Housing Bottoming ?

Some of the recent Housing data has been “encouraging:”

• Sales for existing homes rose in November for the second straight month;
• New single-family homes rose 3.4% in November (seasonally adjusted), following a 3.8 percent decline in October;
• Inventory backlog declined to a 6.3-month supply in November (from 6.7-months);
•  The 4 week average MBA purchase index has risen 12% since August.

However, it may be a bit premature to declare that housing has bottomed just yet. In addition to so many bottom pickers (the sheer number all but gurantees they will be wrong), the historical data simply doesn’t support so early an end to the downturn. I have a monster piece coming out on this very subject soon, contextualizing the rise and fall of housing this economic cycle. But until then, let’s consider a few details.

First, this is rather early in the traditional Housing cycle. According to research of out of Goldman Sachs, the past three cyclical declines (since 1960) saw New Home Sales dropping by over 50% on average. This fall off has occurred over a 26-53 month period.

Where are we now in comparison? Consider that the statistical top in housing activity was only 15 months ago (July/August 2005); Housing
starts are off by “only 20%” year-over-year. This suggests we could
still be very early in the downturn –at least relative to the prior housing cycles. And, we are still near 15-year highs in
terms of existing home inventory, and 13 year lows in home affordability. That suggests more price decreases to come.

We’ve discussed the new home cancellation factor also, running as high as 30-40% amongst some builders. (See: Home Buyers Back Out Of Deals in Record Numbers) Commerce does not report the cancellations, meaning sales are over reported and inventory under reported. This suggests the initial sales and inventory data will be revised.

Even more significant, the new permits, a gauge of future activity, has dropped off a cliff. That will help the inventory situation, but it implies a further dramatic slowing in activity into 2007.

With only 3 cycles as a frame of reference, there is no guarantee that the present housing boom and bust will fit neatly into these same parameters. But given the magnitude of the expansion, it would be surprising to see a mere year and half slowdown. We could very well be early in the Housing downturn in terms of both duration and depth.



One last thought on a related note: (apologies for the name drop)

I was chatting with the CEO of Coldwell Banker Real
Estate in the green room of Kudlow this week. In addition to pointing
out this remains the 3rd best year on record, he revealed a lot of
common sense with this statement: (I am paraphrasing)  “Price your house at a reasonable level and it will sell quickly. Overprice it, or assume its still 2005, and it won’t move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it . . .


End of Housing Slump Seems to Be Drawing Near
Signs of Stability Emerge In Mortgages, Home Sales,
Buoying Economic Prospects
WSJ, December 28, 2006; Page A3

Home Sales Rose 3.4% Last Month
NYT December 28, 2006

Homeowners Cut Prices, Drawing Some Buyers Back
NYT December 29, 2006

Mortgage Applications Index Rose 11.4%
Courtney Schlisserman
Bloomberg, Dec. 13 2006

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What's been said:

Discussions found on the web:
  1. blaze@blaze.com commented on Dec 29

    It would be an interesting study that I’ve never seen, the average price of 3 bedroom detached houses on the market for 90 days plus versus 3 bedroom detached houses no the market for 1 week plus.

    There’d be some common cause problems in there, but still, it would be interesting.

  2. Russ commented on Dec 29

    I look forward to your longer piece on this issue. You remain at the forefront of this debate, but there is one aspect that I see neglected by housing skeptics. This time it really is different! That felt good.
    The past cycles sited in the GS study did not include the 1997 tax law change that made sales of a personal residence tax free for virtually all sales. That significant tax cut is what sparked this boom, more than low rates or creative financing. That incentive remains in place and should continue to drive demand for housing at a higher level than in past cycles.

  3. Teddy commented on Dec 29

    Russ, and roosters crowing makes the sun rise.

  4. Rob commented on Dec 29

    I expect there will always be people who sell their home up north, pocket the large tax free gain, and buy an expensive condo in Florida.

    Difficulty during the next couple of years may be in the “sell their home up north” part of the equation.

  5. Anonymous commented on Dec 29

    The only thing different about this time is the low low interest rates and a Fed that is so scared of a shakeout in the housing market that it is likely to drop rates at the drop of a hat. That is the difference between early nineties, mid nineties and now. Real interest rates. Happy new year everyone and may 2007 bring better luck.

