Sic Semper Tyrannis

A distinct whiff of desperation is now in the air. I am, of course, referring to the housing market. Witness this rather poignant post, found the other day uncharacteristically buried in the comments to Nouriel Roubini's blog:

Crash this housing bubble soon, please.

I am a realtor. I did not make a single sale in the last 3 mons. Somebody has to cut the prices for for the whole bubble industry to move sales. No sales when prices stay too high. Do you hear me? I need to make commision, no matter what the prices are.

Written by Anonymous on 2006-12-28 19:41:06

Yikes. Perhaps this realtor isn't listening to the Fearless Leader, NAR (dis)Information Minister David Lerah, who has come out this month and saved the day once again by calling the market bottom (like some sort of evil real estate groundhog). Or maybe he's tried to take Lerah's predictions to the bank, with disappointing results.

Follow up:

But the "street metrics" seem to support this realtor's concerns. The accompanying chart, for example, is a plot of the Zillow.com home value estimate of the Northern Virginia suburban house of someone I know (the dark blue line is the specific house, the light blue is the whole zip code). That's a ~14% nominal decline in a few months! According to the press this is not supposed to be happening, or rather, it "isn't happening".

The person who owns that house certainly wishes that was the case, I assure you.

The take on some of the latest data in the AJC was representative of the media bias: the headline blared "New Home Sales Up 3.4%" -- only in much smaller print was it mentioned that sales for the south (that is, the Atlanta Journal-Constitution's actual market) were down almost 10%.

Yes, the South is just one region. That's true. But a lot of data has just come out (and, erm, been revised), so let's take stock and put it all in perspective:

• New (not existing) home sales nationally were up 3.4% ...
• but the South was still steeply down (alomst 10%), and other regions were not significantly changed
• New home sales were still way down year-over-year nationwide - by 10.7% (here's a chart of the trend).
• An upward seasonal adjustment to the October housing numbers (72->78) was used to salvage the November stats -- even though the late fall has been unseasonably warm.
• Except for the North-East, all regions in the latest median sales price data were flat or down (chart) ...
• but resultingly, the overall national sales median price got an artificial spike up, as the NorthEast stole most of the volume (chart). This spike will disappear like smoke in subsequent data and revisions.
• Prices nationwide for existing homes are still unquestionably down year-over-year -- by 3.1% (here's a chart of the trend).

I have a theory about what's going on with the North-East, by the way. It has something to do with the record financial company year-end bonuses. I'll leave the rest of the explanation as an exercise for the reader.

On top of the above, the following methodological concerns are worth bearing in mind:

• If you make a conservative 3% inflation adjustment, prices are deep in the cellar for the past year (5-10% down).
• No one is accounting for incentives on all the new homes. So real sales prices from this sector are about 10-30% lower than being reported.
• New homes are only about 10% of the overall real estate market; most of the economic impact lies in what is going on with existing homes.
• No one is accounting for sales contracts that fall through -- at least not in the headline numbers. Cancellations don't surface until months later when the data is corrected (as far as I've seen all the recent stats have been revised down, which also contributes to the headline/latest stats seeming better in comparison). Builders have been reporting 20-40% cancellation rates.
• No one is accounting for homes pulled off the market when they fail to sell after a long time. This makes inventory go down even though the implied selling might not be happening.

A final methodological point: I consider year-over-year comparisons to be the most generally-meaningful indicator for any series where seasonality is a concern (as it is in housing). Month-to-month data is too noisy to be helpful -- but continues to be used, of course, because of its utility for spin purposes. There is no reason to account for seasonality by making artificial adjustments to monthly data. The seasons this year are the same seasons as last year (duh) -- but the data itself may not be. Indeed, the data is what we're trying figure out, so seasonal adjustments are actually the conflation of a known with an unknown!

So overall, it isn't looking good. The seemingly-soft data doesn't stand up to scrutiny, and isn't meshing with what our realtor friend is experiencing and with what most of us are seeing on the streets. Indeed, when you cut through all the quirky and heavily-spun national data, you see things like the chart at the beggining of this post.

