Delving Deeper Into Housing

The spinmeisters approach to Housing is to live in Goofytown —  and if you check out your maps of Spin City, you will find Goofytown is right near the border of Absurdville. A quick look at the Housing data and charts reveals that the details — you know, the numbers and charts — simply do not match up with the spoken words from the dissemblers who endeavor to mislead you.

For example:  Yesterday, we saw New Building Permits drop, and we learned Home Buyer Mortgage Applications fell. That is consistent with what we have seen around our area, heard from the various builders, and learned via the warnings coming out of mortgage writers (See WaMu’s conference call yesterday for the ugly details).

Then comes the New Home Starts, and its as if a life preserver was thrown to a drowning man. Part of the problem, however, is in the innumeracy in this nation, and in much of the financial press also.

Here is the data point released by the Census Bureau:

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 1,772,000. This is 5.9 percent (±8.9%)*

Single-family housing starts in September were at a rate of 1,426,000; this is 4.3 percent (±8.4%)* above the August figure of 1,367,000.

What is the mathematical significance of this release? ABSOLUTELY ZERO. Any datapoint below the margin of error is statistically insignificant.

As the Census Bureau notes:

* 90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.

Insufficient evidence to conclude the change is different from zero. So September starts up 5.9% with a +/- 8.9% error rate means nothing. Single Family Home starts of 4.3% and a +/- 8.4% margin is meaningless.

However, do note the year over year change from  September 2005 — down 17.9%, with a margin error of +/- 7.0% actually IS significant. That means the range does NOT include zero, but rather is from -10.9% to -24.9%. This data is consistent with the rest of what we see and hear from builders, mortgage writers and anecdotal evidence.

When you put it into context, the media focus on a phantom data point – one that the Census
Bureau explicitly footnotes as “statistically insignificant” to be beyond


Next, let’s have look at HMI — the homebuilders sentiment index.  We noted on Tuesday that after 8 continuous months of freefall, there was a tiny blip upwards. To hear the reports on this, you would have thought we were in some new Housing renaissance.

Nope. Get a load of the thrashing my friend Kevin gave this nonsense: NAHB Housing Index Shows Dramatic, Imperceptible Surge:

-"US housing bottoming out!," screamed one headline (sold to you) 
-"Builder Confidence Stabilizes in October" the NAHB said

-A separate article noted the positive nature of the NAHB Index
-The index was up just one point to 31, but this is a positive considering the index has fallen in 13 of the past 16 weeks.

Kevin’s take on the charts reveal the absurdity of the hoopla:



It is simply ridiculous to claim this is anything more than a blip.

And since we are speaking about absurdities, let’s take a closer look at how home prices have supposedly remained the same:

"In September about 77% of home builders were offering some sort of sales incentive in response to spiking inventories, compared with 58% a year earlier, says Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders."

That’s right, if you ignore the 10s of $1,000 of dollars in giveaways builders have used to incentivize buyers, prices have remained the same. With inventories are at all-time highs, giving away granite counter tops, subzero fridges,  covering all closing costs, free trips, inground pools — even C class Mercedes  — makes some sense.

But of course, that’s simply a way to lower prices for Mr. Smith, without infuriating his neighbor, Mr. Jones, who payed 20% more a year ago.

The Housing led slow motion slow down continues . . .

UPDATE October 20, 2006 2:10:pm

This chart via Asha Banglore of Northern Trust reveals how absurd the spin has become:


The HMI edged up only one point to 31.0 in October. The index tracking present sales was unchanged at 32.0 in October. Indexes accounting for sales six months ahead (41 from 37) and the traffic of prospective buyers (23 from 22) moved up slightly in October.


Builder Confidence Stabilizes In October
October 17, 2006

Mortgage applications ease 2.2%
CNN Money, October 18 2006: 9:42 AM EDT

Housing starts pick up unexpectedly
Chris Isidore October 18 2006: 8:43 AM EDT

Home builders up ante to lure buyers
Incentives, discounts are pervasive as market slows and inventories climb
John Spence
MarketWatch, 4:16 PM ET Oct 13, 2006

Factory Sector Shows Widespread Softness
Asha Bangalore
Northern Trust Global Economic Research, October 17, 2006

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What's been said:

Discussions found on the web:
  1. anon commented on Oct 19

    If accurate the pickup up in housing starts would be bad news for the housing industry and market in general. The chief economist of the NAHB said as much yesterday – the market is suffering from a supply-driven correction.

