Hope springs eternal: talk that housing has bottomed

[ASH]

I'm not a trader, but this sounds like an opportunity for somebody?

NEW YORK (CNNMoney.com) -- Has the housing market finally hit bottom? It's probably too soon to say -- but Wall Street sure seems to think so.

The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3%

This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders -- it is up more than 40% compared to about 20% for the S&P 500.

[GRG55]

Re: Hope springs eternal: talk that housing has bottomed

I'm not a trader, but this sounds like an opportunity for somebody?

NEW YORK (CNNMoney.com) -- Has the housing market finally hit bottom? It's probably too soon to say -- but Wall Street sure seems to think so.

The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3%

This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders -- it is up more than 40% compared to about 20% for the S&P 500.

I seem to recall reading somewhere that when a bank forecloses, and the title transfers, the system counts that as a house sale...

[Munger]

Re: Hope springs eternal: talk that housing has bottomed

I'm not a trader, but this sounds like an opportunity for somebody?

NEW YORK (CNNMoney.com) -- Has the housing market finally hit bottom? It's probably too soon to say -- but Wall Street sure seems to think so.

The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3%

This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders -- it is up more than 40% compared to about 20% for the S&P 500.

Agreed. Ritholtz has a thorough takedown of the ridiculousness of using this stat as a sign that housing has "bottomed" by people who should know better (the WSJ) and outright liars (NAR):

Its March, and that means its time for our favorite annual mainstream media math mess up: The February Existing Home Sales errata.

As previously discussed, Home Sales are highly seasonal. Anyone with kids tries to avoid disrupting their school year when possible. And so, the ideal time to move into a new town (and school district) is prior to the start of the new school year in September. That factor, along with other annual holiday activity, explains the annual rhythm of the existing home sales.

January is the worst month of the year for sales. From that low point, sales improve gradually for each of the next 6 months. They plateau over July and August, and then began heading down until December. This occurs year after year.

For those people who actually want to understand the state of the Housing market, you have two options that avoid the cyclical seasonality: 1) You use year over year data. This removes the seasonal patterns by comparing January to January, June to June, etc. And 2) Compare non seasonably adjusted monthly data over the course of multiple years.

Since the market peaked in 2005, we have been in a strong downtrend. Prices have fallen about 27% nationally, and units sales are off about 30% from the highs of over 7 million annual sales in 20056.

There was one bright spot in the Housing data: Housing is now falling at a decelerating level. While year over year prices are still dropping double digits, unit sales are falling at a slower pace. Housing sales are getting worse, just not quite as quickly. The second derivative improvement suggests that we may be nearing a point where the unit sales may stop dropping. But that does not mean we are at a bottom yet, and it certainly does not imply a turnaround is at hand.

Let’s take a quick look at two mainstream articles that have gotten this wrong: Today’s Investor Business Daily, and last years Wall Street Journal.
IBD:

Sales of previously owned homes unexpectedly rebounded in February from January’s record low, the latest evidence that housing — and the overall economy — may finally be hitting a bottom.

I count 3 major errors in that sentence: “unexpectedly,” “housing may finally be hitting a bottom” and “the overall economy [may finally be hitting a bottom}”
The data does not show that Housing is hitting a bottom, it only shows that it is falling at a slower pace. Just because the parachute has deployed does not mean you are on terra firma.

As to the overall economy bottoming, not only is there no evidence of that, but the leading indicators (ECRI, LEI, etc) all suggest the opposite: The economy is likely to get worse before it gets better. IBD is proferring an opinion, not facts — and its an unsupported opinion at that.

Last, here’s why the word “unexpectedly” is wrong: The people who follow housing closely expected an increase in February. It happens every year, as the chart I showed yesterday revealed. And the March data will improve over February data, and April over March, and May over April and June over May. That is the seasonal pattern, and it is only unexpected by those people who are unfamiliar with the data, and simply do not know better.

This especially applies to the NAR, who have been not just wrong, but wildly wrong the entire way down.

Let me also point out that the economists on “Wall Street who expected a dip” are the same folks that did not understand the credit driven housing boom, missed the peak in sales and prices, and failed to see the housing collapse. They have been generally clueless about the entire economy for the past 5 years.

That they were surprised by the same data they have consistently misunderstood and misinterpreted should be unexpected by no one at this point.

Last year, the WSJ had a front page article that got the seasonal data totally wrong: Wave of Foreclosures Drives Prices Lower, Lures Buyers:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest . . . On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.