I'll end this post with a broad sampling of articles on the housing market that go beyond the headline stats:

• Plunging prices

  ...

  Foreclosure and real estate records show the prices of his Gateway Lakes houses plunged $50,000 or more after the original buyer lost them.

  Pedrego's house, for one, sold for $63,000 less than the $239,000 she paid for it last year.

  Strodtman said that happened because "the banks are dumping them" and some foreclosed houses "are trashed."

  Zeller, the builder advertising homes in Spanish to buyers with poor credit and no Social Security numbers, said he does not speak Spanish and did not understand what the sign said.

  Lenders can approve applicants without a Social Security number, but "that sign will come down," he said.

• Home prices fall for third month in metropolitan areas

  Home prices in 20 U.S. metropolitan areas fell in October for a third month, according to a private survey.

  Slower gains in home values are limiting the amount that homeowners can borrow against their equity, one source of growth in consumer spending. Richard Fisher, the president of the Federal Reserve Bank of Dallas said last week that the "sharp correction" in housing may not be over.

• Baby, it's cold out there

  Median prices for new homes in Las Vegas continue to rise in November, but at least one analyst believes incentives are keeping those prices high.

  The median price of a new home in Las Vegas was $335,850 in November, up 11.4 percent from $301,519 in the same month a year ago, housing analyst Dennis Smith of Home Builders Research said Wednesday. He counted 2,829 new home sales, compared with 3,680 a year ago.

  Factoring out sales incentives offered by most home builders, new home prices would probably be down by double digits. ...

• A Bankruptcy Boom Cometh

  Too much capital plus too little due diligence adds up to a bankruptcy boom in the making.

  And who could forget the housing market? While everyone knows the sector is softening, there's still another shoe to drop, Sunshine says.

  While developers aren't starting a lot of new projects, they are finishing those they started in the last 12 months. New buildings take 12 to 24 months to finish, Sunshine says. Since the housing boom started weakening in the last year, builders--and their suppliers--have a few more months before contracts dry up.

  "The day before a hurricane, life's great," Sunshine says. "The weather's always wonderful. We think that sector is potentially in the path of a hurricane."

• When a Seller Finances the Sale

  HOME buyers in a stagnating real estate market are starting to hear a term not bandied about since the days of high interest rates: seller financing.

  ...

• Housing Bears May Just Have It Right for 2007

  David Rosenberg, the chief economist for North America at Merrill Lynch & Co. Rosenberg's contention is that when you take a close look at homes for sale, including those being completed and those under construction, the glut in supply seems likely to get worse, not better.

  According to Mauldin, even the current projection of housing sales may be overstated and thus the existing supply of homes greater than what is reported in the official data. The reason is that the Census Bureau, one of the Commerce Department's statistical agencies, fails to account for cancellations in home sales contracts. Cancellations ran as high as 40 percent for some major homebuilding firms last quarter.

• Where does your city rank?

  Foreclosures nationwide were up 43% from a year ago in the third quarter of 2006. Here are the rankings for the 100 largest U.S. metropolitan areas.

  ...

  The Detroit, Fort Lauderdale, Fla., and Denver areas posted the nation's three highest foreclosure rates for the third quarter of 2006, replacing Indianapolis, Atlanta and Dallas, which had been the top three markets for the two previous quarters. The Indianapolis area was the only one of the three to see the high rate of foreclosure rates dip, edging down 2%.

• Homeowners Cut Prices, Drawing Some Buyers Back

  The sales rate for previously owned homes rose in November for the second straight month, an industry group said yesterday, as homeowners eager to unload their properties in a crowded market cut their prices.

  ...

• Double-digit drop recorded in Maine real estate sales

  In November, 997 single-family homes were sold in Maine, representing a decrease of 12.5 percent from the same period in 2005 when 1,139 homes were sold, according to Maine Realtors' multiple listing service.

  ...

  In Maine, the median price of an existing single-family home was $185,000, a 3.9 percent drop from the November 2005 price of $192,500, the Maine Realtors said.

  Nationally, the median price was down 3.6 percent to $217,200.