    The last thing it needs is more supply.

  2. Cherry commented on Oct 19

    There may not have been a pickup at all, since statistically, the number of starts created last month is within the range of %’s. In the downward phase, you get downward revisions. With RE dropping again in October, they will drop again.

    Getting Starts down to 1.000 range is a priority to clearing the overhang.

    Barry, relax, you sound like a screaming madman like Roubini lol……….

  3. anon commented on Oct 19

    I would argue that any number of housing starts over 1.4 million is actually making the situation more severe:

    ( 2.8 million population growth + 10% 2nd home market ) / 2.4 people per household + 100k demolitions = 1.4 million houses / year needed

    So 1.7 million starts would be making the situation substantially worse.

    What we need now are less than 1.4 million starts (assuming the calculation is valid) to draw down the excess inventory that is causing prices to fall and forclosures to increase.

  4. dave commented on Oct 19

    Cherry, A great point. Inventory of unsold homes is the key issue.

  5. Mark commented on Oct 19

    “The disconnect between the two numbers surprised David Seiders, chief economist with the National Association of Home Builders, who said builders seemed to be working through a backlog of home permits they held for properties where they had not started construction.”

    “Seiders said that a pick-up in building is not necessarily a positive for the market, which has seen the inventory of completed but unsold homes increase to record levels, pushing down prices and forcing builders to offer incentives to sell homes.”

    “‘If both permits and starts were up I’d be scared because I think there are still inventory issues that we need to work through,’ he said. ‘I hope the bounce in starts is a temporary phenomenon. I think it’s inevitable that starts will be down in October.’”

  6. Bob_in_ma commented on Oct 19

    Just a couple clarifications, mortgage applications for purchases did not decline, they rose slightly, refinancings fell. Also, housing start numbers for August were revised UP, not down.

    I have been in the bubble=doom camp for a year and a half, so I’m not quibbling with the thesis. Just the kind of manic way it’s expressed.



    Bob, where did you get that info from? I see something different (all down at) from the MBA

    Ahhh, here it is: Purchase Index increased by 0.4 percent

  7. advsys commented on Oct 19

    Agreed. This non stop deception is infuriating.
    At the same time, at least for the short term, it does explain why home builders etc are on the rise.

    Even more so, why market sentiment is so positive right now. I do worry that the sentiment will change quickly once some event happens that shows folks the nature of the deceptions.

    I hope that I can see it coming before the move gets away from me. It could be a great profit possibility

  8. Jrs commented on Oct 19

    Could not agree more..Spin, Spin, Spin…I feel like the press is a washhouse with about 20 washing machines going at any time.

    Thanks for the information and perspective and I work for a Forture 500 and yes people just do not understand risk is associated with a range as well as a forecast so margin or error is key to understanding possible events.

  9. Mike_in_Fl commented on Oct 19

    One thing that’s a key point of contetion: How much “spillover” impact will the housing mess have? I was, frankly, expecting more than we’ve seen to date. It seems to me that the very latest economic data is simply not as bearish as I expected. I mean, shoot, look at the initial jobless claims today — back below 300,000! While job creation hasn’t been anything to write home about, job cuts don’t appear to be anywhere on the order of catastrophic either. And as I’ve been talking about here for a while, the bond market appears to have pulled back prices from the economic brink. Is that a signal of some firming, too? Just throwing it into the rink for consideration.

    On the other hand, WM wasn’t the only dog to dump on the mortgage market. LEND is self-immolating today as well due to a warning about higher loan losses, tighter subprime market conditions, and more.

  10. Barry Ritholtz commented on Oct 19

    I get perturbed ’cause I have CNBC on all day.

    Someone sez something idiotic , and then I mute it for the next 4 hours.

    But the mental therapy for the stress caused by the bullshit comes out above …

  11. wcw commented on Oct 19

    Employment usually is lagging. The 2001 recession was presaged by upticks in year-over-year claims growth, but that was at the tail end of an employment boom. The recovery since has been the weakest for employment on record; I do not expect claims to be the canary in the coal mine this time around.

  12. lola commented on Oct 19

    Thank you for the morning chuckle.

