Jun232015
“Months of Supply” is worst indicator of housing market activity
The “months of supply” indicator has little or no predictive power and often gives a false impression of the strength or weakness of the real estate market.
The “months of supply” is a measure of market absorption, providing a reading of how fast homes are selling relative to the supply of inventory currently available. For example, if a market has 50 homes available for sale and sells 10 of them, it would take 5 months to sell the remainder if no additional inventory came to market.
The “months of supply” is supposed to be indicative of how aggressive buyers are relative to sellers. In theory, a market with a low months of supply would have greater buyer demand than one with a higher months of supply. As an indicator it’s supposed to signal imminent price increases and thereby the best time to buy a house.
Unfortunately, as an indicator of housing market activity, it’s a dismal failure that often predicts rallies and busts that don’t materialize. The only real value the indicator provides is as a tool for realtors to manipulate buyers into action by frightening them with the fear of missing a bargain or being priced out. In that regard it has tremendous value to realtors — for buyers, not so much.
Predicting Busts and Rallies
For an indicator to be useful, at least occasionally, it must foreshadow some economic event. Months of supply is supposed to indicate busts and rallies, but its track record is dismal. From 1960 to 1982, house prices rose steadily, but the months of supply indicator predicted 5 busts, including two major ones that didn’t materialize. Then in 1982-1984 when house prices really did decline in California, the months of supply indicator was signalling a rally. The same happened from 1991-1994 when the months of supply also indicated a rally that corresponded to falling prices in California.
So this indicator falsely signaled eight busts and incorrectly signaled two rallies during the only two previous instances of house prices declining anywhere in the United States. How much more wrong can this indicator be?
From 1987 to 1990, California inflated an epic house price bubble, yet the months of supply remained consistently above 6.
From 1991 to 1997, house prices steadily declined in California, yet the months of supply fell below six and stayed there for most of the 1992 to 1997 period.
Quite honestly, based on the above analysis, it’s hard to see where realtors came up with the idea that the months of supply indicates anything. If we assume realtors always lie to generate false urgency with buyers (a reasonable assumption), then perhaps this was developed as a completely erroneous piece of propaganda during the previous busts in California. This is a reasonable explanation because in any price decline, buyers see little reason to buy, and they have no urgency. It’s easy to imagine realtors coming up with the 6-month supply rule because that’s all they had to work with. It’s hard to say for sure because the currently-accepted interpretation clearly does not come from looking at the data.
Over the last 16 years, the data has been a bit more predictive, but it doesn’t balance at six-months like realtors say but at five months based on data. The “six-month balance” meme is a distortion of fact (lie) promoted by realtors so often it’s become accepted as truth. It’s not. See the data for yourself below.
With few exceptions over the last 15 years, whenever the moths of supply has been below 5, prices appreciated. When it’s between 5 and 6, prices were flat, and when it’s above 6 prices fell sharply.
The next time you read a report that touts the strength of the market based on months of inventory, recognize the source is a realtor trying to manipulate you and treat it accordingly.
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The featured house is fugly! And there’s not much you can do with that exterior. It’s Irvine houses like these that chase home shoppers into the arms of builders in the new communities.
I wonder how much it would cost to remove the exterior stonework and redo the front of this house so it didn’t look so bad?
When you see small 3/2s from 1971 command prices above $700K, the distorting effect of low mortgage rates is hard to deny.
Fed: May economic activity shows signs of slowdown
On Wednesday the final estimate of the first quarter GDP is expected to come in unchanged – a 0.2% contraction – owing to a number of factors including winter weather, the California port strike, and other issues.
In the meanwhile, early reports for the second quarter paint a mixed picture – according to the Chicago Federal Reserve, there was net improvement in May’s run of economic data but not much at least based on the national activity index which comes in at minus 0.17 vs a downward revised minus 0.19 in April.
The 3-month average is telling the same story of weakness, at minus 0.16 vs a revised minus 0.20 in April.
Much stronger payroll growth, at 280,000, was May’s highlight but the gain was offset by a 1 tenth tick higher in the unemployment rate to 5.5% which leaves the month’s total employment contribution to the index unchanged at plus 0.10.
Housing data has been mixed, with strong news on starts and but a slowing in sales and price growth.
Bring on QE4 right before I lock my rate!
Although rates rose back above 4% recently, I doubt we’ve seen the last sub-4% rate.