  6. Dave commented on Dec 29

    Today’s NYT has a “duh” article on prices going down drawing some customers. One key thing is the record inventory (7.3 months) and one that no one seems to mention but I’m living is the ratio of rent to buy. I’m renting a house for 50% of what it would take to by in conventional loan terms. Another one that I rarely see is that in my area (D.C.) there are NO houses in the MLS priced at median income. http://www.nytimes.com/2006/12/29/business/29econ.html?_r=1&ref=business&oref=slogin

  7. BDG123 commented on Dec 29

    I don’t pay much attention to the talking heads. They are always wrong. Always. It almost makes me sick to turn on CNBC anymore. Bringing on the CEO of CB or NAR or Homebuilders or whatever is so ridiculous. These people don’t want the truth. They are floating down that famous river. Denial.

    1Q 2008 has been my time series projection for a housing bottom. I had a fair amount of confidence at the time I posted it. I am really not feeling good about that date. It all depends on a few macro issues.

    Here’s a dirty little secret. In the early 70s when we had a housing cycle similar to today but less bubbly, homebuilders lost, on average, 40% of their book value in the post boom mess.

    Today’s value is tomorrow’s junk.

  8. jm commented on Dec 29

    The slide will be long and slow, except in the very worst bubble areas. As the boom has been the greatest in US history, symmetrically so will be the bust.
    Consider the Japanese experience. BTW, mortgage rates in Japan are now about 2.73%.

  9. bk commented on Dec 29

    Yes, we can say that the 1997 tax law change means that “it’s different this time!”

    It is ‘different’ this time because the housing bubble is much bigger than it would have been under ‘normal’ circumstances; i.e., with pre-1997 tax laws. Rather than prolong the bubble, the lure of ‘easy’ tax-free gains only insures that financial hardship will be experienced by many thousands more financial ‘gurus’ than in a normal real estate cycle.

  10. GerryL commented on Dec 29

    I am somebody that moved last year and sold my house in Florida. I moved to Northern California and decided to rent for awhile. So far it has worked fairly well because I sold my house near the top. I am watching very closely and trying to decide when to buy a house in Northern California. Houses are selling here pretty quickly if they are priced right (significantly lower than in 2005). However, if they arent priced right they sit on the market for many months. I have also seen numerous houses taken off the market or changed from for sale to for lease. I must admit that I am very confused what to do. I think this spring when many of these homes will come back on the market will tell whether this was a bottom or just a temporary lull in an ongoing bear market.

  11. Bob_in_ma commented on Dec 29

    I think BK may be on to something, the law of unintended consequences and all that. The tax law change probably did add fuel to the fire in a quickly rising market. But it’s hard to see how it offers any price support in the stagnant-to-falling market were in now.

    Barry is wrong about initial sales and inventory data will being revised due to cancellations. Cancellations are never incorporated back into the data. But they will obviously influence future sales.

    There are three factors clouding the picture on inventories, canceled-sale inventory held by builders, properties bought by investors who hoped for quick resales but are waiting for an improved market and foreclosures, still small in number but growing rapidly.

    I think it’s these shadow inventories that will tell the story.


    To clarify the revisions: The Census Bureau counts a house as sold when the contract is signed. If a buyer cancels the contract, however, Census does not readjust the numbers. As a result, sales are overstated and inventories understated for the month the house is initially sold.

    When the house eventually does get sold, sales are understated and inventories overstated.

  12. VennData commented on Dec 29

    Once the tax change is made – ’97’s cap gain reset – all housing prices reflect it. If you sell to ‘capture’ it, so are the folks you’re buying from. Same with the mortgage interest deduction, it’s priced in.

    No one can predict the bottom, though someone will; then they’ll be the next real estate genius… until their next bad call. Diversify. Rebalance. Though, rebalancing out of your dwelling is tricky. Maybe one day we’ll see an ETF of puts on Shiller’s home index..

  13. super-anon commented on Dec 29

    Just look at the foreclosure numbers – they’re exploding.

    Now compare this to previous housing downturns. You see that foreclosures increase at the beginning of a downturn, level off toward the end, and start decreasing after a bottom is reached.