  13. GerryL commented on Oct 19

    I believe the that an increase in starts and a decrease in permits is totally consistent. Houses that are being built now have been in process for a long time. It pays for the builders to complete these homes. However, a decrease in permits shows that they are trying to cut back on future building.

  14. anon commented on Oct 19

    I get perturbed ’cause I have CNBC on all day.

    Someone sez something idiotic , and then I mute it for the next 4 hours.

    But the mental therapy for the stress caused by the bullshit comes out above …

    As a trader, however, you have to think that this kind of disinformation is creating market inefficiencies. So from that perspective it’s a “positive”. The question then is one of timing the “snap back” to reality.

    Who doesn’t think there’s another healthy shorting opportunity with the homebuilders coming down the pipes?

  15. russell120 commented on Oct 19

    The front end of housing development construction has some similarities to commercial construction. A lot of time and effort are involved before the first shovel full of dirt is turned. At this point future plans are being put on hold, but many projects in the pipeline are continuing forward. It is a fairly typical inventory expectation problem.

    In addition builders in areas where business has slowed will begin to “invade” geographic areas that are not as badly hit (remember most builders are relatively small and with a limited geographic reach). In some cases they can do this quickly because they will piggy back on the front end work of others who have pulled out. At this point areas that were looking like they were going to pull through with a “soft landing” will also turn down.

    The slow down will keep going through next year. The cancellation by the big HBs of their land options makes this rather obvious. Given the long lead times needed to get housing developments started you would not expect a real recovery until at least Spring of 2008 (with a soft landing).

  16. MAS commented on Oct 19

    Increase in house starts makes perfect sense. If you are builder and see prices falling, you want to have your homes built faster and ready for sale before your competitors.

    The sooner the housing inventory is built out, the sooner the builders can start lay offs. Once you’ve got a significant inventory, all you need is a skeleton sales staff on the payroll.

  17. calmo commented on Oct 19

    I like the enlargement of the detail and think it shows great promise. The next time your physician asks you about erectile dysfunction for instance, you’ll know how to respond. There was an uptick. There was.
    This was no ordinary blip. But does the other party have the patience to see it your way? She doesn’t.

  18. anon commented on Oct 19

    Increase in house starts makes perfect sense. If you are builder and see prices falling, you want to have your homes built faster and ready for sale before your competitors.

    Red Queen Effect. Homebuilders are accelerating into a brick wall.

  19. mojave commented on Oct 19

    Weldon claims (data from RealtyTrac) there are 25,000 more condos under construction in FL than THE TOTAL # SOLD in the past 9 years. And FL foreclosures in AUG+SEP=29,000 – again more than those currently under construction or sold the past 9 yrs… FL foreclosures up 43% yoy, MI and CO also cratering, commercial bank lending thru the roof, additional supply only adding to record inventories, etc. When does this spill over? Beats me, just wait for the trend to bend I guess.

  20. bob commented on Oct 19

    There are many explanation of this rise in home starts:

    1. It could be statistical error, as Barry said

    2. Dramatic fall in demand for land. In order to get rid of land you need to build something on it. Moreover, rather than lose on land right now you better lose on house next year. This loss will be hidden from investors for a while

    3. The most important one. Banks maintain your credit based on how many houses under construction you have. If you scale down you need to pay back the loans or bankrupt. If you start new homes bank will let you keep the credit line like it was.

    You see?

  21. Estragon commented on Oct 19

    BR – I agree with you on your basic thought – that the start/permit numbers have been bullishly overhyped. OTOH, It’s been a while since I did stats, but I’m not so sure about your suggestion that the margin of error renders the numbers meaningless.

    Assuming errors are normally distributed (nice looking bell curve), the published figures represent the most probable true figures. Eg., SF starts up 4.3% is more likely to be correct than 0%. 0% is possible, but less likely. If errors aren’t normally distributed, your statement might make more sense. If the errors are distributed bimodally for example, the 4.3% may be much less likely than numbers further away from the mean but still within the standard error range.

  22. vfsv commented on Oct 19

    Silicon Valley bulls always claim “They’re not making any more land,” & “cities are restictive on permits,” to “prove” their over-priced PoS is a good investment.”

    We track permits at:

    At the most-recent sales rate, new permits issued would amount to 4.3 months’ supply.

    Sine the alleged “bottom” in Sep’02, new permits amount to 16.6 months’ supply.

    So when it they’re going to stop building new houses around here?

