Matrix Blog

The Economist magazine has been bearish on housing since at least 2002. The current issue is no exception.

[My apologies in advance to those who do not have a subscription, but its well worth getting one. -ed]

The current cover story features the image a bear: Despite the rattled markets, the world economy is still relatively strong. [Just don’t bet your house on it [The Economist]](http://www.economist.com/opinion/displayStory.cfm?Story_ID=6975848).

They seem to be less concerned with the equities markets and more concerned about the housing market in the US and its global implications.

By borrowing against the surging prices of their homes, American consumers have been able to keep on spending. The housing market is already coming off the boil. If prices merely flatten, the economy could slow sharply as consumer spending and construction are squeezed. If house prices fall as a result of higher bond yields, the American economy could even dip into recession. Less spending and more saving is just what America needs to reduce its current-account deficit, but for American households used to years of plenty it will hurt.

My beef with the Economist, is their love affair with the rental market and its relationship to owner occupied housing. The rental equivalent of owner occupancy, because it is less than the cost of housing, portends certain doom from their view point. This has always struck me as overly simplistic. For many reasons, an investment property is rarely of the same quality or caliber as an owner occupied property and reflects different motivations and buyers. This is the same flawed rationale that includes the rental equivalent of housing in our CPI stats rather than using actual sales stats to represent the housing market. Rental markets have not behaved like the owner occupied markets have during this recent housing boom.

I think its more directly related to affordability. Low mortgage rates have been the key driver of this boom and any other factors are minor in comparison.

In fact their focus on this point has gotten to be the source of some rather dark humor in economics circles. However, the tone of this article seems to back-pedal this 5 year argument a bit, providing both a hard and soft landing scenario.

Here’s a sample of articles for each of the past several years that repeatedly show their view point that the American housing market is headed for a hard landing.

• 2002 [The Economist’s new global house-price index confirms that spring is in the air. But will the housing booms in America, Britain and elsewhere end in bust?](http://www.economist.com/displaystory.cfm?story_id=1057057)

• 2003 [Is another bubble about to burst?](http://www.economist.com/displaystory.cfm?story_id=1794899)

• 2004 [Spending is increasingly being driven by higher asset values rather than higher incomes.](http://www.economist.com/displaystory.cfm?story_id=3219563)

• 2005 [The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.](http://www.economist.com/displaystory.cfm?story_id=4079027)

• 2006 [Homebuyers can lose money even if house prices do not fall.](http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_ID=5587046&subjectid=2764524)

The current bear article seems to be calling for the Fed to continue rate increases because for the world, it is best that America slows today. Later, imbalances will loom even larger. The Economist seems to be saying that inaction by the Fed now would raise the odds significantly that we could see a recession in 2007 as a result.

I contend that the slowing housing market has not been fully represented in the current array of economic stats, and when it does, a recession is already possible without anymore increases by the Fed.

Lets hope that Bernanke doesn’t read The Economist.

Tags: Pending Home Sale Index, Ben Bernanke, PHSI, NAR, National Association of Realtors

Comments Off on To The The Economist, The Housing Outlook Bears All

To their credit, the FDIC writes in a good summary on the economy and some possible concerns for a recession in [FYI: An Update on Emerging Issues in Banking: Scenarios for the Next U.S. Recession [FDIC]](http://www.fdic.gov/bank/analytical/fyi/2006/032306fyi.html)

Its a surprisingly good narrative on banking as it relates to housing as these industries go hand-in-hand in estimating when we may see the next recession.

Housing

The risk of a housing slowdown is another area of concern going forward. The recent housing boom has been unprecedented in modern U.S. history.2 It has been suggested by many analysts that the housing boom has been a significant contributor to gains in consumer spending in recent years. Indeed, a number of the FDIC roundtable panelists pointed to the apparent connection between rising real estate wealth during the past four years and the sustained strength in consumer spending during that period. Because consumer spending accounts for over two-thirds of U.S. economic activity, any shock to consumer spending, such as that which might be caused by a housing slowdown, is a concern to overall economic growth.

