Thursday, April 24, 2008

New Home Sales Plummet to 17 Year Lows

The new home sales report came out today and it was much worse then expected as new home sales hit 17 year lows. What a surprise. The market did not react well. The most eye opening statistic in the report was the median price for new homes fell 13.3% versus 2007 which was the largest year on year drop in almost four decades!!!

Here is the news from Bloomberg:

"April 24 (Bloomberg) -- Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off.
Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades."

``This blows away any hope that things are stabilizing in housing,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``It's a negative for growth and for the economy, and it's going to persist into the second half of the year.''

My take:

Housing continues to free fall. CNBC reported that new home inventories rose to 11 months which is the highest level seen during this current housing downturn.

So here we are in the spring selling season and prices are dropping faster then at any time in almost 40 years and inventories are at all time highs. There are no signs as the economist described above that we are near the end of this.

As I have said before, bubbles can be very psychological and after seeing these numbers, who in their right mind would try to buy a house right now? Why wouldn't you wait to buy if prices are dropping 13.3% year on year?

Expect this bad new to continue to put more buyers on the sideline which will exacerbate the problem.

Robert Shiller

How bad are things in housing? Look at what Yale economist Robert Shiller from the famed Case/Shiller index had to say:

"NEW HAVEN, Conn. – An influential economist who long predicted the housing market bubble cautioned Tuesday that the slump in the U.S. housing market could cause prices to fall more than they did in the Great Depression, and bailouts will be needed so millions don't lose their homes.

Yale University economist Robert Shiller, pioneer of the widely watched Standard & Poor's/Case-Shiller home price index, said there's a good chance housing prices will fall further than the 30 percent drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15 percent since their peak in 2006, he said.

Home prices rose about 85 percent from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Shiller said.

Basically we're in uncharted territory,” Shiller said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.”

Many people became convinced that housing prices would increase 10 percent annually, a notion Shiller called crazy."

Bottom line:

You are now witnessing a bubble that is in the middle of a total collapse. The good news is at some point the renters of the world are going to be able to get one hell of a deal on a nice house that's affordable. The bad news is it will probably destroy the economy.

For the time being just sit back grab some popcorn and watch the fireworks. We are witnessing an historic economic event.


Minton Mckarkquey said...

I honestly feel you should get a slot on CNBC will pithy gems such as "the good news is renters will get one hell of a deal... the bad news is it will probably destroy the economy"!

As an aside, even these numbers are not capturing the totally desperate nature of house pricing right now, simply because in some situations there isn't any. I have a $160K house on the market in South Carolina that could be worth $120K, $100K, $80K, but the fact there are no buyers means there's no pricing. Fortunately, I can afford to hold onto it.

I'm reminded of what my Dad said years ago: something's only worth what someone is willing to pay for it. The only people even close to buying anything right now are likely 100% cash buyers capitalizing on apparent deals of the century.

Great post, as always.

Jeffrey said...

I appreciate the kudos Minton!

Sorry to hear about your house. I am glad you can afford to hold onto it.

I agree with your comments about the desperation in housing.

There is a ton of manipulation of the numbers in the housing.

Imagine the number of foreclosures that haven't been counted because the buyer is still living in the house.

Its going to take some time for the real numbers to get out. These games can't go on forever.

Minton Mckarkquey said...

Another interesting part is the income/mortgage ratio and how it's been skewed in recent years. If you take 4.5 multiple that was gospel for a long time, and match that with the real average income - which has been falling for a long time - it produces house prices far below where we are now.

Your comment about people still living in about-to-be-foreclosed properties is totally accurate. While these guys are clutching at straws, I guarantee they're not buying Starbucks, Apple products or plane tickets while every dollar goes to keeping their families afloat.

Sad, sad times.

The sooner the government stops supporting Wall St and starts supporting its voters, the sooner we'll start to find a way out of this mess. Since there's no sign of that, the question is what next?

My short-term investment ideas are:
- Puts on Google at $450 and cash in on $400. That's a relatively realistic value.
- Calls on SBUX at $10 - store closures will draw it down that far, attract a takeover, and propel it back to $20 (check out the asset values).
- Calls on airline sector ETFs, since they'll eventually realize that price collusion is the way to go and people still have to fly - definitely at/near the bottom here.

Thank God we don't need much rice!

Jeff said...

Minton I like those calls.

Good contrarion play on the airlines. I gotta buy a ticket tomorrow. Curious to see what it costs now.

I think Google is going to run into trouble as well. Companies are going to reign in ad spending as the recession puts a hurting on corporate profits.

I noticed today that the rally was very narrow. I wan't impressed with it. Apple and th financials are what propped it up.

Why anyone wants to own financials here is beyond me!