New Home Sales Cut in Half

I was chatting with a friend about our earlier post taking apart the New Housing Sales data (Sales drop 23.5%), and he asked — "Gee, how far do you think that’s from the top?"

A few clicks later — and courtesy of Asha G. Bangalore, we learn that sales of new single-family homes are down 47.6% from their peak in July 2005.

New_1_family

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To contextualize this, if the current path continues into 2008, Centex
CEO Timothy Eller
 said to Bloomberg, "This looks like it’s going to be the deepest correction
of any housing correction since World War II."

Truly amazing.

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Sources:
Existing Home Sales – Sales and Prices Are Down, Inventories Keep Climbing Up
Asha G. Bangalore,
Northern Trust, November 28, 2007 
http://tinyurl.com/28wh2o

Housing Slump’s Third Year Will Be `Deepest’ Since World War II
Dan Levy and Brian Louis
Bloomberg, Nov. 30  2007
http://www.bloomberg.com/apps/news?pid=20601109&sid=aW1lrGeadgHI&

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What's been said:

Discussions found on the web:
  1. s commented on Nov 30

    Again, why is this surprising? Deepest decline and biggest bubble in history are two sides of same coin. Low interest rates are the key here as it is the last saving grace for the liquidity scoundrels…thuis is as much about saving the banks as it is about resuing the consumer balance sheet…

  2. PrahaPartizan commented on Nov 30

    Taking a quick look at that graph, one should be able to eyeball that the percentage drops were equally as large in the the periods 1972-1975, 1978-1982, 1986-1991. What is potentially breathtaking is that only the 1972-1975 plunge occurred over a similar time-frame, generated in large part by the first oil shock from the OPEC oil embargo. This plunge has been pushed by nothing like this other than the rot within the system itself. Further, assuming that this “stumble” lasts as long as they typical decline, just how far does it go before finding a bottom. We could be sailing pelagic financial waters at this point with only the abyss below.

  3. wally commented on Nov 30

    It isn’t over yet. Wait until the U S gov’t decides to help fix things; that’s when the wheels REALLY fall off.

  4. randy commented on Nov 30

    what if they lower rates and no body borrows the money, or the sub-prime crowd are the only ones who take the bait.did’nt greenspan have rates at one% for almost a year before the economy started to pick up.

  5. joe commented on Nov 30

    it would be interesting to see that graph side by side with price, im assuming that number of sales leads price

  6. wally commented on Nov 30

    Randy,
    That’s sort of an issue. Everybody knows that Fed rate actions take forever to have an effect and Bernanke keeps hinting that the economy will be stronger in a year than it is now… but he and other Fed govs who have spoken seem much more tuned in to daily events and seem to be reacting almost wildly to daily headlines. Maybe they don’t know their mission? Maybe they think they are ‘players’? Maybe things are on the edge of disaster and they just don’t want to be blamed? Time will tell.

  7. Donny commented on Nov 30

    Those gray strips on the graph represent US economic recessions.

    Now, is there anybody that actually believes we’re not going to have a recession.

  8. TKL commented on Nov 30

    The chart starkly shows how inescapable recession has been every time housing has declined in the past. (Not clear whether ’66 was a decline and recovery or, as in ’80, a cyclical spike in a secular decline.)

    The question seems to be not if, but when. The problem for investors is that it is impossible to know either (1) whether recession will begin early or late in the housing decline, or (2) where the bottom in housing is.

    Early or late? In ’70 and ’80, recession began when housing bottomed. In ’75 and ’90, recession began about halfway through the housing decline. Assuming we’re at least approaching the halfway point in this decline, recession could begin now. But it could begin on the late side, leaving time for a bit of sucker’s euphoria.

    Where’s the bottom? Past cycles peaked at 800k and bottomed at 400k, a 50% decline. This time it peaked well over 1200k. Any of three vastly different scenarios could play out: (1) this decline could resemble past declines in percentage terms, in which case we’d be near a bottom at 600k; (2) this decline could resemble past declines in absolute numbers, in which case we’d have to drop another 50% to 400k; or (3) this decline might have to exceed past declines in percentage and absolute terms, because it peaked so far above past cycle peaks.

    Given all the uncertainties, it seems impossible to form a reliable opinion about investments’ safety or expected return.

    One more word to the wise: Do not equate the bottom in housing activity (permits, starts, completions or sales) with a bottom in housing prices. In the past, prices did not make a final bottom until years after housing acitivity bottomed.

  9. Bob A commented on Nov 30

    One thing I am pretty sure of is when most (not all) the unsold new houses down the street and around town finally sell, the price is not going to be what they are asking today.

    On the other hand prime view, location, and waterfront property around here (around Microsoft) just keeps going up.

  10. Bill B. commented on Nov 30

    This is interesting – but how about an overlay of price declines. I am astonished about how sales are cratering…but (at least here in Washington DC proper) prices are *not* falling much if at all.