Homeownership is not a commodity that everyone can afford
With the housing market still in recovery from the recession, homeownership is not a commodity that everyone can afford. In fact, it is a luxury. Forbes writer, Erin Carlyle pointed out a housing forecast titled “What to Expect in the Second Half of 2015” that the homeownership rate in 2005 was 69.1 percent, while today, it’s 63.7 percent, the lowest level the nation has seen since 1993.
The forecast highlights that sellers are in an ideal market as the demand for housing is back, but for buyers, home prices are not very favorable and continue to rise. First-time buyers are especially deterred by the inflating price tags. Once you factor in increasing rents, slow wage growth, and high student loan debt, the younger and lower-earning end of the population have a tougher time breaking into the housing market.
“The housing market conveyer belt requires people to buy the homes,” said Stan Humphries, chief economist at Zillow. “If we can’t get people on the first rung the whole conveyer belt slows down.”
The improving jobs market is another reason for increased housing demand, Forbes reported. Last year, the nation gained three million jobs and this year another two million are expected, says Doug Duncan, chief economist at Fannie Mae. Household formation also increased for the past two quarters, meaning that younger people are entering the housing market.
“The pickup in jobs is resulting in some increase in real incomes, so the demand side is strengthening faster than the supply side,” Duncan said.
Forbes said that another issue in 2015 the low real estate inventory levels.
“Despite the fact that investors have mostly left the market (since the great deals of the recession are now gone), regular people are still competing for too few homes,” Carlyle said. “One key reason: developers simply aren’t building enough new houses.”
The real reason there aren’t enough homes for sale on the MLS is that so many are still underwater.
Concerns lurk beneath the good news in May existing-home sales
Ed Stansfield, chief property economist at Capital Economics, says “The renewed strength in employment growth and a recent upturn in mortgage lending should support continued strength in the months ahead. However, existing sales are already close to long-run norms, suggesting that there may be a limit to how much further they can rise on a sustainable basis,” Stansfield says in a client note.
The share of home sales to first-time buyers, which has been unusually low in recent years. Although the rise, from 30% to 32%, was modest.
This, he says, suggests that the gradual easing in credit conditions over the past few months is helping more FTBs enter the market.
“The recent tight supply conditions continued in May, as new listings failed to keep up with the faster pace of sales. Although the number of existing homes for sale increased to a seven-month high of 2.18 million on a seasonally-adjusted basis, this wasn’t enough to prevent the months’ supply of unsold homes falling to 4.9, from 5.0 previously,” Stansfield says. “This is low by historic standards, and the limited choice of homes for sale in recent months may have been putting off potential buyers. But with the share of homeowners in negative equity continuing to decline and attitudes towards selling improving markedly, supply conditions should begin to loosen in the months ahead.”
Housing Advocates Want to Kill REO-to-Rental
Housing advocates: REO-to-rental boom is bad for California renters, buyers
A new report by the affordable housing nonprofit group California Reinvestment Coalition says the practice of investors buying and renting foreclosed homes hurts neighborhoods throughout California.
The report, based on a survey of 80 community-based nonprofits, says that long-term tenants are being displaced, first-time homebuyers are losing to all-cash offers by investors, and communities are being destabilized.
Kevin Stein, associate director of the California Reinvestment Coalition, and author of the report, said that the whole thing is a vicious cycle.
“The irony in Wall Street profiting from a foreclosure crisis they helped create is not lost on anybody. Even worse, main street banks like JP Morgan Chase, Wells Fargo, and Citigroup, who are subject to the Community Reinvestment Act, are enabling these harmful practices by financing these investors and by securitizing their portfolios,” Stein said. “The Federal Reserve and the OCC should give these banks negative CRA credit for contributing to the displacement of long-term residents, pushing out first-time homebuyers, and reducing the supply of affordable housing in California.”
Some findings from the report include:
* 80% of respondents felt that institutional investors have a “negative” impact on clients and neighborhoods;
* 77% of respondents said that qualified homebuyers were “always” or “often” losing out to cash investors when trying to purchase a home; and
* 50% of nonprofit housing developers report being outbid by cash and institutional investors.
