Phantom Rebound in the Housing Market

Dan Gross had a good Sunday Times piece on a favorite subject of ours: The Phantom Rebound in the Housing Market. Not surprisingly, it was on cancelled new home contracts.

Which brings us to this morning’s news:

D.R. Horton orders tumbled 23%, and cancellations remained high in the fiscal first quarter as the home-building giant continued to struggle with a deteriorating housing market.

The Fort Worth, Texas, builder received net sales orders for 8,771 homes valued at $2.3 billion in the latest quarter, down from 11,463 homes valued at $3.2 billion a year earlier. The decline was slightly better than the fiscal fourth quarter’s 25% dropoff.

The decline, however, was larger than the 18% drop Banc of America analyst Daniel Oppenheim had forecast and significantly above the 6% decline rival Lennar Corp. reported for its fiscal fourth quarter. . .

Cancellations from buyers nervous about the unpredictable and volatile housing market continued to hamper net sales. The cancellation rate was 33% in the quarter, slightly better than the 40% cancellation rate in the fourth quarter. However, Chairman Donald Horton cautioned that the small improvement doesn’t indicate that demand is rebounding." (emphasis added)

This is very much in sync with the Sunday Times piece, which cautions that the "improvements" are misleading:

"But those who think that the worst may be over for the housing market should take another look at the data, economists say. For the figures on new-home sales have a strange wrinkle that, in the current environment, may lead the government to overstate sales (and to understate inventory) by up to 20 percent. “The market is weaker than the data say,” said Mark Zandi, chief economist at Moody’s/

New-home sales are tallied by the Census Bureau, based on a sampling of contracts signed by home buyers. Running at a pace of more than one million a year for the last four years, new-home sales have been a significant contributor to the housing boom — and to the economy. (Existing-home sales, reported monthly by the National Association of Realtors, count actual closings.)

But here’s the rub: If a contract to buy a home, signed in November, is canceled in December, the Census Bureau does not subtract the failed transaction from the number of sales, or add the house back to its inventory total. In the last year, as the housing market has cooled, the volume of cancellations has risen to epidemic proportions." (emphasis added)

Note that Toll Brothers had cancellations of 37%, while Pulte Homes reported a 36% cancellation rate. And as we noted last week, Lennar announced a stunning land-related write-down of $500 million.

The NAR’s survey of 30 large builders, (November 2006), showed cancellations running at an astonishing 38% of gross sales. That compares with 26% for the same period in 2005, and about 18% 1H 2005. In other words, cancellations are actually accelerating.

How significant are the actual numbers? Dan Gross observes:

"On its Web site, the Census Bureau acknowledges: “As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated.” By how much? Mr. Carson of AllianceBernstein estimates that the government is overestimating the pace of annual sales by 100,000 to 150,000. Mr. Zandi of estimates that the differential is even greater. “Given the rise in cancellation rates, it suggests that between 150,000 and 200,000 home sales are being counted that actually did not occur.”

There is some good news in the housing area:  Mortgage Applications ticked up as rates slid  last week. Oh, abusive, high-pressure sales tactics of Ameriquest Mortgage Securities hasn’t saved their bacon: Fitch and S&P lowered their investment ratings on their mortgage-pass-through certificates; Other sub-prime lenders have run into troubles, including bankruptcy.

But the most amusing mortgage news is that if you shop around, you can get competitive rates — including: No Mortgage Payment for 12 Months

I guess that’s what some people consider a sign of a bottom: free houses for people who can’t afford them.



A Phantom Rebound in the Housing Market

Economic View
NYT, January 7, 2007

D.R. Horton Orders Tumble 23%
WSJ, January 10, 2007; Page C8

Mortgage Applications Up as Home Buyers See a Break in Rates   
NYT, January 9, 2007

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What's been said:

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  1. Larry Nusbaum commented on Jan 10

    “Dan Gross had a good Sunday Times piece on a favorite subject of ours: The Phantom Rebound in the Housing Market. Not surprisingly, it was on cancelled new home contracts.”

    *YAWN* Cancellations come from new home builds, right? And, new home builds make up about 15% of the housing market, right? So, maybe the headline is a bit misleading, right? Since, new home builds is not “The Housing Market”, right?
    But, here is something I agree with: “a favorite subject of ours” *SIGH*

  2. Leisa commented on Jan 10

    HOrton’s average contract value fell to $262 from $279K or 6.1%. It will be interesting to see how this trend continues.

  3. Mike_in_FL commented on Jan 10

    I’m still a bear on residential real estate over the long term. And yes, I believe this is a “bounce” not a “bottom” (my estimated timing for that — sometime in 2008). But even I have to admit that was a yowser of a rise in mortgage apps in the most recent week. These holiday-adjusted numbers are always extremely volatile (just a few weeks ago, we had a 5.9% decline followed by a 10.6% plunge). But it’s clear demand has increased somewhat from the summer low.

