Wednesday, November 24, 2010

Back to our Regularly Scheduled Housing Crash

It looks like things are starting to wind down for the holiday. 

One more post before I shut it down for turkey day new home sales. 

Housing has been placed on the backburner recently as the European debt crisis and insider trading probe have taken center stage.

We got the October new home sales data this morning and it was flat out dismal:

Here are the numbers from Reuters:

"(Reuters) - New U.S. single-family home sales fell unexpectedly in October and prices dropped to a seven-year low, a government report showed on Wednesday, pointing sustained weakness in the housing market following the end of a home-buyer tax credit.

The Commerce Department said sales dropped 8.1 percent to a 283,000 unit annual rate after an upwardly revised 308,000 unit pace in September.

October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.

The median sale price for a new home dropped a record 13.9 percent last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4 percent, the largest drop since July 2009."

My Take:

The pricing data is even worse than the putrid number of new homes that were sold.   Home prices have now fallen back to where they were selling when the housing bubble really got going back in 2003.

Inventories continued to rise in October as buyers remained on the sidelines despite record low interest rates and a huge correction in prices. 

The housing market was hopeful that the rebound seen in September was the beginning of a recovery.  Today's data blows that theory right out the window.

The Bottom Line 

As I have said all along, housing is not coming back anytime soon and it will likely never get back to selling where it was at the peak.

Housing prices are only heading in one direction and that is down.  The fact that no demand has been created with the combination of record low rates and huge price drops tells you that there is a ways to go as the bubble pops.

I see another 20-40% price correction from today's price levels depending on what market you live in.  I say this because once the mentality of deflation kicks in it's almost impossible to stop.  Just ask Japan.

The psychology of deflation is devastating once it takes hold. 

It works like this:  People stop buying and prices then begin to drop.   As buyers see prices drop they sit on the sidelines thinking that they might drop some more.  Eventually prices drop again due to lack of demand.  Buyers react by holding out some more because they think they can get an even better deal if they wait just a little longer.

Making matters worse:  As prices continue to drop, buyers become afraid of catching a falling knife which just exacerbates the problem. 

This all becomes a viscous cycle where all pricing power is lost. This is how deflationary death spirals are created. Many economists refer to this as a positive feedback loop.

The fallout of the housing crash will fall on the shoulders of the banks because they are the ones who will be saddled with the losses.  Of course, when it's all said and done, we get stuck with the tab because our stupid government decided to backstop the losses which ultimately means the US taxpayer foots the bill.

I expect most of the "mortgage slaves" will continue to default or just walk away from their homes as this death spiral intensifies and they watch their loans fall deeper and deeper underwater. 

The banks will be crippled by this because their balance sheets are filled with bloated McMansions loans that will never be paid back.

The trading algo's of course ignored this news today and focused on the weekly jobless claims data which was better than expected.  The bond market remained weak but steadied after the 7 year bond auction got done. 

If you are in the market to buy a home do yourself a favor and wait.  Prices will only continue to drop as the economy remains weak.

Before I finish up I want to wish everyone a very Happy Thanksgiving!  I will hop on when I get a chance in the oncoming days.


Anonymous said...

"Inventories continued to rise in October as buyers remained on the sidelines despite record low interest rates and a huge correction in prices."

I assume you meant "months of inventory", since inventories are at a 40 year low.

getyourselfconnected said...

Well at least D.C is doing well, snark.

Have a great holiday Jeff, all my best.

Anonymous said...

"Well at least D.C is doing well, snark."

Why "snark"? Here is what DC has done since the day Jeff told me the Case Shiller trend change was "nothing but bullish spin" and that he could "pretty much guarantee that prices would be lower a year from now":

May 09 - 169.5
Jun 09 - 173.2
Jul 09 - 176.4
Aug 09 - 179.6
Sep 09 - 180.7
Oct 09 - 180.1
Nov 09 - 179.2
Dec 09 - 178.8
Jan 10 - 177.4
Feb 10 - 176.6
Mar 10 - 175.4
Apr 10 - 179.6
May 10 - 182.6 (i.e. 1 year later)
Jun 10 - 185.8
Jul 10 - 187.7
Aug 10 - 188.2

Jeff says we will see 125.0 sometime between now and Mar 2012. I say we will never sniff 155.0 again. I guess we shall see huh?

Bottom line, ignore local market conditions at your peril...

Jeff said...


U too bud. Happy Thanksgiving.


Yes. Months of inventory. U are playing the game looking in the rearview mirror with every tailwind at your back. U just saw your stimulus induced bounce. DC will hold up better than others but it will eventually roll over.

Herb said...

The full effect of the 8k buyers tax credit that expired in June is now coming into play.

It pumped up house prices and pulled forward a lot of buying.

But just wait until more of the shadow inventory is released. As they say in show business, you ain't seen nothing yet.

Anonymous said...

But just wait until more of the shadow inventory is released. As they say in show business, you ain't seen nothing yet.

Ooooooo - this has me shakin in my boots!!! The dreaded "unleashing" of the shadow inventory. I remember when, 4.5 years ago, and inventory started declining, people started saying "just wait til the shadow inventory is released". Given that DC's stated inventory is now 1/3 of the peak, we would gladly take some of that shadow inventory now.

Actually, I dont know why I give anyone else here the time of day. Others come here in defense of Jeff and his absurd call, but as DC continues to not crash, his fly by night defenders get discouraged and disappear. Jeffy and I are the only ones in this for the long run.

See you on tuesday for Case Shiller Jeff. You should get your first negative number of the year so be sure to sharpen your long knives! C ya!