“The recently released report by the California Reinvestment Coalition furthers shows the need for hearings on the role large institutional investors play in the rental market,” said U.S. Rep Mark Takano, D-Calif., a long-time critic of housing policy. “With more than 80% of respondents saying the investors have a negative impact on their neighborhoods, and 65% of local real estate professionals saying they have hurt their business, it is clear that companies like Blackstone and Colony Capital are changing our communities. Once again, I call on the House Financial Services Committee to hold hearings into this matter so that my colleagues can learn about the REO to rental market.”
It’s unclear what these advocates want to accomplish.
Soaring home prices not a ‘bubble’: realtors
Lawrence Yun is least credible source possible
The median price of a home sold in May of this year was $228,700, according to the National Association of Realtors (NAR). That was just off the highest monthly median home price ever of $230,400 in July 2006, at the peak of the last housing boom.
It was also high enough for NAR’s chief economist, Lawrence Yun, to pronounce that 2015’s annual price could exceed the 2006 peak.
Then he made another bold claim: “This is clearly not a bubble.”
Yun pointed to the following:
1. Overall demand for housing is 25 percent lower than it was during the housing boom.
2. New home construction is about half of what it was during the housing boom.
3. Mortgage debt outstanding is 10 percent lower than during the housing boom.
Yun defines a “bubble” as home sales and prices rising at an unsustainable pace, not supported by economic fundamentals, such as steady job growth, and/or sales and prices driven by lax underwriting. Mortgage credit availability is now far tighter than it was during the housing boom, when anyone with a pulse could get essentially free money. Fundamentals, however, are another story.
“We are definitely not in a bubble in the sense of what we experienced in the mid-2000s,” said Peter Boockvar, managing director and chief marketing analyst at The Lindsey Group. “But I think it’s easy to argue that home price gains are running at an unsustainable pace. Interest rates are certainly in a bubble in that people could borrow over the past few years at rates never before seen. The industry itself, as measured by new homes, is still in a recession with sales so far below average levels.”
Enjoy!
The NAR Sees “No Housing Bubble”, So Here Is A Look At NAR’s History Of Absolutely Disastrous Forecasts
When it comes to industry associations such as the homebuilders’ National Association of Realtors, one thing is certain: their chief economists, in this case the always wrong Lawrence “Larry” Yun, never see anything but blue skies ahead… even when the second great depression is staring them in the face.
Which is logical: after all forecasting anything but a chart from the lower left to the upper right for a person tasked with selling houses (which is what the NAR ultimately does) is the same as Goldman issuing “sell” recommendations on all its stocks, starting a market crash, and alienating all of its corporate clients. It is also why all NAR recommendations are utter garbage and why in 2011 the NAR admitted it had artificially inflated its housing metrics by 14% for the 2007-2010 period.
Unfortunately, these individuals also never learn from their mistake, and today was a perfect example: as part of its improving housing market propaganda, which incidentally is now carried almost entirely on the back of Chinese investors parking the PBOC’s hot money in US real estate, and who just surpassed Canadians as the largest foreign buyers of homes in the US…
http://www.zerohedge.com/news/2015-06-22/nar-sees-no-housing-bubble-so-here-look-nars-history-absolutely-disastrous-forecasts
Some of what ZeroHedge blamed on Lawrence Yun was actually the fault of David Lareah, but both are incompetent shills, so their positions as chief bullshitters at the NAr are interchangeable.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/06/Yun%20forecasts%20history.JPG
On the first FRED chart you label every minor spike in months-of-supply as a “predicted bust”. I think that’s really a stretch. It looks like anything between 5 and 7 months is within one standard deviation meaning it’s a normal reading and not anomalous, and therefore not predictive. The only spikes that exceeded two standard deviations are the ones you labeled 4, 5, 7, and ‘Housing Bubble’. Three out of four of those spikes did predict five year bear markets in real estate. The only “misfire” was the first one in 1974, which did result in a lull in real estate prices when adjusted for inflation, but wasn’t a true housing bust.
See the 100 year Shiller chart to refresh your memory:
http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHiller-updated.png
How could this be used as a forecasting tool? I see no pattern of predictive results that correspond to either levels of months of supply or changes in months of supply. Conceptually, it sounds great, but like many technical indicators in stocks, it has little or no predictive ability in practice. In fact, it reminds me a lot of the Elliot Wave that looks good in hindsight, but it has no real-time predictive ability due to ambiguities in its interpretation.