Housing analysts are in disagreement as to whether or not recent signs point to a moderation in housing activity or the beginning of a more significant correction. Currently, inventories of unsold homes and sales volumes are among the indicators pointing to a housing slowdown. Inventories of unsold existing homes rose from under four months of supply at current sales volume in early 2005 to 5.3 months of supply as of January 2006. Meanwhile, the pace of existing home sales has been trending lower since last summer. A clear trend in the direction of home sales and prices may not be evident until the completion of the peak spring and summer selling season later this year.

Many analysts argue that home prices in the hottest coastal markets, especially in the Northeast and California, could be poised to decline in the near future. For example, PMI Mortgage Insurance Company analysts place essentially even odds that home prices will decline during the next two years in a dozen cities in California and the Northeast.4 Should home prices either stop rising or begin to fall in these areas, local banks and thrifts would need to look to non-residential loans to support revenue growth.

Banking

There are concerns, however, that changes in the structure of mortgage lending could pose new risks to housing. These changes are most evident in the rising popularity of interest-only and payment-option mortgages, which allow borrowers to afford more expensive homes relative to their income, but which also increase variability in borrower payments and loan balances.

Credit

10 percent of U.S. households may be at heightened risk of credit problems in the current environment. This group mainly includes households that gained access to mortgage credit for the first time during the recent expansion of subprime and innovative mortgage loan programs.

Tags: Pending Home Sale Index, FDIC, Sub-Prime, PHSI, NAR, National Association of Realtors

Comments Off on Recession Scenarios And Other Observations To Bank On From FDIC

I wonder if the NAR, in some respects is regretting the housing boom. With all the income the industry has generated, it has also generated attention that probably isn’t beneficial to the trade group in the long run. Commissions, multiple listing service data, statistical methodology, believability as a resource, etc.

In the article [NAR: Pittsburgh Condo Deal Puts Banks into Residential Real Estate [RISMedia]](http://rismedia.com/index.php/article/articleview/13611/1/1/) the National Association of Realtors contends that banks are getting into real estate despite regulations that prohibit this activity.

In a letter delivered last week to the chief counsel of the Office of the Comptroller of the Currency, the president of the National Association of Realtors responded to the recent defense by the OCC of its approvals permitting national banks to engage in new real estate and commercial activities.

[They are also fighting Wal-Mart Bank’s application Because It Mixes Banking and Commerce [NAR].](http://www.realtor.org/PublicAffairsWeb.nsf/Pages/REOpposeBanksandCommerce) [They] will actively oppose the application for federal deposit insurance by Wal-Mart Bank, a proposed Industrial Loan Company (ILC) headquartered in Salt Lake City, and requested the opportunity to testify at upcoming hearings. The Federal Deposit Insurance Corp. has scheduled public hearings in April in the Washington, D.C., area, and the Kansas City, Mo., metro area on Wal-Mart Bank’s application.

Since 2000, Realtors have opposed a pending regulation by the Federal Reserve and Treasury that would allow national banks to broker real estate and perform property management. Since 2002, Congress has blocked the regulation. It seems to be a matter of time before banks will have this option since every year this debate comes before Congress.

The NAR contends that by banks entering the real estate business, the safety and soundness of the banking system is at risk since it is a speculative investment. The idea posed is the the concentration of assets would be higher making the failure of one bank more critical to the financial system. [NAR contends that the top 5 banks hold 45% of industry assets [Mortgage News Daily]](http://www.mortgagenewsdaily.com/12212005_RE_Bank_Competitiveness.asp) and has a series of arguements why banks are a higher risk.

_Number of firms:_
Real estate – 98,000 to over 200,000 (depending on who is counting)
Banks – 8,000 to 10,000.

_Barriers to Entry:_
Real estate – usually less than $1,000 and a few weeks of studying time to obtain a license and enter the field;
Banking – large capital requirement.

_Taxpayer Risk and Historic Experience of Government Bailout:_
Real estate – none;
Banking – yes (historic evidence, S&L failures and RTC bailout.)

_Influence of Foreign Governments:_
Real estate – no;
Banking – large multinational corporations are subject to foreign government regulation.

_Consumer Data on Buying Habits and Possibility of Price Discrimination:_
Real estate – none;
Banking, -vast, often based on data mining of credit card purchase information.

_Cooperation with Competitors in the Sale of Products:_
Real Estate – yes, through MLS;
Banking – no.

