Activity Index Click on graph for larger image.

This suggests growth was below trend in May.

According to the Chicago Fed:
A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Sunday, June 24, 2012

Look Ahead: New Home Sales

by Calculated Risk on 6/24/2012 10:25:00 PM

The key report tomorrow will be new home sales.

• At 8:30 AM ET on Monday, 8:30 AM: The Chicago Fed National Activity Index for May will be released. This is a composite index of other data.

• At 10:00 AM, The Census Bureau will release New Home Sales for May. The consensus is for an increase in sales to 350 thousand Seasonally Adjusted Annual Rate (SAAR) in May from 343 thousand in April.

• At the 10:30 AM, the Dallas Fed Manufacturing Survey for June will be released. The consensus is for 0.0 for the general business activity index, up from -5.1 in May. The regional surveys have been disappointing in June.

The Asian markets are mostly red tonight. The Nikkei is down slightly, and the Shanghai Composite is down 0.5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 futures are down about 8, and Dow futures are down 50.

Oil: WTI futures are up to $80.09 (this is down from $109.77 in February) and Brent is up to $91.90 per barrel.

Summary for Week ending June 22nd
Schedule for Week of June 24th For the monthly economic question contest (four more questions for June):

DOT: Vehicle Miles Driven decreased 0.4% in April

by Calculated Risk on 6/24/2012 07:21:00 PM

The Department of Transportation (DOT) reported last week:

Travel on all roads and streets changed by -0.4% (-1.0 billion vehicle miles) for April 2012 as compared with April 2011. Travel for the month is estimated to be 247.2 billion vehicle miles.
The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is mostly moving sideways.

Vehicle Miles Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 53 months - and still counting.

The second graph shows the year-over-year change from the same month in the previous year.

Vehicle Miles Driven YoY Gasoline prices peaked in April at close to $4.00 per gallon, and that was higher than the $3.85 per gallon drivers paid in April 2011 - so it makes sense that driving was off a little year-over-year.

Gasoline prices were down in May to an average of $3.79 per gallon according to the EIA. Last year, prices in May averaged $3.96 per gallon, so I'd expect miles driven to up year-over-year in May.

However gasoline prices is just part of the story. The lack of growth in miles driven over the last 4+ years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), and also the aging of the overall population. Census data shows that gasoline demand peaks around age 50, and then starts to decline - so many "baby boomers" are probably driving less now.

Summary for Week ending June 22nd
Schedule for Week of June 24th