    We’re not even close.

    Plus home prices continue to fall, which devastates the US consumer’s balance sheet.

  14. The Dow Dominator commented on Dec 29

    The stock market bottomed in July & housing is bottoming now.

    The bears will always be bears.

    -The Dow Dominator

  15. Lord commented on Dec 29

    The 97 tax change was largely insignificant because most people move up during their lives and only as they approach retirement do they move down. Almost no one paid the tax before or after. Limitations in property tax increases in many jurisdictions amount to much larger benefits than the 97 law.

  16. dave commented on Dec 29

    maybe, just maybe interest rates will influence home buyers. Interest rates were moving down since the summer but have very recently begun moving up.

    Interest rates need to go a lot lower, in my opinion to get housing to stabilize. But considering all the leverage used to get in (at the top, of course) I think the marginal players need to be rinsed out prior to any meaningful rebound. Marginal players represent supply and from what I understand there are a lot of marginal players in the game.

  17. jj commented on Dec 29

    Interesting how the —-

    1997 Real Estate tax cut

    1997 Electric Utility De-Regulation Act

    1996 Telecom De-Regulation Act

    brought us huge bubbles and busts in each one of these industries through the last few years —- and how we get left with the clean-up

  18. super-anon commented on Dec 29

    Also, it’s worth noting that the 30 year bond is up almost 25 basis points in the past 3 weeks.

    What do you think this is going to do to mortgage applications, and in turn, home sales going forward?

  19. Chuck commented on Dec 29

    Since 2003, the “market price” in the residential market has been driven by widespread “extreme balloon lending”: Interest-Only, Negative Amortization, etc. ( where the “teaser” payment takes up 30% – 50% of borrower’s take-home pay. Obvious ramifications on ‘payment reset’ to an amortizing amount. )

    Using the “traditional” housing metrics to gauge where this will end up is probably unwise.

    It’s laughable to be dicussing 30-year-fixed rates, or employment statistcs, in this context.

  20. Barry Ritholtz commented on Dec 29

    Lets clarify this once and for all (and I apologize for my inartful usage of the word “revision”):

    The Census Bureau counts a house as sold when the contract is actually signed.

    If a buyer cancels the contract, however, Census does not readjust the numbers. As a result, when there are lots of cancellations, sales may be overstated and inventories understated for that month.

    When the cancelled house is eventually sold, sales are then understated and inventories overstated.


  21. semper fubar commented on Dec 29

    Barry – I thought existing home sales and new home sales were captured differently:

    New home sales captured when the contract is signed (hence cancellations are a potentially huge factor)

    Existing home sales captured when the sale closes, so they represent an actual sale

    Am I right about this??

  22. winjr commented on Dec 29

    “The 97 tax change was largely insignificant because most people move up during their lives and only as they approach retirement do they move down. Almost no one paid the tax before or after.”

    Incorrect. Prior to the ’97 change, tax was avoided on gain only to the extent that the cost of a purchased replacement home exceeded the net sales price of the home sold. Therefore, “move down” buyers always paid the tax.

  23. super-anon commented on Dec 29

    I thought existing home sales and new home sales were captured differently:

    New home sales captured when the contract is signed…

    More important, perhaps, I think the new home sales report is more of a sample and the existing homes report more of an aggregate.

    In any case, the new homes report seems highly noisy – almost worthless in the short term. Whereas the existing homes report seems much more stable (and it better confirms my views – always a great feature).

  24. Brian Mihalic commented on Dec 29

    Chuck mentions what I believe is the single largest variable in the housing market – lending standards. The boom, as fueled by low interest rates, speculation, etc. would have peaked earlier if lending standards hadn’t gotten progressively looser. I think the current talk of a bottom is merely a dead cat bounce made possible by loose subprime lending and desperate homebuilders doing whatever it takes to sell off inventory. Even though sales volumes have dropped, median prices show some support as long as fools and crooks can buy houses with someone else’s money. But if lending standards finally tighten in 2007 then sales volume and prices could really go off a cliff.

  25. me commented on Dec 29

    My Sister moved from Ohio to Charlotte. The Brother-in-law was incensed and rabid his Ohio house did not sell in one week like some earlier sales.