  11. a guy called john commented on Nov 30

    how much has revenue dropped for Realtors¬©? using the $227,000 median and 5% per transaction for drop of ~650,000 houses that’s $7,377,500,000. wait, can that be right?!?

  12. Bob A commented on Nov 30

    Speaking of revenue drop… how bout my buddy the ex mortgage loan consultant for wamu. 2003-2004 $~250k. Today $2000/month Unemployment. Good thing his wife has a steady job as a teacher.

  13. lewis commented on Nov 30

    All you economists predicting a recession real soon must not have taken politics 101. No recessions allowed in an election year. Whatever is required is done to assure this never happens. Probably not foolproof, but the way it is. So do not wonder when you see Bernake cutting rates to whatever they see as necessary to defer the recession until 2009, or some ludicrous plan to freeze existing adjustable mortgages until the election is over, or some plan to get cash into consumers pockets in 2008 or WHATEVER is required to get us through November 2008 without the R word taking hold.

    I will say that based on what I am seeing done to do that, heaven help us in 2009….

    Lewis

  14. PrahaPartizan commented on Nov 30

    Lewis, your prediction is really no surprise. The Fed followed the same practice in 1976, which is one of the things which led to the inflation and high interest rates which bedeviled Jimmy Carter’s Presidency. Does anyone remember the “misery index” besides me? I predict we’ll be seeing a return of the “misery index” next year to describe the effect of what Helicopter Ben is doing, because inflation has no way to go but up given the nick in the femoral artery the dollar will be suffering under his supervision. The Fed might be cutting rates, but the banks will need to raise their rates to counteract the loss of foreign funds flowing into the system. This will not be pretty, with the specter of the Reichsbank looming in the shadows.

  15. oral-roberts-for-prez commented on Dec 1

    Right, Praha. And Obama/Dems will take the blame, paving the way for a Pat Robertson University grad to cut taxes and increase spending. Hallelujah! Allah, uh, I mean, Jesus be praised!

  16. Robert commented on Dec 1

    Or we could vote for Ron Paul, and end all the foolishness at once…

  17. HT commented on Dec 1

    Question is, is this chart adjusted for population growth? It doesn’t seem to be. If not, expecting a return to 400k units as a bottom point like ’65 when the population was ~190M as opposed to ~310M today would be a potential mistake.

  18. TKL commented on Dec 1

    HT, population does not appear to have affected the data much over time. The numerous cycle bottoms from 1965 to 1990 were all around 400k. There is no upward channel.

    The likely reason is that these are only new homes, which add to the stock of existing homes. If population growth is steady, then the rate of new home sales can be steady too.

    Also, note that these are only single-family homes. If more people chose to live in urban apartments, that would reduce the need for single-family homes, despite an overall increase in population. Don’t know if that’s been the case.

  19. TKL commented on Dec 1

    Lewis says “[n]o recessions allowed in an election year.” History does not appear to support that claim. Of the seven recessions since 1960, two of them (1960 and 1980) occurred in an election year. Two of seven is slightly greater than the one-in-four probability that would be observed in a purely random distribution over a quadrennial cycle.

  20. lewis commented on Dec 2

    TKL,

    It is what they are TRYING to do. It ain’t foolproof, as I said, because with politicians, well, you are dealing with fools. And what happens when you have that event, a recession in an election year, your party gets thrown out of power big time (white house minimum, capitol hill usually), which is the biggest political no no of all. Plus I think you missed the last one, because from memory the George Bush senior economy was tanking in his final years, maybe not technically a recession, but he got pounded for it in the campaign, and he got tossed too (“It’s the economy, stupid” was the great quote from that one). The point isn’t what actually happened, it is what they were trying to make happen (and when it fails, they undoubtably blame the dark science folks).

    And I think the current gang at the white house is pulling every lever they can, although I think there aren’t enough levers available. I personally like the idea of the 2008 Bush tax cut surge to overcome the recession insurgents (tongue DEEP in cheek on that one).

    Lewis

  21. HARM commented on Dec 4

    “Question is, is this chart adjusted for population growth? It doesn’t seem to be. If not, expecting a return to 400k units as a bottom point like ’65 when the population was ~190M as opposed to ~310M today would be a potential mistake”

    While we might expect the average highs/lows to be ~40% higher today, due to population growth, there is no guarantee that we will not see 400k sales or lower during this bust.

    Why?

    As TKL already pointed out, this RE bubble was easily the largest in absolute and relative terms that the U.S. has ever experienced –much larger than previous booms. During the past 6 years, HBs overbuilt more than ever before, and future demand was exhausted well into the next decade. When you experience a peak of such magnitude, it is not hard to see how we could easily hit or surpass previous bottoms on the way down. One of these 2 scenarios seems most likely to me:

    “(2) this decline could resemble past declines in absolute numbers, in which case we’d have to drop another 50% to 400k; or (3) this decline might have to exceed past declines in percentage and absolute terms, because it peaked so far above past cycle peaks.”

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