Yesterday’s Existing Home Sales number made for good headlines but there was little else to cheer about. In fact, sales once again are following a very predictable seasonal pattern despite massive stimuli being thrown at the market and were down 5.2% from August. This reality is in stark contrast to the “9.5% surge over August” and “sales are at highest rate in two years” plastered all over the headlines.

September’s not-seasonally adjusted results were also in contrast to the past couple months of significant headline press covering the ‘30 offers on each foreclosure‘ and ‘buyer frenzy’ happening all over the nation. The headlines have painted a picture that seasonality is out of the window and it is a buyer’s horse race to the November tax credit sunset. This is just not the case. In fact, September sales in CA were LESS than a year ago, one of the worst years on record for housing.

The following chart shows the past five-year of sales — NOT seasonally adjusted unlike the popular reports yesterday. The seasonality of it all is obvious. In fact, taken in context the booming housing sales ’surge’ and ‘recovery’ looks rather anemic especially considering a trillion dollars was thrown at the housing market through tax breaks, artificial historically low interest rates, and mortgage mod initiatives and foreclosure moratoriums meant to tip the supply/demand balance back in favor of housing. Additionally, new loan defaults are not following the same seasonal pattern, which means in the shadows, supply is building.

The next chart is the same as above but is a cut out of the past three years. The blue boxes represent that past few months when housing sales were actually stronger than the year prior.

In fact during the May to Sept selling season only 45k additional houses sold in total in the US. But when extending that out for the full year, sales are DOWN 20k sales in 2009 vs 2008, one of the worst years on record. In addition, Year-on-Year median prices were down yet again albeit at a slower pace.

The largest threat to a housing recovery is negative-equity…period. Remember, organic move-up/across/down buyers have always led the market. First timers and investors have always been the weakest segments and cannot carry the market for long. This highlights the most important factor plaguing the housing market — epidemic negative equity prohibiting the typical homeowner from selling and re-buying. Epidemic negative equity is only fixed by ‘years’.

Last but not least is a new phenomena that is also responsible for goosing reported sales this year – flip sales. Over the past year, investors have been very active in the foreclosure market with at least half intent upon fixing up and reselling the house within six months. These foreclosure resales are counted twice before an end user finally occupies the property. When backing out flip resales, September’s actual sales count was 418,859 (red), which was 53k below the not-seasonally adjusted sales print of 472k, and within a few thousand sales in September 2007 (yellow), the worst on record.

Yesterday’s headlines of a sales “surge of 9.5%” was based upon a Seasonally Adjusted Annualized pace, which uses historic data to smooth and report the data in a fashion that is consistent month over month.

But seasonal adjustments can’t pick up one-off events such as the present tax credit set to expire at the November. The tax credit essentially pushed out the purchase season a month into the month of September — a historically much weaker month than August. This goosed-up the Seasonally Adjusted number reported yesterday and headlines today are talking about a sales surge when in fact, sales fell Month-on-Month by 5.2%.

The sad part about this type of misinformation is that is sets the market up for a major disappointment when conditions reverse in the near term when it never had to happen if the Existing Home Sales report was portrayed for what it was in the first place. The association should have dedicated at least a paragraph explaining the September anomaly instead of going out with the ’sales surge’ headline knowing full well how 99.9% of population would perceive it.

When seasonal sales go away suddenly for the season, which will happen in the near-term whether the tax credit is extended or not, it sets reported sales and prices up for the largest swing lower since all this began two years ago. This is because a) an extension of the credit buys buyers a lot of time to shop and spreads hasty purchases out of a longer period of time b) when the seasonal buyer goes away what remains are mostly distress buyers on much lower priced houses, which will swing the reported median and averages prices back to the distressed market price over a very short period of time.

Unintended Consequences on the Housing Market of Foreclosure Moratoriums & Mortgage Mods

So, on one hand the Gov’t through massive spending as managed to cause a rush to buy low-end houses by first-timers and investors. This was done at the right time and is a success, no doubt.

But on the other hand they put out HAMP, which prevents foreclosures and is keeping the very low-end supply that is in such high demand off of the market. In fact, the low foreclosure counts are undermining the housing market at this point in time, which is why house sales are falling at the same time you are hearing stories of 30 bidders for each foreclosure resale and sellers not dealing with buyers who require financing in favor of cash buyers, even at a lower price.

Keeping troubled borrowers in houses and good buyers away is a perfect example of an unintended consequence of government action that will push out a true recovery indefinitely. As a matter of fact, because of the neutralizing effect that housing market gov’t stimuli vs HAMP has, if hundred of billions were not thrown at the market, we would likely be sitting right where we are now anyway…tax payers would just be that much richer.

HAMP and the other mod initiatives and foreclosure moratoriums have effectively served as the longest foreclosure moratorium seen yet.
Millions of underwater, over-levered zombie renter-homeowners squatting in their house because of a loan mod simply ensure the housing market remains a heavy and volatile asset class for years.

Another unintended consequence of HAMP will be a foreclosure surge eventually. The in-process foreclosure pipeline has never been as full and the first wave of Obama-mod three month trials are expiring now. Those that don’t make the trial go directly to foreclosure.

The number of trial mods eclipsed 500k last month and because of the massive backlog that led to a large number of servicers now granting trial mods to virtually anybody that requests one — subject to missing documentation being submitted as of a condition to turning the trial mod into a permanent mod — monthly trial mod starts are likely well over 100k per month.

If the HAMP performs worlds better than other mods and only 33% fail their trial mod, then up to 100k additional monthly foreclosures could be coming soon. With foreclosures in the US average roughly 80k per month over the past 6 months — and most loan mods that fail being foreclosure-ready — this could double foreclosures over a very short period of time.

But the fact is that over the period of 9-12 months, most HAMP mods will fail based upon historic cure and re-default rates making HAMP the largest can-kicking experiment to date. When HAMP is acknowledged as a failure the only place left to go will be massive principal balance reductions, which will cause a whole new set of problems — about 3 trillion of them.

On a positive note, a HAMP failure will be the first step to a housing market recovery, as millions of qualified low-to-low mid price range house buyers who deserve a shot at home ownership will have their crack at a foreclosure resale. These are people who will ultimate own their home one day vs HAMP modifyees, many of whom still owe 100% more than the present value of the property and have no intention of staying around for the duration. To the majority, HAMP is way to get cheap rent while they hope that in the future their financial condition turns around.

Housing headlines are about to get very interesting.

Mark Hanson

Data source: National Association of Realtors

 Print This Post | Filed on: October, 24 2009 by markmti

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