    We was lived when a guy down the street priced his house for sale thousands less than the brother-in-law.

    After 9 months it finally sold and it wasn’t a month until he had bought the house in Charlotte. They close in 2 weeks.

    I think there is a pop in the market where some people sold and are moving into something else.

    I ws talking with our pet sitter. She said the folks across the street from her had lived there for 10 years and were being foreclosed. They just kept running up the credit cards, refinancing and now that ship has sailed.

    I talked to a former colleague and she told me the family that just moved in next to her are filing bankruptcy. They bought the house here without selling their house in, get this, Michigan. After a year of not selling up there they are filing.

    This slowdown has not even taken hold yet. Want proof, Greenspan says its over. Before becoming Fed chair and during, he was the worst forecaster.

    The first sub-prime lender has gone out of business, thousands are being laid off in finance and construction. Nothing goes straight up, or as in this case, straight down.

    But hey, happy new years, be safe, happy and prosperous.

  26. Bob_in_ma commented on Dec 29

    “When the cancelled house is eventually sold, sales are then understated and inventories overstated.”

    Barry, no, that isn’t correct. The inventory won’t be overstated when the cancelled-sale house eventually sells because the Census Bureau’s inventory is counting the houses for sale. Selling a house outside of that inventory won’t change how many houses are in that inventory.

    There is less shadow inventory, but that isn’t part of the stated inventory. You could say that the stated figure understates the true inventory by less than it did before. ;-)

  27. number2son commented on Dec 29

    “Also, it’s worth noting that the 30 year bond is up almost 25 basis points in the past 3 weeks.”

    True enough, but it’s the 10-year bond that more accurately tracks mortgage rates. In any case, both have been moving steadily higher in recent weeks. This, no doubt, was reflected in the recent weakness in mortgage apps.

  28. ECONOMISTA NON GRATA commented on Dec 29

    “”Price your house at a reasonable level and it will sell quickly. Overprice it, or assume its still 2005, and it won’t move. Houses get stale, and pricing it wrong to begin with is a guaranteed way not to sell it . . . ”

    The key word here is “reasonable”.

    We had an unprecedented run up on residential real estate values, new construction, financing, etc. etc., between 2001 and 2005. What is reasonable….? Please define. “REASON”, has little to do with what has occured in recent residential housing history.

    This market will have to play it’s self out and to this observer, it appears as though we are in the very early stages of the downturn. Anecdotal evidence indicates that we are beginning to see foreclosures and cancellations outnumber sales. Reasonable would be to do a comp market analisys, then trim 20% off the top, get on your knees and pray.

    If you are a speculator that bought recently 2002-2005 and you have to sell, you have my sicerest sympathy.

    Wishing all a prosperous 2007.


  29. Repoman commented on Dec 29

    Why are so many people on this board predicting “housing bottoms at the end of ’07 or ’08”. Anyone who has studied housing cycles would realize that it takes YEARS, many YEARS for real estate to bottom and then move up again.

    If this is indeed a bubble, which I’m completely convinced it is (due to the underlying CREDIT bubble), it will take years if not decades to achieve the highs that were made in 2005 (if ever). The problem with bubbles is that it takes a long time to repair the damage. Since this real estate cycle brought one of the largest price expansions ever, it only makes sense that the trough cycle will equally as long and painful on the way down.

    Look for an alternating slow drip and large swings down for many years. True national real estate cycle is 18 years from peak to trough. Coupled with the extremely poor balance sheet of the U.S. homeowner, retiring baby boomers (selling their homes to fund their retirements, due to no savings), and rampant speculation, the next decade is going to be very tough for those with too much house.
    Bottom line, those with 1-3 time orizons for a housing bottom had better do more homework on real estate cycles and the bursting of bubbles.


  30. Lord commented on Dec 29

    About the only time buyers ever moved down was at retirement which already held a one time exemption. A few deaths and divorces led to moving down but this was relatively rare. Continually inflating values also made it a rarity. One difference though is that the prior law tended to stabilize the market since few would willing move down. That has changed for some, but I suspect still rather few.