  4. costa commented on Jan 10

    So as a 23 year old. Saving to evenutally buy a house in 3-5 years. Is it even worth it?

  5. Henry commented on Jan 10

    “I guess that’s what some people consider a sign of a bottom: free houses for people who can’t afford them.”

    What a fantastic line.

  6. super-anon commented on Jan 10

    The “housing has bottomed” crowd is going to go nuts today when they see that mortgage applications are up 16.6% this week and up 3% year-over-year.

  7. Larry Nusbaum commented on Jan 10

    “So as a 23 year old. Saving to evenutally buy a house in 3-5 years. Is it even worth it?”

    costa: They asked the same exact question in 1991 and in 2001 and the answer keeps coming up the same – YES!

  8. Eclectic commented on Jan 10

    In addition to this housing piece today, you can read from John Mauldin’s latest “Outside The Box” letter in which he reproduces an analysis by Hoisington and Hunt at Hoisington Investment Management Company, titled ‘Quarterly Review and Outlook – Fourth Quarter 2006.’

    Their analysis is excellent and possibly demonstrates the reasons for anticipated poor domestic cap ex, and for why GDP almost immediately turned strongly down when the yield curve inverted.

    Barry, these are possibly reasons why BLS and ADP measures have diverged so strongly beginning in about Feburary 2006 and widening more impressively starting in late summer 2006.

  9. number2son commented on Jan 10

    Costa, at 23 years old why are you even thinking of buying a home? This is a major financial committment. When I was 23 I was too busy exploring the world to take on such a major responsibility.

    Live a little first! And besides, it looks like the market will come to you in the meantime.

  10. fred hooper commented on Jan 10

    The problem with real estate agents is that most of them have just a few years experience. Most of them are washouts from previous careers. Larry’s case, investment banking circa 2000.
    Costa, look back in the early 80’s and ask yourself whether buying a house made sense. Larry hasn’t been selling houses long enough to remember. Take his advice at great peril.

  11. lurker commented on Jan 10

    uh oh–Fred you have lit the Larry fuse. Duck and cover. Costa, it depends where you want to live and what you pay for the home. Location and Price always matter… Unless you are sure of perpetual cheap rent, you should do your research and refuse to overpay or buy more home than you can afford. and live a little too and remember that saving money is always smart in order to have cash for bargains. Good luck kid.

  12. Macro Man commented on Jan 10


    The 3m – 10y yield curve inverted in December 2005. 1Q06 GDP growth was 5.6%. Not really immediate.

  13. Larry Nusbaum commented on Jan 10

    lurker: I agree 100%. He did say that he wanted to save money and he wouldn’t be buying a house for a least 3-5 years. Who could argue against saving and having fun in his 20’s.

    And, yes, even buying a house in the early 80’s wound up making sense fred. And, no fred, I don’t sell houses and never did….

  14. costa commented on Jan 10

    thanks for the advice. I live a little(saving for a nice 42in HD tv) but I live in ny and realize I need a down payment at least $50k + to have a mortage that I can acutally afford. Plus rent is so much in the city, get a nice closet for $1500 a month.

  15. Gary commented on Jan 10

    The first leg down in any secular bear market has typically lasted for at least 2 1/2 to 3 years. Take a look at 29 to 32 bear, the early nighties in Japan, the collapse of the tech bubble in 2000 and the secular bear market in the dollar recently. Why should housing be any different. Obviously it takes a while for human nature to give up hope.

  16. gsinbe commented on Jan 10

    Is the junp in mortgage applications a real jump or does it reflect a shift in mortgage providers? Isn’t the MBA index only based on a subset of the mortgage providers? Could the recent jumps in the MBA index be due to the carnage in the sub-prime providers, causing home buyers to shift to MBA members when they need a mortgage?

  17. Alex commented on Jan 10

    In relation to subprime borrowing and HPA, its important to keep an eye on the job market. HPA is the dominant factor in loan performance: strong HPA will mitigate a weak job market, however, when weak HPA conditions exist, delinquincy rates can swing by up to 10% b/w the best and worst employment situations.

  18. GerryL commented on Jan 10

    I understand why cancellations were so high a year ago because people were surprised that the market turned down. They realized it was cheaper to lose their deposit than buy the house. What I don’t understand is who are the people that are buying now and cancelling. Shouldn’t cancellations be slowing down now because people have realized the market is going down? Why are they buying now and losing their deposits?

  19. Cherry commented on Jan 10

    ALWAYS ignore the application part of it. The most overvalued “index” I know of. I suspect the sub-prime bust has started to role the number of apps “upwards” as the rise in apps started when the bust started putting them out of business, the timeline is just to sweet and lenders are now becoming extinct forcing more onto the other lenders(like MBA). The “demand” share was down to Summer 2003 levels and what you really need to watch. Halfway down boys and gals.