_Degree of Regulation:_
Real Estate – minimal;
Banking – heavy.

_Social Promotion of Entrepreneurship, Women and Minorities, and Small Business:_
Real Estate – yes in every category;
Banking – yes in every category bus assessment is limited to owners of community banks.

Here’s a blog post on this issue from a banking perspective: [ALERT: NAR’s New Threat from Mega-Banks – There they go again? There who goes again? [Inman]](http://www.inman.com/blogger/2006/02/alert-nars-new-threat-from-mega-banks.aspx) All I read into this most recent industry warning by the NAR is the voice of a threatened professional association that insists upon denying the consumer the choice of any other ownership structure for real estate brokerage other than the status quo – Realtor-centric. Drill down and you will find a true fear that if banks were to be in the real estate brokerage business about the last professional association they would insist their operators belong to would be the NAR.

This is all very interesting and well-laid out on both sides except:

==> ==> ==> ==> ==> ==> ==> ==> ==> ==> ==> ==>
NAR says that banks are not a good idea because they place a higher risk on the banking system by being more speculative.

< == <== <== <== <== <== <== <== <== <== <== <==
Banks (more than just the included post on Inman) say that NAR has a monopoly on home sales and keeping banks out of the process only extends broker control further.

Confused? Be glad you are not a regulator. Its tough to see through the spin. At the end of all this, I think the banking lobby will win out over the broker lobby. They seem to have the OCC and momentum on their side.

Tags: Pending Home Sale Index, PHSI, Bailout Nation, NAR, National Association of Realtors

1 Comment

The housing market is now being characterized as a super tanker or large ship.

I was humored by the [Lereah changes metaphor – Real estate is now a ship, not a balloon [Northern NJ RE Bubble Blog]](http://nnjbubble.blogspot.com/2006/02/lereah-changes-metaphor-real-estate-is.html) post which takes a [quote from the NAR Chief Economist [Reuters]](http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2006-02-01T154147Z_01_N01243327_RTRIDST_0_FINANCIAL-PENDING-HOMESALES-UPDATE-1.XML) who says:

Changes in the overall direction of the housing market are akin to a large ship making course corrections — it takes some time for the driving factors to materialize as a change in the sales level.

This comes after his recent pronouncement that we are in a [housing expansion [Matrix]](http://matrix.millersamuel.com/?p=230). However, that description did not gain traction, and in fact did more damage to NAR credibility trying to be the [lighthouse in the dark and stormy night [Matrix]](http://matrix.millersamuel.com/?p=356). [Sorry about that]

Actually I am not sure that the ship analogy is accurate. I don’t think that housing markets always take long periods of time to change as the ship comparison would suggest. However, I think it does take a long time for market participants to accept change, especially when the market has been largely unchanged for several years.

Tags: Pending Home Sale Index, PHSI, NAR, National Association of Realtors

1 Comment

In George Chamberlin’s column [By George: Words for Investors [North County Times]](http://www.nctimes.com/articles/2005/12/11/business/chamberlin/19_31_2212_10_05.txt) in San Diego provides some plain language to the discussion of the current state of the real estate market. He is a TV and radio commentator.

• After the Fed release its quarterly household wealth report, CNBC ran alerts that Americans were deeper in debt than ever before but the report said that net worth rose to a record level.

• Foreclosures are lower today than a year ago

• As far as a slowdown in sales, the California Association of Realtors said it took 34 days to sell a house in October. A year ago it took 33 days.

• The NAR report that pending home sales dropped 3.3% in November and that was reported as a sign of collapse yet in California, they rose 0.8% indicating that real estate is local.

• The UCLA Anderson Forecast calls for a crash of Southern CA real estate prices over the next few years yet excludes San Diego county from their stats.

• Wall Street has a vested interest in seeing housing slide to prompt more people to return to the financial markets.

Although this commentary is California-orientated and I am not an advocate for the real estate industry, the lesson here is for the media to fairly interpret the information released.

Tags: CNBC, Pending Home Sale Index, PHSI, Radio, NAR, National Association of Realtors

Comments Off on Bubble Challenge: Just The Facts

The NAR released its [Pending Home Sale Index [NAR]](http://www.realtor.org/publicaffairsweb.nsf/Pages/OctPHS2005?OpenDocument) which showed that the real estate market was easing. “The National Association of Realtors said its index of pending home sales, based on contracts signed in October, declined 3.2% from September to a seasonally adjusted 123.8. The reading was down 3.3% from a year earlier. The index was 100 in 2001.”