No, the 2.9% was nothing special. It was the regular February increase from January.
~~~
What is so amazing about this is that we see the same errors every year. And given how wildly wrong the usual pundits have been on this issue, one would hope the MSM would be a touch more circumspect.

http://www.ritholtz.com/blog/2009/03...-sales-errata/

[ASH]

Re: Hope springs eternal: talk that housing has bottomed

Agreed. Ritholtz has a thorough takedown of the ridiculousness of using this stat as a sign that housing has "bottomed" by people who should know better (the WSJ) and outright liars (NAR):

http://www.ritholtz.com/blog/2009/03...-sales-errata/

Thanks for the reference. Would you suppose that this has created a good entry point for opening fresh bets against the housing construction industry? Say, sometime in mid-summer?

[Munger]

Re: Hope springs eternal: talk that housing has bottomed

Thanks for the reference. Would you suppose that this has created a good entry point for opening fresh bets against the housing construction industry? Say, sometime in mid-summer?

I am not so good on timing, but it does seem to me popular sentiment is that housing has "bottomed." This is not just from the WSJ and NAR, but from also from friends, family and acquaintances who have expressed their desires to jump on housing before it starts back up again. I would think that surely ... I mean surely there are enough savvy investors out there (of perhaps just people who've been reading Ritholtz for a while) for prices to be somewhat appropriate - but I tend to overestimate the savviness of market participants...

I don't think the appropriate bet is against construction though - Ritholtz and various others seem to think that it is likely that housing starts will truly bottom sometime this year (due pimarily to the fact that starts cannot go negative so cannot continue their current trend for long). However, just because starts bottom does NOT mean that prices will bottom. I think a lot of people get this confused: there is inventory for years sitting around and on the sidelines - all of the people who put their house on the market for a few months then pull it off because they don't like the offers they got.

I have a relative who bought a condo in FL in 2004, for example, who wants to sell but is "going to wait for prices to come back up" because he doesn't want to "take a loss." I told him that he will likely be sitting on it for 15 to 20 years and will still sell it for a loss in real terms. It was like he could not hear me.

Perhaps the suitable play is to arbitrage by going long on construction and short on residential prices. Then, if construction stabalizes and prices continue to drop (the most likely scenario) you win. If both pick up you break even. If construction picks up yet prices drop you win big. Only if construction deterioates faster than home prices would you lose. I haven't given this as much thought as it needs ... thoughts?

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

I seem to recall reading somewhere that when a bank forecloses, and the title transfers, the system counts that as a house sale...

No... trustee's deeds are excluded from sales.

In California it seems quite likely we are nearing a bottom in the harder hit markets like Sacramento or Riverside, while I think it is equally likely we still have a ways to go in the stronger markets like San Francisco or Orange County.

EJ's Geographic Regions Cascade explained this idea back in 2006 and it is clearly playing out exactly that way.

[don]

Re: Hope springs eternal: talk that housing has bottomed

We don't use the term Underwater around here. We like to think of it as market challenged and that will be made all better soon.

The NAR, in cooperation with Secretary Geithner.

[vanvaley1]

Re: Hope springs eternal: talk that housing has bottomed

In northern California the Sacramento area and valley may have hit a bottom. The bay area may not have done so yet. Buyers are 'out there'. Not sure if the 'bargain' aspect of pricing is the principal motivation...though it plays a large part...as much as the interest rates quoted for long term loans is the primary motivator.

If the public has bought into the idea that inflation is coming as well as an accompanying rise in interest rates, the gathering in of a low interest rate for a 'long' hold on a hard asset may result in more buying. Unfortunately, unless the buyers have some deep pockets and are financially secure, the axe of unemployment hanging over the head of 'first time' buyers in this economy is a bit menancing...even with parental support...and inhibiting some buyers from jumping in with both feet. There's no doubt they've got their pinkies in the pool though as the thought of owning a home rather than renting is a hereditary nesting instinct that's hard to resist. Something that appears affordable is enticing. But this 'pool' of potential 'qualified' buyers may be smaller than the optimists are hoping for.

[GRG55]

Re: Hope springs eternal: talk that housing has bottomed

Agreed. Ritholtz has a thorough takedown of the ridiculousness of using this stat as a sign that housing has "bottomed" by people who should know better (the WSJ) and outright liars (NAR):

http://www.ritholtz.com/blog/2009/03...-sales-errata/

Here's more on this from Ritholz today...

http://www.ritholtz.com/blog/
A parade of the mathematically innumerate business writers (and even worse headline writers!) continue to misread data. The latest evidence? New Home Sales.

After incorrectly reporting the Existing Home Sales, the mainstream media misread the Census department report of New Homes.

No, New Home Sales data did not improve. In fact, they were not only not positive, they were actually horrific. The year over year number was a terrible down 41%. Sales from this same period a year ago have nearly been halved.

Why did the media report this as positive? If you only read the headline number, you saw a positive datapoint: February was plus 4.7% over January.

To get the the facts, you need to read below the headline. In the present case, it wasn’t the seasonality factor that was confusing, it was the “90-percent confidence intervals” — or as it is more commonly known, the margin of error.

From the Census Bureau:

Sales of new one-family houses in February 2009 were at a seasonally adjusted annual rate of 337,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 4.7 percent (±18.3%)* above the revised January rate of 322,000, but is 41.1 percent (±7.9%) below the February 2008 estimate of 572,000.

The median sales price of new houses sold in February 2009 was $200,900; the average sales price was $251,000. The seasonally adjusted estimate of new houses for sale at the end of February was 330,000. This represents a supply of 12.2 months at the current sales rate.

Note that the month over month data at 4.7% — plus or minus 18.3% — is statistically insignificant. (i.e., meaningless). The reported data does not inform us if sales improved month-over-month or not. It is a range, from down -13.6% to plus 23%. Since “zero” is part of that range, we can draw no conclusion. As the Census Department itself notes, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”

The data does however, tell us that the year-over-year sales fell 41.1% plus or minus 7.9% gives us a range of -49% to -33.2%. The entire range is negative, therefore we can conclude sales fell year-over-year.

These are facts. This is data. This is how you interpret it.

Most of the MSM reports (WSJ, Marketwatch, Bloomberg) were simply wrong.

Not nuanced, not shaded, but 2+2=5 wrong.

Let me remind that many of these folks incorrectly misinformed you that Housing wasn’t getting worse in 2006, 2007 and 2008 — just as Home sales and prices went into an historic freefall. Now, these same folks are misinforming you that Housing has turned around and is improving. That is simply unsupported by the data.

(And don’t even ask about television — they simply read the wrong news. Here is a life lesson for you: Never believe news people who read teleprompters. They have no idea what they are doing, they are reading what someone else wrote. When it comes to data interpretation, they are quite literally clueless. Rely on news readers to your personal financial detriment).

The bottom line: Learn to interpret data correctly. Avoid using the people who cannot do so as primary news sources.

>

[cjppjc]

Re: Hope springs eternal: talk that housing has bottomed

Here's more on this from Ritholz today...>

I'm sure these were honest mistakes.

[Sharky]

Re: Hope springs eternal: talk that housing has bottomed

In northern California the Sacramento area and valley may have hit a bottom.

:eek: Based on what?

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

:eek: Based on what?

A number of these Central Valley markets in California are now off 50-70% and affordability based on current incomes is nearing record highs. Prices could deteriorate further if interest rates or unemployment rise significantly, but for now these harder hit areas have likely bottomed as they are affordable to first time buyers, and attractive to investors given current rents. Further, REO's have slowed and it is not unusual to see multiple offers on well priced properties (there is still inventory that is overpriced, and not selling).

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

A number of these Central Valley markets in California are now off 50-70% and affordability based on current incomes is nearing record highs. Prices could deteriorate further if interest rates or unemployment rise significantly, but for now these harder hit areas have likely bottomed as they are affordable to first time buyers, and attractive to investors given current rents. Further, REO's have slowed and it is not unusual to see multiple offers on well priced properties (there is still inventory that is overpriced, and not selling).

Increasing unemployment, inventory glut, and stagnant wages will kill prices even further everywhere you go. The rate at which the declines occur will slow but I think we've got another year or 2 before we hit bottom in CA at least.

[vanvaley1]

Re: Hope springs eternal: talk that housing has bottomed

A number of these Central Valley markets in California are now off 50-70% and affordability based on current incomes is nearing record highs. Prices could deteriorate further if interest rates or unemployment rise significantly, but for now these harder hit areas have likely bottomed as they are affordable to first time buyers, and attractive to investors given current rents. Further, REO's have slowed and it is not unusual to see multiple offers on well priced properties (there is still inventory that is overpriced, and not selling).

Even though we live in Gilroy, we have a rental and have represented buyers from an extended family in the Sacramento area and down the valley. We lived there for a chunk of our life. Plus we know friends and previous renters that have purchased in the valley when the market was 'hot' and prices seemed reasonable compared to Santa Clara. The problem with some buyers in that area isn't finding well priced properties, it's the fear of a continued slide in real estate prices and the worry of losing a job. There's other issues involved, of course, but those two are the prevalent ones. Two of the above mention folks have lost their jobs. One has lost his home.

Without lending loosing up substantially the economy in going to continue to be in a state of stress and so will potential buyers. Again, anecdotally, walking bout places...grocery store, mall, etc... the principal small talk is about individuals who have their backs to the wall cuz they lost a job, kids who can't find a job, etc. and not about real estate prices.

One market that seems to be holding on but is slipping slower than the other markets is Davis. UCD is there. This little college town offers a lot of reasons why prices slide less than the surrounding communities in the valley.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

Increasing unemployment, inventory glut, and stagnant wages will kill prices even further everywhere you go. The rate at which the declines occur will slow but I think we've got another year or 2 before we hit bottom in CA at least.

While that may be a rational thought for the state as a whole, it is also a gross generalization that does not take into account the reality that some areas are off 15% and others 70%. You are not likely to see much if any further correction in the areas that are off 70%.