    Next stop to “2001” all aboard!!!!!(except building 1991 lol)!!!!!

  20. Gary commented on Jan 10

    Manufacturing, housing and autos are all in recession and retail sales for the holidays were somewhere around 3.1% yoy, barely above inflation and that’s if you believe the numbers. With consumption being 70% of GDP and 3 other large sectors of the economy declining its hard to see what’s going to drive GDP much above 0 this quarter. Oh well I’m sure the government will come up with some kind of magic adjustments to cover any shortfall.

  21. GerryL commented on Jan 10

    This is a quote from the NY Times article:

    Of course, the large publicly held builders comprise a minority of the home-building industry. Lawrence Yun, senior economist at the National Association of Realtors, noted that “smaller home builders aren’t affected as much by cancellations because they generally try to sign up clients before they start construction.”

    Does anybody understand what it means? This guy is David Lereah Junior of the NAR. I guess he is being trained to be the NAR spin doctor when Lereah leaves.

  22. Macro Man commented on Jan 10

    “Manufacturing, housing and autos are all in recesson”

    If this is right, it’s a stunning revelation. We now know why America cannot sell any cars to foreigners; evidently, Ford and GM sell them flat-pack instead of manufacturing them…. ;)

  23. super-anon commented on Jan 10

    Is the junp in mortgage applications a real jump or does it reflect a shift in mortgage providers?

    Remember the mortgage apps are seasonally adjusted. The applications for last week are being compared to the typical hellishly cold first week of January. So I think it’s reasonable to think the balmy Spring-like weather we’ve had in many regions lately has greatly skewed the mortgage apps. However these will likely come out of demand later this year.

    Also there may be some merit to the argument that the new lending guidelines and dissappearance of some sub-primes are pushing more applications to the lenders covered by the MBAA survey.

  24. GerryL commented on Jan 10

    Thanks for the information Barry. This article has prompted many questions for me.

    I wonder how much of the jump in mortgage apps is refinancing. The smart thing to do now is get out of those exotic mortgages and into a fixed mortgage.

  25. winjr commented on Jan 10

    “The “demand” share was down to Summer 2003 levels and what you really need to watch.”

    Cherry, I’m not following exactly what you’re saying. Could you explain this further?

  26. wcw commented on Jan 10

    There are separate purchase and refi indexes.

    costa, model your market. residential housing over the long term is a low-volatility, 1%-real grower. the key is to model the tax subsidy — it is absolutely huge. even at current prices on the coasts, a toy monte carlo model I made has owning beating renting and investing the difference about 1/3 the time.

    as for the health of the market, I just can’t look at new-home sales rates versus population growth and vacancy rates in both for-sale-only and for-rent series and be anything but a housing bear long-term. that still doesn’t mean you shouldn’t buy — tax break, tax break, tax break.

    I rent (in SF), and save the difference, but at the right price, would buy.

  27. Cherry commented on Jan 10

    The lenders on the MBA index probably wish the number of apps would fall so the bad crappy loans they are getting from the failed sub-prime lenders would go away lol. Like getting a pile of manure and asked to do something with it. Will it drag down some MBA lenders they cover? Stay tuned.

    Now you see how the chain reaction of events cause stuff like financial panics and S&L crisis.

    Ugly stuff when you let it get out of control.

  28. OldVet commented on Jan 10

    Some smart people over at Contrary Investor think the Fed will panic and start pumping liquidity into the system when the broad effects of the housing decline are felt. It’s a tried and true answer for recessionary conditions. But the likely spillover effect may not be into housing, but other asset classes. Question: Liquidity pours into what assets??

  29. Cherry commented on Jan 10

    winjr, I was actually talking about the ‘refiance’ share, sorry for confusing you. But using this share in the past, usually tells you the demand level applications are at. The fact is, applications(2005 levels) are way above the actual demand(2003 levels halfway down to 2001).

    That is because the subprime bust is feeding ‘manure’ into the MBA index lenders they cover and forcing up applications. You can pretty much see the “rebound” in applications since November has happened right when the Sup-primes bust began shutting them down after a long trend down to Oct.

    The 80’s have nothing on this mess. Will it take some MBA lenders down as well? Stay Tuned.

  30. costa commented on Jan 10

    wcw thanks. I agree, I dont want to rent. It would kill me pay 800-1500 a month for nothing.

  31. Teddy commented on Jan 10

    Cherry, are there any laws on the horizon to monitor and regulate the standards of lending for mortgage brokers? What are the educational requirements, and do they have to be tested and licensed in most states? Hopefully, all this predatory lending will be considered a white collar crime punishable by prison time and not just a fine.