Positive economic news seemed to offset the weak housing news. Productivity fell, suggesting the inflation pressure is weakening. The post [NAR stuck on spin cycle [Property Grunt]](http://propertygrunt.blogspot.com/2005/12/nar-stuck-on-spin-cycle.html) makes a strong case that the NAR phrasing of a soft landing does not correlate to the data that they released. Its shows how much spin we are subject to.

[NAR Pending Sale Index [pdf]](http://www.realtor.org/Research.nsf/files/PHS0510.pdf/$FILE/PHS0510.pdf)

Note: “The Pending Home Sales Index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 closely parallels the level of closed existing-home sales in the following two months.”

Tags: Pending Home Sale Index, PHSI, NAR, National Association of Realtors

Comments Off on NAR Says We Cooled It: Pending Home Sales Index Dropped

It depends on who you listen to…

Today the US government reported [a record number of new-home sales [MarketWatch]](http://www.marketwatch.com/news/story.asp?guid=%7B4EC23421%2D171A%2D40BF%2DB72F%2D9CFFCEBF35D3%7D&siteid=mktw) which seemingly contradicted [yesterday’s release of existing home sales [WSJ]](http://online.wsj.com/article/SB113318905850108049.html?mod=djemTAR) by NAR.

This has brought further debate to the housing market interpretation. The media seems to be betting on [a burst of the bubble [MarketWatch]](http://www.marketwatch.com/news/story.asp?g=37D276C5905045B9B001A0BF686A184C&siteid=mktw&dist=nbk) while the NAR seems confident in a soft landing next year.

The MarketWatch article suggests three paths are possible:

1. “any further acceleration in housing could fuel a spurt in consumer spending, but at the risk of forcing the Federal Reserve to continue raising interest rates beyond what’s now expected.”

2. “a collapse in housing, if it were to happen, could slow job growth, shatter consumer confidence and lead to a significant retrenching in their spending.”

3. “a gradual decline in housing would likely keep the U.S. economy growing at a slower but healthier pace, allowing the Fed to conclude its rate hikes. Most economists expect this third option to come to pass.“

“Being the first to call the end of the housing boom has become a favorite parlor game for economy watchers. As evidence, they’ve gleefully pointed to the reduction in mortgage applications, to an increase in unsold homes on the market, to a slowing in home price appreciation and to a drop in home-builders’ confidence.”

This is interesting because the existing home report and the new-home report are based on [a different data set and mean very different things in a changing market [Matrix].](http://matrix.millersamuel.com/?p=195)

Existing home sales lag the market by 30 to 60 days or more because they reflect closed sales. New home sale stats are based on contracts.

So if there is a change in the market, new home sales would be considered the leading indicator. However, its reliability should be tempered by the fact that new home sales represent about 10% of existing home sales.

In other economic stats released today:

At the same time, [consumer confidence spiked [Forbes.com]](http://www.forbes.com/business/manufacturing/feeds/ap/2005/11/29/ap2359063.html) reversing a 2-month slide.

[US Factory orders rose 3.4% and durable goods orders posted strong gains as well. [ABCNews]](http://abcnews.go.com/Business/wireStory?id=1356003)

Tags: Pending Home Sale Index, Forbes, PHSI, NAR, National Association of Realtors

Comments Off on New Housing Data: Is The Glass Half Empty Or Half Full?

Source: CNN/Money

[The NAR released their 3rd quarter report this week showing continued strength in the housing market [CNN].](http://money.cnn.com/2005/11/14/real_estate/buying_selling/prices_going_south/) The CNN article is focused on an anticipated slowdown.

The clues the author presents are:

• Builder pessimism
  
• New-home sales declining
  
• Developers have to drop prices to move inventory.
  
• Inventories rising
  
• Sell times are up
  

The takeaway with this article is basically that without double digit, skyrocketing appreciation, the “party is over.” However, in the same breath, the article concludes that we will see flat to 5% annual gains through 2007. The URL to the article is “prices going south.” That seems to infer falling prices doesn’t it?

