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Diana Olick: Housing Double Dip a Done Deal
Thursday, June 3, 2010
Northern Virginia Bits Bucket 6/3/2010
Posted by Harriet at 6:00 AM
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28 comments:
interesting
i was driving around last night and went past one of the properties i was watching last summer.
1035 10th ST NE.
it's apparently sold.
it kept hanging up on sales, and it would list and the bank would pull the listing and it's apparently quietly sold for 209K.
can anyone figure out what happened?
did the bank do a private party sale?
yes, the comments are interesting too.
I think she makes a lot of good points, but at the same time, it's hard to crunch the numbers to see what will really happen, both nationally and locally.
So you have a 40% drop in mortgage purchase applications for all of May. If you take the total number of contracts that would have been signed in April and May, assume they would have been evenly divided between the two months under normal circumstances, and then move 1/4 of May's contracts into April, you get 5/4 in April and 3/4 in May with a 40% dropoff.
So using that logic one should take April's pending's and multiple it by 4/5ths to correct for the pulled forward effect. Which would put the pending home sales index around 88 similar to last year's 90.
Since we started seeing price gains locally last year around April... I'm not sure that 90ish is really a scarily low number.
But as always, I hate to use US trends to judge the DC market. Better to stick to what it means for the nascent recovery.
So under that rubric I would say that the April pending home sales are nothing to cheer about, and the stock markets will be due for another 200-400 point drop again when everyone suddenly figures this out. (If they really were foolish enough not to know this already).
(If you spread it back over 3 months... then the 40% drop in May is even easier to explain since it needs to account for both March and April's highs, so the corrected index would be higher than 90).
Meanwhile, I'm going to go out on a limb and predict a surge in contracts in June as all the shorts put in over the winter look like they're no longer such a good deal and not going to happen, and people start settling for higher prices on homes that are in better condition and will actually close...
Hmmm, I'm no stock market expert, but I don't think housing performance is the only or even the major factor affecting current and near term future levels. It played a role in the modest pre-2009 increase, partly because some people were grossly overspending on housing and partly because some were HELOC-ing and spending on consumer goods, and because packages of risky loans were being sold at inflated prices (etc.), while other factors were more stable. These factors have been limited somewhat since then and may be going forward. But the stock market is also affected by world markets, financial messes, value of the dollar, oil prices, big company profits, unemployment rates, uncertainty/fear, and other factors. So housing more typically wouldn't be that influential (unless it covaries with some of these other factors).
Right now the stock market levels are still well below peak and the average annual change in the returns to domestic stocks 2000-present is FAR below traditional 8% annual returns (dividends and stock price increases included). And it was below that before the big drop in 2008/9. Conditions are uncertain right now and have been for awhile, and uncertainty tends to depress prices.
So it appears to me that the current valuation may reflect anticipated downward changes in home prices. Or, if they don't, it's not clear to me that there will be much change, unless the housing price changes and sales levels change greatly.
YMMV.
Regarding the double dip, I take my cues from the aftermath of Cash 4 Clunkers.
http://calculatedriskimages.blogspot.com/2010/06/light-vehicle-sales-may-2010_02.html
The surge in auto sales Jul & Aug 09 was quite obvious as C4C pulled future demand forward. Likewise, when C4C expired, sales fell off a cliff in September 09.
As soon as that happened, you had breathless reports of how you stole future demand for months or even years to come, and that by Oct or Nov 09, auto sales would smash through the lows seen in early 2009.
Of course, all those shrill voices sorta melted away when hindsight showed Sep 09 was not the beginning of another leg down, but actually just a lowpoint on a multiple month upward trend. Either way, the distortion from C4C didnt last very long.
So if that is any guide, I see the same thing happening here, just a bit more severe and longer lasting. We may see 3-4 months of post buyer bribe hangover, and essentially a lost summer in terms of sales & prices. However, I dont know if there will be enough "oomph" to the double dip to threaten the price bottom established last spring.
Ace,
I didn't think of it as being a factor, but rather as an economic indicator. Stocks seem to be looking for signs of recovery, the speed of recovery or the return of a downward slide, or just extended lack of growth. Housing in that sense is like retail sales or consumer confidence. It only effects as small portion of stocks directly but may be a broader market indicator.
(although house prices plummeting would suck for financial stocks I would think, even sales slowing would interfere with the ability to sell REOs).
The other thing is that housing is seen as a leading indicator so "they" could be putting more weight on it than "they" should.
The Anonymous,
Agreed. In fact since in most areas mediam home ownership is 4-5 years, which sounds as if it would be similar to car-ownership length, the gap might similarly be 1 month.
And if a lot of them don't close, then both those buyers and sellers will be back in the market in June/July.
cara,
What's your source on average length of homeownership? I'm googling and getting no definite answers. One site claimed NAR/NAHB say 7-8 years but then does not link to anything.