    To keep up with Silicon Valley news, visit:


  23. The Theroxylandr in Flame commented on Oct 19

    The magic of housing starts

    We just learned the strange disconnection between home sales, home prices going down and the last home starts going up.
    Is that good news? I think those are bad news, because it seems to me that this shows how home builders are trying to postpone addre…

  24. glenn_in_MA commented on Oct 19

    Bob, Good points…I see a slow motion train wreck. What folks have to realize is that the bottoming of the housing market will take a few years to play out….the national average profile will be slow and steady…unlike the way an equity market bottoms with lots of sharp peaks and troughs. Now that’s not to say that the entire nationwide housing market will bottom and recover at the same time. Each region will proceed at its own pace. And within each region, different types of real estate and locales will also proceed at their own pace. But for the next couple of years or so we’re looking, on average, at a slow motion train wreck.

  25. Bob A commented on Oct 19

    from the LA Times article
    “Just Wednesday morning, Zhang dealt with a Lancaster resident who had taken out a $310,000 adjustable-rate mortgage with a starter interest rate of 5.4% and a monthly payment of $1,050.

    In July, the interest rate climbed to 8.5% and the monthly payment jumped to $2,306. A year-end adjustment will send the monthly payment to $2,744.”

    Now let’s see… the difference in monthly payments is about enough to buy a new plasma TV evey month, plus make the payment on a new Lexus, or two or three Fords, plus put away enough to be able to take a nice vacation to just about anywhere in the world next summer…. but they’re not going to be doing that are they?

    But are the going to keep paying that $2744/month for a place they could rent for $1500/month? Would you?

  26. Cherry commented on Oct 19

    Starts were not revised up, but down modestly in August. Claims are being effected by the “Katrina” effect in October. November will probably “normalize” them somewhat FWIW.

  27. bodanker commented on Oct 19


    You said, “… the published figures represent the most probable true figures.” This may be semantics, but they represent the best estimates of the true figures and those estimates have distributions. Statistically speaking, your statement that, “4.3% is more likely to be correct than 0%” would only be true at a lower level of confidence.

    Here are a couple more interesting excerpts from the footnotes of the referenced Census report:

    “It may take 4 months to establish an underlying trend for building permit authorizations, 5 months for total starts, and 6 months for total completions.”

    “The statistics in this release are estimated from sample surveys and are *subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting, and undercoverage.*” (emphasis mine)

    “All ranges given for percent changes are 90-percent confidence intervals and *account only for sampling variability*. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.” (emphasis mine)

  28. Kevin_r commented on Oct 19

    1) The real impact of the end of the housing boom on the rest of the economy has two components: the loss of housing related employment and the loss of the home equity ATM. Employment in housing has not fallen all the way yet because builders are still finishing off projects too far down the pipeline. The impact of the loss of the home equity ATM is starting to show up, but has not made its full impact on consumption. (That is the point at which everyone from here to China would feel it.) If people add on credit card debt to replace the home equity ATM, the eventual drop in consumption will be delayed but intensified.
    It is still too early to say that housing is taking down the economy but also too early to say that the danger has passed.
    2) The builders are in a classic game theory situation. For individual builders, it makes more sense to finish many of the pipeline projects into which much money has already been poured than to write off what has already been spent. However, builders as a whole would be better off if they all stopped right now.
    Bob said above that builders have to keep building to prevent their loans from being called in. If so, this will amplify the “what is good for one is disastrous for all” effect.

  29. jkw commented on Oct 19

    It will take a while for everything to flow from the housing boom ending to the economy actually contracting. People can still refinance and take out HELOCs based on equity growth if they haven’t done so for over a year. Foreclosure processing takes at least 6 months in most states from when the last payment is made. ARMs from 2003 are just beginning to reset (and ARMs from more recent times are still at teaser rates). All this means that people are just now being forced to turn to credit cards to maintain spending. Assuming they are willing to do that, we can continue for another year or two with no change in consumer spending (I have been given a total credit card limit of 2.5x my annual income, which is probably above average, but it suggests 1-2 years should be possible). So the debt-based economy could go strong all the way through late 2007.

    Personally, I doubt that people are going to be willing to go that deep into their credit cards. I also doubt that the banks will let them – they can cut credit limits and cancel cards at any time. So it seems more likely that spending will drop off by this coming spring. That’s when we get to find out if Bernanke’s theories about how to prevent deflationary depressions are right or not.