  32. S commented on Jan 10

    If investors believed the jump in mortgage apps was real and sustainable, they’d be jumping all over themselves to get in NEW, a mortgage REIT yielding over 25% with a chart that looks like a roadmap to the southeast.

  33. RW commented on Jan 10

    The cited comment of NAR’s Lawrence Yun makes a little sense but not very much and its rather misleading in any case because: (a) Some private builders are very large enterprises, even larger than the better-known publicly held builders possibly (e.g., ) so Yun’s sudden shift to “small” when the topic is “private” doesn’t logically follow; (b) regardless even small home builders build spec houses and (c) they do not always succeed in signing up clients before construction begins because construction schedules can not be continually revised if a builder expects sub-contractors to remain cooperative; (d) in cases where they do “sign up” clients before construction begins the typical deposit of 30% makes it less likely the client will walk away but (e) a small builder’s size can make even a single cancellation catastrophic.

    It’s true that small builders are often hired by a landholder client but even there the client may postpone or cancel the project for a number of reasons (including inability to pay due to loss of job need one add) and the most a contractor can do is halt construction and file a lien on the property while waiting for resolution of the case.

    Taken as a whole the possibility that Yun is angling for Lereah’s job seems to be the best conclusion one can draw from the quote.

  34. wunsacon commented on Jan 10

    Oldvet, where do you think that liquidity *will* end up? Gold? Wheat? Stock prices of defensive industries?

  35. Dr. Housing Bubble commented on Jan 10

    The Four Horsemen of Housing will show up in 2007. In Southern California, we had many folks taking off their homes in late 2006 thinking they would be able to sell in 2007. You can see this by looking at sales number in 2006. They dropped toward the end of the year, in many areas around 20%.

    Prices are finally starting to hit zero to negative appreciation. It was only a matter of time and this mainstream media of a housing bounce is purely smoke and mirrors from a minor last push.

  36. Mike_in_FL commented on Jan 10

    You guys will love this comment from a real estate agent in Michigan. In real estate land, it’s ALWAYS a good time to buy AND sell. And things are so good, even the past … when things were bad … was really good. You can’t make this stuff up.

    “I think the decline that we’ve seen is not going to occur,” said Tomie Raines Realty President Debbie D’Valentine. “I don’t think we’ll have a huge increase back but I think it’ll stabilize and will be the beginning of the rebound for the housing market.”


  37. Eddie commented on Jan 10

    “wcw thanks. I agree, I dont want to rent. It would kill me pay 800-1500 a month for nothing.”

    Wait till you see how much of that $2000/month mortgage goes to interest for those first several years. Talk about paying for nothing! :)

  38. costa commented on Jan 10

    Eddie, haha that is true too. Ive seen plently of Amorzation tables to know that.

  39. Eclectic commented on Jan 10


    Can’t argue the point… Maybe the authors view what they said in the sense of a gradient that began ‘almost’ immediately. Anyway, here’s an exact quote. I hesitate to do wholescale quoting.

    Maybe Hondo can get permission from Mauldin and reproduce the whole thing for us.

    Again, crediting Hoisington and Hunt at Hoisington Investment Management Company, article titled ‘Quarterly Review and Outlook – Fourth Quarter 2006.’ via Mauldin’s ‘Outside the Box.'(of course Mr. Mauldin gratiously makes this letter free to interested persons and you can easily find it):

    “The economy has already shown a clear and unmistakable response to the inverted curve of last summer. Almost coincidental with the arrival of the inverted yield, the rate of growth in nominal GDP dropped sharply. For example, nominal consumer spending in October and November grew at an estimated 2.3% annual rate, down sharply from 5.2% in the third quarter and 6.7% in the second quarter.”…end quote

    To my mind, the phrase ‘almost immediately’ [they actually used the phrase ‘almost coincidental with’] is appropriate to the thrust of their thesis.

  40. My1ambition commented on Jan 11

    OldVet, I must make a point.

    Many believe that the Government, Fed, etc. are going to go on playing the same game that they’ve played for years thereby bailing the public out of every rotten mess we as a nation get ourselves into.

    So can the Fed increase liquidity, credit, REPOs, lower interest rates and hold their bluff a bit longer? Yes.

    Are they willing to? Many doubt it.

  41. Teddy commented on Jan 11

    My1ambition: If oil prices collapse and we continue sending our good paying jobs abroad (notice that the dollar has rallied since Hank and Ben came back from China -not good for US manufacturing,I think the Fed will lower fed funds rates dramatically and the mortgage brokers will rush to save the housing market from significant damage………for the short term.

  42. My1ambition commented on Jan 11

    …for the short-term. lol.

    Just reading Mish’s most recent article, I hope so.

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