“Regionally, the South recorded the slimmest gain, at 7.7 percent, while the West had the highest – 18.8 percent. The Midwest (13.1 percent) trailed the Northeast (13.2 percent) slightly for second place”

[Chart of 147 markets [CNN/Money].](http://money.cnn.com/pf/features/lists/nar_3q05/index.html#table)

Tags: Pending Home Sale Index, PHSI, NAR, National Association of Realtors

Comments Off on Depending How You Spin It, Good Housing Results Could Be Bad

I recently added [a “faux chart” to my weekly post [Curbed].](http://www.curbed.com/archives/2005/11/09/three_cents_worth_seller_reality_distortion.php#661) The numbers were perfectly aligned to illustrate a point that I wished to make. I had about 20 people comment on the post, and one of the anonymous responses (see below) got me thinking about the quality of data that is presented to the public.

Anonymous: “It is always amusing when some Wall Streeter treats real estate like stocks or bonds. Real estate is different from stocks and bonds. Prices aren’t transparent, “friction costs” (eg. brokerage, closing costs, etc.) are very high, and product isn’t easily compared. And you need a place to live. Does anyone actually know a person who sold their house/apartment in anticipation of the market falling, rented a place (or lived in the street), and subsequently bought the equivalent place for less money. I know several who messed that one up pretty badly (mostly Wall Street traders who confused their personal life with their professional life). Yes, real estate is cyclical, but it had maintained a pattern known as “higher highs / higher lows”. In other words it trends higher, although not necessarily in a straight line. Maybe you catch a dip if you are really really smart. But mostly you buy when you have to and sell when you have to. Real estate downturns are driven less by interest rates and more by job conditions in specific markets. Look at Denver after the telecommunications mergers, Houston after Enron, San Francisco after the tech bubble, and New York after the each Wall Street implosion. So much of the price data that the media latches onto is suspect. Small samples that are statistical garbage. Remember the old saying “lies, damn lies, and statistics”. If you can afford to buy, and find what you like, then buy. If not, rent or find another city. But get a life.”

If you think about it, with few exceptions, so much of the source data used by the media and consumer from the real estate market is from compromised resources within the real estate community. Then that news becomes a resource, and its a viscious (a bit melodramatic) cycle.

In other words, the stats are coming from people whose livlihood is dependent on how well the market does. I’m not suggesting that all stats are misleading. Some of the info is great, some is spun and some is presented naively. I am not sure how the consumer can tell the difference.

Its important that readers understand the source of the information they are relying on and take that with a grain of salt. I guess the moral of the story is “don’t believe everything you read.”

Here are some seemingly random thoughts:

• The National Association of Realtors (NAR) is a powerful trade group who mission is to promote the real estate brokerage profession. They are the primary source of key housing stats like existing home sales and pending home sales indexes. They produce some interesting stuff we all rely on, but by definition, its spin.
  

• Local MLS and real estate brokers are spokesman for the market: Same as NAR but on a local level. In a changing market, [they tend to go on the offensive and use historical trends [Matrix]](http://matrix.millersamuel.com/?p=170) as support for the argument that the market is currently “strong.”
  

• The use of [“Chief Economists” [Matrix]](http://matrix.millersamuel.com/?p=89) for these trade groups and companies who are there only to “spin”, under the guise that their position is prestigious, above the fray, and are providing a neutral opinion.
  

• The production of market reports whose stats are “cherry-picked” to show the most extreme results.

• Market reports updated in small timelines, like monthly, using a small data set. They bombard the consumer with results of diluted reliability. For example, when a specific market area, like a neighborhood is based on a few dozen sales and compared to a prior month, how can that be useful?

• The misuse of statistics to grab a headline. During the rising market, we saw crazy growth numbers without drilling down to see what it was all about. The same is happening in a less-frenzied market, were the stats are being exagerated to show a sharp downturn.
  

• Press releases of studies done by a biased party to show how a weak aspect of the market is not really all that bad.
  

I guess you could say that I am currently in a “glass is half empty” mode.