I also cannot really find anything reliable on average car ownership rate. Found a few that said 5.5 years based on alleged gov't report but no link to report.
tbw,
Cars all I could find was google answers which cited a couple of studies with no links. Probably the same you found, and indeed it was 5.5 - 7 years.
Houses? Nationally I don't know. But 4-5 is from two things, one the links in Redfin to local stats for the counties in the area. (6-9 is more true for SFHs). And if you want a better one you can use the ACS data which in 2007 said the median year bought for DC and it's huge MSA was 1999, which would be 7 years.
So, same order of magnitude. Bizarre huh?
(math is failing me, that would have been 8 years)
You could take more inferences from this if you want. Given that people hold condos for shorter, that gap in demand might be only 1 month, versus 2 or 3 for SFHs, except that the greater percentage of first-time buyers for condos, and the greater flexibility of condo buyers with respect to the school year (one would think, in general) would mean the condo gap would be very deep and very short, whereas the SFH gap with more move-up buyers might be non-existant or at least very small, since many weren't eligible for the credit, and many will care about timing moving with the school year (so could only do April contracts closing at the end of June not March or earlier).
TBW, I think the Census reports may include measures of length of homeownership but it might take some digging to find the #s you want.
Cara, re: stock markets, are you arguing that housing prices correlate to some extent on a time-lagged basis with stock market prices, but only because of their relationship with another variable, and do not have any influence on them? I guess I would want to understand what you think is the process by which they are related.
I'm arguing that even the time-lagged correlation is low at this time, because stock market prices depend on what buyers and sellers believe about present future conditions. And right now, I think both are aware that US housing prices may go down and that is priced into current stock values (along with a lot of other factors) and so I don't expect much change in stock market values once the later #s come out, unless they deviate a lot from what you predicted.
wiki's entry on indicators is actually pretty interesting.
http://en.wikipedia.org/wiki/Economic_indicator
oops, "housing prices" should have been "(US) housing performance" (reflecting both sales and prices) or maybe just sales volume, since that's what Cara referred to previously.
Ace,
Everything I'm saying is what I've gleaned from CR and Krugman over the years. So it would be better to make your own conclusions based on CR than listen to me...
But my best shot.
1) The housing reports have often seemed to move the market slightly one way or the other on the day they come out when they are either above or below published expectations.
I also have very very little to no faith in the stock markets reliability as a body that accurately "prices in" anything right now. I think it's basically in an indeterminate holding pattern, waiting for stronger signs of recovery and then leaping ahead of itself when it gets them.
2) How do I think they are related?
a) people don't buy homes when they aren't confident about their jobs.
b) buying a house rather than renting is first and foremost an inflation hedge, which means people buy homes when they expect either rising house prices, or rising rents, or that inflation will erode their debt load.
c) the direct impact through new home construction, rehabilitation, and bank profits.
a and b are what make it a leading indicator, especially for an economic recovery.
I've seen quite a bit of 4-5 yrs ownerships in my search. Out of 47 active listings, the following 18 are owned 5-yr or shorter (most w/ DOM < 60):
List Price: $649,900
Last Sold: 3/30/2006 $618,000
List Price: $599,900(currently a rental I think)
Last Sold: 5/26/2006 $515,000
List Price: $619,900
Last Sold: 7/26/2006 $592,500
List Price: $599,999
Last Sold: 5/27/2008 $576,076
List Price: $599,000 (currently a rental)
Last Sold: 1/30/2006 $475,000
List Price: $599,000 (currently a rental)
Last Sold: 10/31/2007 $500,000
List Price: $649,900
Last Sold: 11/30/2004 $500,000
List Price: $620,000 (short)
Last Sold: 8/30/2005 $610,000
List Price: $619,000
Last Sold: 3/25/2005 $600,000
List Price: $519,000
Last Sold: 7/26/2005 $537,500
List Price: $644,900
Last Sold: 9/1/2006 $610,000
List Price: $559,900
Last Sold: 11/27/2007 $524,200
List Price: $619,900
Last Sold: 4/20/2006 $569,000
List Price: $560,000
Last Sold: 11/2/2005 $561,000
List Price: $549,000
Last Sold: 5/6/2009 $497,400
Last Sold: 9/25/2009 $560,000
List Price: $479,000
Last Sold: 10/3/2006 $435,000
List Price: $439,500
Last Sold: 6/23/2006 $436,500
Cara, all of that makes sense to me. At the same time, take a look at the indicator site, which suggests that the stock market levels are leading indicators for the state of the future economy, including housing starts, for example.
