Wednesday, July 26, 2017

Existing Home Sales Tank This Summer: Fact vs Fiction

Existing home sales declined nearly 2% in June from May on a SAAR basis (Seasonally Adjusted Annualized Rate). (SAAR is the statistically manipulated metric used by industry organizations and the Government to spin bad monthly economic data into an annualized metric that hides the ugly truth).

Here is the NAR-spun fiction: “Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that’s straining their budget…” – Larry Yun chief “economist” for the National Association of Homebuilders.

This has been Yun’s narrative since home sales volume began to decline last year. His headline mantra of low inventory is mindlessly regurgitated by Wall Street and the financial media. But here’s what the truth looks like (click to enlarge):


Going back to 1999, this data sourced from the Fed, who sourced it from the NAR, shows an inverse correlation between inventory and sales. In other words, low inventory drives sales higher. Conversely, as inventory rises, sales drops. You’ll note that the chart does not go past 2015. This is because, for some reason, the Fed purged its database of existing home inventory prior to June 2016. There’s a gap in inventory between mid-2015 and mid-2016. However, there is this (click to enlary):


I hate to call Larry Yun a “liar” because it sounds unprofessional. But what else am I supposed to call him when the data completely contradicts the narrative he shovels from his propaganda port-o-let into the public domain? I have no choice.

AS you can see, from 1999 to mid-2015 and from mid-2016 to present, inventory and sales are inversely correlated.

This has been the worst selling season for the housing market’s peak sales months since 2011. In 2011 the Fed was dumping trillions into the housing market and mortgage finance system. To make this morning’s report worse, mortgage rates have been declining at a steep rate since the end of December. Near-record low rates, combined with near-zero percent down payment Government-guaranteed mortgages combined with the lowest credit-approval standards since 2007 combined with the peak selling months should have catapulted home sales much higher this year.

Here’s the problem: the factors listed above have tapped out the available pool of homebuyers who qualify for a near-zero downpayment, low-credit rating Government-backed mortgage:


The graphic above shows the average household mortgage payment as a percentage of disposable personal income (after-tax income). The graphic above is for those households with 20% down payment mortgages. As you can see, that ratio is at an all-time high. It’s far worse for households with 3% down payment mortgages. Either the Government will have to roll-out a program that directly subsidizes the households who still want to over-pay for a home but can’t afford the mortgage payment let alone the cost of home ownership – i.e. helicopter money – or the housing the market is getting ready to head south. This won’t end well either way.

As for the inventory narrative. New homebuilders are bulging with inventory. How do I know? Because I look at the actual balance sheet numbers of most of the publicly traded homebuilders every quarter. Newly built homes sitting in various stages of completion or sitting complete but completely empty often are not listed in the MLS system. There’s a rather large “shadow inventory” of new homes gathering dust. This fact is reflected in the fact that the rate of housing starts has been declining for most of the past 8 months. There’s plenty of new home inventory and homebuilders are open to price negotiation. This is evident from the declining gross margins are almost every homebuilder.

- Source, Sprott Money

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