Monday, 26 January 2009 23:00

On the Media Reported Rise in Home Sales

The increase in home sale is most likely banks dumping their REO and pre-foreclosure inventory at cut-throat pricing that existing homeowners who are looking to sell cannot match. That is bad news, very bad news. It means that you are getting the lower price points, but you are not truly reducing the natural inventory of existing homeowner sellers and new homebuilders, just the synthetic inventory created by banks with bad deals on the books. It is concievable that natural inventory is actually increasing. I haven't looked into it, but it is a distinct possibility, even a probability!

Reference last year's (and even the year before that) posts. It wasn't that hard to see this coming. In addition, the housing metric that everybody is following (Case-Shiller) is extremely optimistic when considering many urban areas, ex. Miami, NYC, Pheonix, Vegas, Philly, etc. due to the exclusion of practically everything but single family, owner oocupied, detached, homes with the resale being mandatory.

My housing market forecasts from 2007 were right on point.
The contruction of the Case-Shiller index excludes a lot of inventory commonly found in urban areas: mutlifamily, condos and co-ops, investor properties and recent flips. See "A reminder concerning popular housing indices" and " The Real Trend in US Housing Prices...".

It may be of use to remember how much inventory the homebuilders still hold as well. These posts (nearly all of the links on this page) are over a year and a half old. Notice how prescient they were.

Straight Talk From the Homebuilder CFO: How independent are the independent auditors?
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog) ...lass. As I stated before, the purpose of senior level classes is to give you a peak behind the curtain of how homebuilders operated. The good (none), the bad (lies) and the ugly (incompetence). You...

Thursday, 11 October 2007

Straight Talk From the ex-Homebuilder CFO: Divergence
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
Tuesday, 06 November 2007

In lesson 9 I stated I would walk through a financial model in lesson 10 to show the huge reduction in book value (that isn't being taken by the builders). I got sidetracked and gave a macro view
Thursday, 11 October 2007

Tuesday, 06 November 2007

Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

...less and thus they are worthless. (1) Land and Debt are four letter words. One of the golden rules to being a homebuilder is to finance land with equity and use debt for financing your homebuilding o...
Thursday, 11 October 2007
Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
Thursday, 11 October 2007

Tuesday, 06 November 2007

Last modified on Monday, 26 January 2009 23:00


  • Comment Link jarret Saturday, 31 January 2009 10:43 posted by jarret

    I opened up a new account with Interactive Brokers last week and have been very impressed so far. They have a wide range of investment options (ie world exchanges, forex, futures etc) as well as have shares available to short in MAC, SHLD etc that my previous broker didnt.

  • Comment Link NDbadger Friday, 30 January 2009 14:59 posted by NDbadger

    I use Schwab and often can't get shares. I couldn't get them on Sears and am pissed because I think it is a great short idea.

  • Comment Link phirang Wednesday, 28 January 2009 13:27 posted by phirang

    the Fed will end the mortgage binging party with higher FFR.

    It's as if the media forgets that cost of funds is the #1 determinant in home prices... sheesh.

  • Comment Link fedwatcher Wednesday, 28 January 2009 04:15 posted by fedwatcher

    There is a large shadow inventory of homes to be sold. Any apparant "bottom" in 2009 will be followed by the real "bottom" after 2011.

    "Flood of foreclosures: It's worse than you think"

    “RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database.”

  • Comment Link NDbadger Tuesday, 27 January 2009 21:44 posted by NDbadger

    So now we have the solution. The government is going to overpay for the bad assets on banks balance sheets and the taxpayer is going to get screwed. So much for free markets.

  • Comment Link Surf Bum Tuesday, 27 January 2009 21:09 posted by Surf Bum


    On the housing numbers... they actually went down not up.

    NAR's "seasonally adjusted annual rate" is a distorted and misleading metric. Let me explain why. Home buying is seasonal because everyone wants to move in the summer when the weather is warm and the kids are out of school. Because of this, sales are skewed towards the middle of the year with the slowest months being December and January.

    Seasonally Adjusted Annual Rate (SAAR) is calculated by looking at historical sales patterns and averaging what percent of full year sales occurred in any given month. The result… a month like July will have 11% of annual sales and December will have 5% of annual sales on average for any given year. Of course these numbers are movable depending on the timeframe you use, because the range of the values being averaged can be substantial for any given month and small moves effect SAAR in a major way.

    They calculate SAAR by taking the total number of units sold and annualizing the number using the estimated % of annual sales ratio.

    (December Units Sold) / (December % Sales rate) = (1,000) / (5%) = 20,000 units sold for the year based on one months sales.

    You can see where this breaks down… it is entirely dependant on how far the deviation from the Mean the Actual sales ratio vs. the Estimated sales ratio for the month is. This can only be determined at the end of the year when the actual sales figures come in.

    Even if the sales ratio was completely accurate… another place it breaks down is the units sold. In a down market, lets say unit sales are down 10% YoY in Nov and 5% YoY in Dec… keeping the sales ratio at (1/12) = 8.33% for consistency.

    (Nov Sales)*(sales ratio) = (1000 * 90%) * (8.33%) = 10,800 units SAAR
    (Dec Sales)*(sales ratio) = (1000 * 95%) * (8.33%) = 11,400 units SAAR

    December sales went down in total, but because they did not go down at a rate as fast as November… SAAR would show this December decline as a 5.6% increase… which is why NAR puts this number in their press releases. So they can call the market bottom every other month.

    The real number is in their press release... home sales went down 3.5% in December vs. last year using the real accurate way to adjust for seasonality... Year-over-Year.

  • Comment Link gadog Tuesday, 27 January 2009 13:24 posted by gadog

    I forgot to mention the latest I heard regarding the federal home loan banking system..most of these banks have warned the community banks that they are out, almost out, or will be out of capital soon, meaning liquidity is going to become a major concern for the community banks. This means that they will have to receive additional capital injections from the feds, this number will be very large.

  • Comment Link gadog Tuesday, 27 January 2009 13:17 posted by gadog

    reggie, I think you are right on with this analysis..every market we are in, and we are in a lot, the economic picture continues to weaken. I watched the nikkei last night respond to the mass media headlines that the us economy was turning for the better and was thinking how dumb people are...

    really nice call on PNC, I made a very nice profit on very little investment buying some puts just before the stock tumbled down last week.

    Have you taken a look at Visa yet?

  • Comment Link zeetrader Tuesday, 27 January 2009 13:13 posted by zeetrader

    Here's an interesting note validating the above thesis - and the news is about to get a tad worse.

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