I think this is because people and institutions are willing to pay more for stock (pushing prices up) when they think the economy will be healthier in the future. So if they are worried (accurately or not) that the economy will not do well (or that the European or Chinese, etc., economies won't do well, depressing demand for US products and having other negative effects), they won't pay as much for stocks of companies that depend on these as when they believe conditions are improving (accurately or not), ceterus paribus and all that.
I think if you look at the housing reports' effect on same-day performance, what the stock market reporters tend to say (FWIW) is that when a report is *very different from what was expected* you will see a short term effect (not whether something like housing performance goes up or down). In other words, if buyers/sellers expected a 1% drop (and there are measures of this before the day of the report), and the report confirms a 1% drop, you don't see much if any change. Even on days where a housing report deviates substantially from the expectation, any effect it has may be eclipsed by something else, or may disappear the next day.
My argument is not that the stock market levels accurately foretell the future (though the indicator site indicates that there is some relationship, i.e., stock market levels are used as a leading indicator of economic performance). Rather, I believe investors right now have information (as you and I do) that govt. stimuli had an influence and that this is going away (as one example), that unemployment is persisting, etc., and so they expect that the recent housing "good news" may not be sustained. It's in the media constantly, investors have recently been burned, a lot of people are still parked on the sidelines, etc. I would argue that this is in contrast to the 2008 experience where the most relevant info about major problems was NOT known by the stock market experts and/or the media continued to puff up. Info is never perfect obviously. And obviously if conditions change, stock prices change, e.g., if the govt. decides to step in again...
Anyway, back to work...
Anon
Cars have the difference that the fleet wears out at about 11 Million units per year, when things got really ugly the fleet age started increasing.
we are now back to about fleet replacement, which is still far below what sales were running in the Zero's.
Anon
Houses have a much longer life,
a house has a median design life of 25 years and with a little care will go 100 years.
From the article:
So now the NAR is asking Congress to provide flexibility on the deadline for closing.
There could be a sizable number of homebuyers who responded to tax credit incentives, but may encounter problems meeting the settlement deadline by June 30.
Too bad. They knew the deadline. The extension was made largely for this same stupid reason. I see NAR is trying to devise a way to make the credit last forever.
kevin
even if they extend another month it won't mean much
Anon said - "Regarding the double dip, I take my cues from the aftermath of Cash 4 Clunkers."
Wow...good luck taking housing market clues from auto market. I must say, it is quite logical..:):)
For one, there wasn't any bubble in auto prices, my friend. I think you completely forgot why we are here in the first place.
what's the deal with this N Arl walk to Ballston REO SFH? priced below assessed land value?
Tom of Waverly Hills - isn't this your neck of the woods? any gossips?
spider,
He's taking a clue from C4C because both were major tax incentives. C4C dollar for dollar was an even larger incentive.
And if you don't think cars are massively overpriced, you're living on a different planet from me. While in the checkout line the other day I saw a headline "great cars for under $30,000!!". Freaking eh. Since when do you "need" to pay $30k to get a decent new car? WTH has happened to this country? Of course you don't need to pay $30k for a good car, but that's a HELOC hangover for you.
$30k. Gah. So, we have a rule of thumb for what multiplier of income one's house "should" cost, 2.5-3 ish. What fraction of one's yearly income do you all think is reasonable for a car? Hmmm, perhaps I will regret opening this can of off-topic worms.
cara,
I agree with you on car purchases. I always go pretty basic, pay cash and keep it for up to ten yrs. Expensive cars are a huge waste of money.
Now, for the other side ("half") in my family. Cars can be very important for some psych or other reason that I don't fully (or partly) understand. My husband's car cost 3X mine and he gets a new one every 2 or 3 yrs. My cancelling all his car mags has not affected this behavior.
That said, it seems quite easy to get car financing.
Va_investor,
Yup my other half has a car and shoe fetish that I don't fully understand either. We don't make the money to support it at the moment, but given more financial slack, I know he'll be hard pressed not to give in to the siren call of expensive cars...
We'll see if not having a garage will temper this at all.
His mom always has two cars, neither of them over 4 years old, one of them a sports car, it's her one big luxury item, though it's not clear to me that she really can afford it with respect to her retirement planning (she easily can on a current cash-flow basis with her job and a paid-off house).
"MM said...
what's the deal with this N Arl walk to Ballston REO SFH? priced below assessed land value?
Tom of Waverly Hills - isn't this your neck of the woods? any gossips?"
Haven't heard any gossip. I presume the bank wants to unload it quickly. And that's exactly what will happen, given the high demand around here!
VA Investor said
"That said, it seems quite easy to get car financing."
I just bought a new car. (Been without for seven years). The finance company offered me 0.0 financing for three years. I said "Uh, duh, okay. "
Should I have asked them to pay me three percent per annum to borrow?
Sho
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