    I wouldn’t expect housing to bottom before late 2008. 2009 seems more likely. Conveniently enough, that will be right around when I will want to buy a house anyway.

  30. Mike commented on Oct 19

    Ummm, excuse me for reading the legend but uh, isn’t that uptick in a statistic that is labelled “SF Detached *next 6 months*”? I am not an expert in these data, but um that sounds like it’s a predicted number, based on models and stuff. That’s generated by a group funded by people who make money selling houses. Hmmm, uh am I supposed to take even two more seconds thinking about this?

    Lets watch the actual data huh? not the predictions.

  31. whipsaw commented on Oct 19

    I don’t find it surprising that housing starts could have picked up even if houses are not selling, that’s just the way that construction works. What it amounts to is that if no income is coming in because of sales but there is a construction loan commitment in place that still has some room, they will continue to build in order to draw against the loan and thus maintain some cash flow. In single family projects, borrower covenants are fairly loose and the construction loan is more like a secured revolver than a mortgage, so the developer has a lot of flexibility in what he does and when.

    But isn’t the construction lender concerned about the lack of sales? Probably should be, but it takes a while for that concern to turn into a cut off and, in theory, they have a good LTV anyway. So the developer pushes ahead to keep draws coming in and things are apparently humming.

    So what happens next? The developer (which probably has inhouse design/construction mgmt and is just farming things out to subcontractors to do the actual work) finally gets down to completion of a house that isn’t going to sell because he’s still got houses he finished 4 months ago that haven’t sold. This is where the fun starts because the subcontractors have been rolling along getting paid for percentage complete less retainage (~10%) which is not payable until punch list items are attended to at the end and construction is 100% finished, while the developer has had that money in hand.

    Guess what? The developer sees horrible flaws in the work of the subcontractors and refuses to pay them the retainage (that he has probably already spent) for their incompetence! They file liens and everybody goes to war, but unless and until there is a contract on the property, it doesn’t matter. The bank knows it will take 3 years for a subcontractor to get a final judgment and foreclose the lien, the developer is already upside down or he wouldn’t have done this, and the subcontractor is at least as likely to go bankrupt as the developer before the whole mess is sorted out.

    In my Other Life a great while ago, I had construction litigation cases in 18 states and this was generally the scenario altho most of my experience was with multifamily or highrise commercial. But regardless of the type of construction, the problems always start when things are not selling or renting as planned and flow down from there. Eventually, they flow back up as well and take out the lenders faster than you can say “RTC” if they have been foolish enough, but that’s a story for another day.

  32. A Dash of Insight commented on Oct 19

    Statistically Insignificant? Watch out!

    Experts can detect non-experts just by the way they use technical terms. Something is said that no one trained in the field would actually say. It gets one’s teeth grating to hear it… The great fictional detective Nero Wolfe once

  33. Mark commented on Oct 20


    Enjoyed that post immensely. That is EXACTLY what happens. My boss used to pull that crap on the subs even in the GOOD times. They would eventually get to the table and a little haircut would take place. Until word got around. Then every bid was marked up by 10-15% for the “opportunity cost” of workin’ with good ol’ Dan. He would pull the same stunt and they’d “give in”, get paid, and walk away smiling. Construction Dept. never told Danny Boy that they knew the subs were marking up the bids. Hell, everyone in the company hated the SOB so they just kept it a secret.

  34. John commented on Oct 20

    All true

    In addition

    The bank prefers standing finished houses to half built; they can at least liquidate the inventory at some price

    Entitlement (permits ) lapse. Better to build and have the finished product than have to try to liquidate land with no entitlement

    You gain unit cost effficiencies at larger volumes, especially on grading and slabs. Better to do a tract than house

    Land values decline more rapidly in % terms than finished home values in a down market. IN some down markets you cannot sell land at all. Building the product with the banks’ money reduces your potential for loss

    All adds to the overall marketing “red queen” factor described above

  35. lorcar commented on Oct 29

    Could some plz explain what the article talks about?
    I thought we say something about statistical significance and errors when we deal with forward looking analysis (statistical inference). In this case, i thought “Privately-owned housing starts” and “Single-family housing starts” were clearly measured now and one year ago. So it would be clearly possible to determine the percentage change.
    Where do i fail?

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