• Fewer homes sell here (And for less money)

  Sales of previously owned homes in Greater Cincinnati plunged 13.5 percent in November, the Cincinnati Area Board of Realtors said Thursday.

  Realtors reported that 1,708 homes were sold for an average price of $173,593 in November, compared with 1,975 homes and an average price of $183,212 in November 2005.

  Northern Kentucky reported a similar drop Wednesday. The number of used homes sold in November fell 2.6 percent to 494. Figures for Southeast Indiana were not available Thursday.

  On a year-to-date basis, the sales comparisons aren't as bad: down 2.6 percent in Northern Kentucky, down 5 percent in Greater Cincinnati.

  "That's not bad compared to many parts of the country, such as California and Florida, where sales are off more than twice that amount,"

• Consumer confidence, home sales rise [Ed. note: Hah!]

  The better-than-expected showing for both new and existing home sales could be signaling that this year's severe slide in housing is starting to bottom out, analysts said.

  However, they cautioned not to expect a sharp rebound. Rather, they said they look for prices to continue falling for several more months as sellers are forced to trim their asking prices more in the face of near-record levels of unsold homes.

• http://www.investors.com/editorial/IBDArticles.asp?rtsec=16&issue=20061229

  The biggest uncertainty facing everyone from Bernanke on down remains the U.S. consumer and his or her relationship to declining home prices.

  While most economists are predicting a soft landing, many also continue to wince at rising mortgage defaults.

  New estimates from the Center for Responsible Lending predict that 2.2 million Americans who took out riskier subprime loans in recent years may face foreclosure.

• Washington Mutual ordered to pay whistleblower $1 million-plus

  SEATTLE - Washington Mutual Inc. has been ordered to pay more than $1 million to a whistleblower who complained of retaliation for reporting that policies were not being followed in loan processing.

  As a result of the 52-page ruling this week by Gerald M. Etchingham, a U.S. Labor Department administrative law judge in San Francisco, the Seattle-based banking company must pay a total of $1.2 million in lawyer fees, back and front pay and deferred compensation to former loan executive Theresa Hagman.

  Hagman's lawyer, Marc A. Susswein of New York, said it was the first whistleblower award of money in lieu of reinstatement under the Sarbanes-Oxley Act.

  "For the first time a person who has won a Sarbanes-Oxley case can get monetary relief into the future, known as front pay, instead of getting reinstated in her job," Susswein said.

• Brower Piven Announces Class Action Lawsuit Against Technical Olympic USA, Inc.

  BALTIMORE, MD -- (MARKET WIRE) -- December 14, 2006 -- The law firm of Brower Piven, A Professional Corporation, today announced that a securities class action was commenced on behalf of shareholders who purchased or otherwise acquired the common stock of Technical Olympic USA, Inc. (NYSE: TOA) between August 1, 2005 and November 6, 2006, inclusive (the "Class Period").

  The case is pending in the United States District Court for the Southern District of Florida against defendant Technical Olympic USA, Inc. and one or more of its officers and/or directors. The action charges that defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period, which statements had the effect of artificially inflating the market price of the Company's securities.

Update, Dec 31, 1am: Mortgage lender MLN was abrutly shut down. The news is just trickling out, so here's a post from a message forum discussing the event:

MLN is dead as a door nail. We closed a purchase loan with them yesterday and they never sent the wire. Told everyone the wire would be here today. Of course it never came. They called while everyone was waiting around to say they went out of business and can't send the funds. Borrowers left without a home.

The a-hole builder won't even let the borrowers move in. So we have a lender who closes a loan, never sends the funds, and a builder who with no sympathy. The buyers must love real estate professionals right.

Fortunately, we were able to find another lender and fund it today.

Gotta love this business.

Will yet another corporate parent bank get away scot-free? I'm beginning to see a pattern here -- it looks a lot like the banks set up fly-by-night mortgage lending shell companies, often as wholly-owned subsidiaries, to keep unethical lending practices at "arms length" while draining these originators of the corresponding profits. The one problem with this system is that when the loans default, there's no one to sue to recover the money.

Update, Jan 2: I've created a page to keep track of all the mortgage lenders going bankrupt.