  31. DavidB commented on Dec 30

    I am wondering what effect the hyper informative internet marketplace will have on this real estate boom and people’s decision making. Thanks to the net the average man has so much more information available to him that I would argue it must improve his decision making(or at least his wife’s and yappy neighbor’s) and thus speed up the rate of corrections.

    That is probably the only significant factor I would say that adds to the mix and can thus change the dynamics versus prior real estate booms

  32. BDG123 commented on Dec 30

    Why are people calling for a housing bottom in 2008? Because there is precedence for it. (Bank of International Settlements study as well.) And, it would be three years from peak to trough. It may take many years to create the crisis but typically revisions are much faster than the rise. It may take the better part of a decade for housing to rise to values seen at the peak but that is different than a bottom.

    Tech may have taken a decade to create a bubble but it bottomed in 2002. One may argue housing is different than equities but unless we have a very out of bounds catastrophe, it won’t take decades to resolve.

    The U.S. is NOT Japan. The causes and outcome were very different. Not that a long deflationary cycle couldn’t happen. But it would be predicated on many things that have nothing to do with real estate.

  33. Teddy commented on Dec 30

    Comparing the US to Japan is like comparing apples to oranges. Japan has always been a nation of savers and the government likes it that way. It has led to trade surpluses, external credits, and SOLID current account surpluses as the population ages. When the Japanese banks that created their stock and real estate bubbles went bankrupt,the US financial engineers pleaded with the BOJ to close down these brain dead banks like we did thru the Resolution Trust. They didn’t, and thus did NOT generate loans (debt, printing money, whatever you want to call it) and the economy stagnated and real estate and stocks spiraled down. The honorable people who bought these inflated stocks and real estate didn’t file bankruptcy. But this created even more savings in that country and even lead to the Japanese carry trade which resulted in huge amounts of INTERNAL debt being created, but what’s the big deal? They owe it to themselves, it helped their manufacturers and trade surpluses, and they will get paid in Yen, not Dollars by American debtors. Japan looks after the well being of BOTH the corporations and its people, and not just the current aging population, but their children also, the next generation. They believe the world is round. And kudos to Honda for their direct investments in manufacturing plants in THIS country which worked financially, produced great cars here, and proved that American workers ARE good workers. And kudos to Honda who is coming out with the first hydrogen fuel cell car within 2 years.

  34. Teddy commented on Dec 30

    And lest I forget, congratulations to Toyota which made a huge direct investment in the American people in Georgetown, Kentucky and proved again that American workers can produce great cars that are a huge financial success.

  35. Repoman commented on Dec 30


    Respectfully, you don’t know for sure that tech “bottomed” in 2002. It may have made a temporary bottom at that time, but it is not known if that will be a long term bottom. I can easily see the Nasdaq retesting that low. It can be a bull rally, in a longer term bear market for that index.

    The Nasdaq hasn’t even recovered half of what it was at it’s high. If the housing market is also a true “bubble” we can see the same results for that market as well…don’t say that one market is different than another…a bubble is a bubble.

  36. ac commented on Dec 30

    I think what B is talking about is production or maybe distribution values rather than financial which he fully realizes will take years to sort through.

    Then I agree. Especially if we are seeing the remaining speculators “rush to the exits” over the last 2 weeks(make that 3?).

    Thus we are about halfway down the bust. Entering recession phase next?

  37. Dave commented on Feb 15

    A year later, and still the market has way to fall. We know a median house will cost $120-$140k at the bottom. That’s 3x the median income.

    The only question is how long it will take to reach that level. We have way long to go, which means stagflation. Of course, that means the real wealth will deteriorate as neighborhoods continue to go to hell and houses fall apart from the lack of maintenance. Especially ones with pools.

    Bank, investors, and fool buyers who might be foreclosed on aren’t going to put money into maintenance for a depreciating asset.

    Too bad. Greed caused this bubble, and greed is now causing stagflation. Note to sellers: buyers don’t have to buy now and ultimately either won’t buy your house at all (cause it wasn’t maintained or the neighborhood went to hell) or will offer a hell of a lot less the longer you wait.

    Meanwhile, we are all renting and saving our money. It’s unfortunate, we potential buyers lose this rent money, but we’re going to lose a hell of a lot less than the banks, investors, and fool buyers.

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