Problems With Housing Data

US Equities responded favorably to morning news about pending home sales.  The data showed a third consecutive month of gains, actually up 6.7% over the prior month.  Some pundits favor the year-over-year comparison, which was up 3.2%.  It certainly seems like good news.

Commentators quickly pointed out some problems with the data - the sample size is small and sampling error is large.  Pending sales do not always translate into actual sales.  It is only one month.  Etc.

The Sad Truth about Housing Data

Housing is at the epicenter of the financial crisis.  Home values affect wealth, personal consumption, and the need for further write downs in “legacy” (formerly known as toxic) assets.  We would love to have good data about housing.

Forget it.  Nearly all of the housing series are flawed with significant discontinuities or conceptual problems.  No matter what the data report, there will be plenty of opportunity for pundits to dispute the results for the next year or so.

Here are some of the problems:

• Pent-up supply, and pent-up demand.  Most pundits claim that there are many homes ready to hit the market as soon as things improve a bit.  We believe that there are also many latent buyers, waiting for the right combination of loan availability and price.  Neither of these assertions has any hard data.
• Foreclosures. The principal media and blog observations show the percentage increase in foreclosures.  This is an alarming increase from a small base.  Interpreting this series is guesswork.  There was a moratorium on foreclosures as the Obama proposals worked through the legislative process.  That gave a false sense that foreclosure were lower.  Since non-foreclosure sales are generally at higher prices, it made prices seem higher.  Now that the moratorium has ended, we are seeing the opposite — more foreclosures and lower prices.  Those looking at the data series will be deceived by both effects.
• Tax credit effects. New buyers have until the end of November to collect a tax credit of $8000.  It is reasonable to expect any first-time buyer considering a home purchase to act in the next few months.  This may draw forward demand, leading to a reduction in purchasers after the credit expires.
• Financing effects. There is a sense that mortgage rates have bottomed, and moved higher.  This my stimulate some to act more quickly.  The increase in pending sales was quite dramatic in some regions - over 30% in the Northeast.

Our Take

Like everyone, we watch housing data closely.  We also solicit anecdotal evidence from many sources.  We know of first-time buyers, using the credit, who put 5% down via FHA and got the seller to cover closing costs.  It is a great opportunity for qualified young buyers.  There is some Internet mythology that there are no 5% loans.  That is incorrect.

Our major conclusion?  Most of the pundits are too confident in their predictions.  We see so many who expect prices to move much lower, but there is little supporting data.

We continue to look for good indicators on housing, and welcome comments.  Our major observation relates to the calculation of “months of inventory.”  This measure takes the known inventory and divides by the annualized rate of sales.

At this point, the rate of sales is so low that even modest increases will dramatically reduce the months of inventory.