It looks to me like 8 months of supply or higher is a signal to get the hell out of dodge, but you would need to be prepared to act quickly once that level is breached. It might be too late to sell quickly without aggressive discounting, backing your point about a lack of predictive power. I still like Bruce Norris’ affordability metric better as it gives you a 12-18 month lead time before the s*** hits the fan.
The Ultimate Moral Hazard: 70% of Greek Mortgages Are In Default
Tipping point reached in Greece
Just as we warned earlier in the year, total uncertainty about the future of Greece has enabled a growing sense of moral hazard as “if the nation doesn’t pay its debt, why should we” sweeps across the troubled nation. As Greeks’ tax remittances to the government, which were almost non-existent to begin with, have ground to a halt, so The FT reports, so-called ‘strategic defaults’ have become a way of life among Greece’s formerly affluent middle-class…”I still owe money on the car and motorboat I can’t afford to use. Even a holiday loan I’d forgotten about…I’m living with my mother looking for work and waiting for the bank to come up with another restructuring offer.”
As we detailed earlier this year, it appears taxpayers everywhere are learning from the best: their insolvent governments. In this case, Greek (non) taxpayers have decided to slow down their mandatory remittances to the government even more because the government may just not exist in two short weeks:
Most taxpayers have chosen to delay their payments, given that the positions of the two main parties leading the election polls are diametrically opposite: Poll leader SYRIZA promises to cancel the ENFIA and even write off bad loans, while ruling New Democracy acknowledges the difficulties but is avoiding raising issues that would generate problems and fiscal consequences.
The dwindling state revenues will not only hamper the next government’s fiscal moves, but, given that the fiscal gap will expand, also negotiations with the country’s creditors. The Finance Ministry will have to make plans for new measures and make sure that salaries, pensions and operating expenses are covered, especially in case the creditors do not pay the bailout installments which are already overdue.
Speaking to Kathimerini, a top ministry official confirmed the major slowdown in the rate of applications for debt settlement, and referred to post-election consequences from the shortfall in state revenues. The tax collection mechanism appears to be largely out of action while expired debts are swelling due to taxpayers’ wait-and-see tactics and the reduction in inspections. The same official pointed out that it is normal for revenues to lag during election periods, adding that this time there is no scope for shortfalls.
And now, as The FT reports, the situation has got far worse…
Strategic defaults have become a way of life among Greece’s formerly affluent middle-class. Many borrowed heavily as local banks competed to offer consumer loans at accessible interest rates after Greece joined the euro in 2001.
When the crisis struck they resisted changes to their lifestyle, convinced that it was only a blip on a continuous upward path to income levels matching those of Italy and Spain.
But they have since been forced to make harsh adjustments. With their own savings depleted and the country’s immediate future so uncertain — will Greece default on its debts and leave the euro? — many have simply stopped making payments altogether, virtually freezing economic activity.
Tax revenues for May, for example, fell €1bn short of the budget target, with so many Greek citizens balking at filing returns.
The government, itself, has contributed to the chain of non-payment by freezing payments due to suppliers. That has had a knock-on effect, stifling the small businesses that dominate the economy and building up a mountain of arrears that will take months, if not years, to settle.
“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”
For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties
“There’s a real issue of moral hazard . . . Around 70 per cent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.
After six years of living in straitened circumstances, middle-class Greeks have also grown accustomed to shedding valuables inherited from their grandparents.
“There’s a big underground market in family heirlooms . . . many people feel a sense of shame at having to part with them so it’s not much talked about,” said Angelos, an appraiser for a Geneva-based antiques dealer.
“For buyers there are opportunities that only come along when there’s a real economic upheaval . . . in Greece it hasn’t happened since the second world war,” he adds.
As one middle-class father concluded, he is no longer embarrassed by his inability to pay, he says, because so many other parents are in the same situation.
”In the good years we took all these things for granted,” she says. “But the way Greece is headed with these people in charge [the Syriza government] I wonder whether I’ll ever have them again.”
Great post, the sector is littered with many useless activity indicators, but the granddaddy of all/worst of the worst goes to ‘pendings’
Facts are callous!
I was going to write a section on how Steve Thomas distorts this indicator further by using “Pendings” instead of “closings” in the calculation (it makes the number smaller), but I didn’t want to pile on.
[…] The basic problem with his analysis is that he uses the NAr’s months of supply, and the “Months of Supply” is worst indicator of housing market activity. […]