Tags: Pending Home Sale Index, PHSI, NAR, National Association of Realtors

Comments Off on Rinse Lather Repeat: Filtering Out Dirty Data In A Changing Market

• [Weekly Mortgage Rate Trend Index (50/50 expectation for rising rates) [Bankrate.com]](http://www.bankrate.com/ust/static/rti.asp)
  

• [30-Year Mortgage Rate Trend (Rates seemed to crest this week) [Bankrate.com]](http://www.bankrate.com/brm/graphs/graph_trend.asp)
  

• [Weekly Mortgage Applications Survey (Apps increase 2.3%) [MBA]](http://www.mortgagebankers.org/news/2005/wk1109.asp)
  

• [Key Economic Indicators (a whole bunch of them) [EconEdLink]](http://www.econedlink.org/datalinks/#Fundsrate)
  

• [Charting Common National Data Series (Serious charting) [Economagic]](http://www.economagic.com/popular.htm)
  

• [Pending Home Sales Index (pdf) [NAR]](http://www.realtor.org/Research.nsf/files/PHSI.pdf/$FILE/PHSI.pdf)
  

Tags: Pending Home Sale Index, Bankrate.com, PHSI, NAR, National Association of Realtors

Comments Off on Week-ending Stats Fest Linkage

Since we are in a changing market, it is also important to look at price indicators that are closer to the point where the “meeting of the minds” occurs between buyers and sellers. As I indicated in a [prior post on Matrix](http://matrix.millersamuel.com/?p=195), the national housing stats for existing home sales (NAR) are based on closed sales and new home sales (Census) are based on contracts. The NAR also has an indicator based on contracts called the [Pending Home Sales Index or PHSI [PDF]](http://www.realtor.org/Research.nsf/files/PHS0509.pdf/$FILE/PHS0509.pdf/)

PHSI

Source: NAR

Pending sales eased from last month but was at its [second highest mark on record [RISMedia]](http://www.rismedia.com/index.php/article/articleview/12393/1/1/)

Whats really interesting about the stats is the difference between seasonally adjusted stats and the stats that were not seasonally adjusted. For example, the seasonally adjusted national numbers showed a 0.3% drop in contract prices while the unadjusted numbers showed a 12.7% drop. Quite a difference betweent the results. Annual changes were up 3.3% seasonally adjusted and up 2.7% unadjusted.

At the end of the day, these numbers tell us that contract prices, as a leading indicator, were slightly weaker nationwide compared to the prior month.

Tags: Pending Home Sale Index, Commerce Dept, Census, PHSI, NAR, National Association of Realtors

Comments Off on NAR Pending Home Sale Index Weakens, But Still Nearly At Record Levels

With the [drop in mortgage rates that started in early August](http://www.mortgagenewsdaily.com/972005_Mortgage_Rates.asp), it comes as no surprise that [mortgage applications are now starting to rise](http://money.cnn.com/2005/09/07/real_estate/mortgage_aps.reut/index.htm)

The next thought that comes to mind is whether or not home sales will follow. Sales activity seemed fairly brisk in New York, althought the [NAR’s Pending Home Sales Index [Note: PDF]](http://www.realtor.org/Research.nsf/files/PHS0507.pdf/$FILE/PHS0507.pdf) showed modest declines in all regions except the south. The idea here is that contracts are the better indicator of the current state of the real estate market. However, this is more of an informal survey from their members. It is still behind the market since they have only report through mid-July.

With Katrina and higher oil prices, it will be interesting to see what happens in September. I’m thinking good thoughts.

I will probably get a little annoyed if interpretation the the next round of housing data does not consider that August is usually one of the seasonally slowest times of the year for housing sales. Hence the infamous, seasonal adjustment should be applied. See [Lies, Damn Lies, And Government Statistics: Part I](http://matrix.millersamuel.com/?p=65)

One other thought is the idea of using mortgage applications in predicting home sales. There is an interesting article published from the Dallas Fed [Can Mortgage Application Help Predict Home Sales?[Note: PDF]](http://www.dallasfed.org/research/er/1996/er9604c.pdf) Its a bit dry but my sense is that the mortgage app data really lags too much to be an effective predictor of home sales without a lot of tweaking.

Tags: Pending Home Sale Index, Hurricane Katrina, PHSI, NAR, National Association of Realtors

Comments Off on Mortgage Apps Rise As Rates Fall: Will Home Sales Rise Too?