Housing: Hope springs eternal

Today we learned that new home sales rose 4.8% in September. As was to be expected, many folks see this as a sign that housing is turning the corner. Needless to say, this is more a dead cat bounce than a true rebound. As this graph shows, similar monthly bounces have been registered in the recent past during the course of a dreadful secular collapse.

As Barry Ritholtz points out, the rise is not statistically significant and that compared to year ago levels, new home sales in September were 23% below the year-ago level.

Of course, we should also keep in mind that existing home sales --which make up the bulk of the residential market--fell 8% in September and are 19% below the year-ago level.

As for prices, both the new home and existing home sale median prices are not reliable indicators, as they're not seasonally adjusted and are affected by changes in the type of housing unit sold. Also, builders have so far resorted to incentives like free plasma TV's and the like to promote sales rather than price cuts. Clearly, the stickiness of prices has made sales volumes bear the brunt of the downturn.

Inflamatory question of the day

Why are almost all houses in the U.S. so similar? This has nothing to do with the real estate market, but with their layout and materials. From Maine to California, the typical home, built out of flimsy wood and stucco, is very similar (it seems almost centrally planned) regardless of climate or other considerations.

I ask because I live in San Diego and, while in no danger, I've seen on the television countless homes burn in minutes. Southern California has always faced severe danger from wildfires. Yet, houses are built in a manner that makes them highly flammable. Maybe wood is less expensive than brick or cement as a building material, but surely it can't be that much of a difference and, if the present value of fire insurance is added, the other options would be more attractive.

This is not the first time I've asked this. Americans build houses that the Big Bad Wolf would have no trouble blowing down in harm's way. Like the Gulf Coast. I have yet to see anyone even suggest a change in the way houses are built (in Mexico's Caribbean coast damage from hurricanes is much less severe precisely because buildings are made of sturdier stuff).

Why is this? Government doesn't help. By subsidizing catastrophe insurance and providing generous reconstruction funds it shields homeowners from the worst consequences. Nonetheless, my guess is that it's mostly a cultural thing. Americans simply can't conceive of houses build any other way. While the typical home may be well adapted to, say, New England or the Pacific Northwest, its totally out of place in West, where it would make much more sense to build the typical Mediterranean house.

Weird.

Housing false starts

Even if you have a pessimistic bent, the latest housing starts figures are dispiriting. They fell 10.2% in September, to 1.19 million units, well below the consensus forecast of 1.28 million units. This translates to a full 31% drop from year-ago levels.

Are we near the bottom? Not quite. If the past is any guide, they could go as low as 800,000 units. The question now is how fast we'll get there.

A couple of additional points. First, it's hard to exaggerate just how far forecasters have been behind the curve. According to the Philly Fed's third quarter survey of professional forecasters, in the fourth quarter of this year housing starts would average 1.4 million units (annual terms). Needless to say, reality has rendered this outlook worthless and we should keep this in mind when assessing 2008 growth forecasts.

Of course, this also feeds into my current pet obsession: how can this collapse in housing construction be seen everywhere except in residential construction employment?

Ben's Soothing Tonic

It seems Dr. Ben decided that the patient was best served by having the patient down his medicine in big gulps rather than sips.

With short-term Treasury rates near 4.2% at the end of last week, the markets were pricing a full percentage point cut in the Fed's reference rate over the next few months. So today's decision was merely a question of how quickly the Fed would deliver. Apparently, it is alarmed enough (not surprisingly given the run on Northern Rock in the U.K.) to prescribe a large, 50 basis point dose, even if that means losing some face.

The statement offered little insight. More surprising was the massive reaction in stock prices (the S&P 500 ended 2.9% higher). I think there are two possible explanations for this reaction:

1) Lowering the cost of credit will ease losses and restore liquidity to the markets. Everything will be sunny and it'll be like the two past months never happened.

2) The economy is in danger due to the woes in the housing sector. It's good that the Fed recognizes the magnitude of the threat and is beginning to act accordingly.

Obviously, numero 1 is mucho more likely than 2, as far as investor opinion is concerned. Needless to say, I'm in the #2 camp.

Actually, make that #3: the economy is in much worse shape than generally assumed and things will get a lot worse before Ben's Magic Tonic begins to take effect in a few months. Today's reaction in stock prices was not warranted.

Before calling me Dr. Tangible Gloom, chew on this: everyone has massively, consistently underestimated the problems in the real and financial sides of the housing market, as well as their impact, over the last couple of years. I don't see that changing, yet.

Thou shalt not lie: NAR edition

I've heard the meme that "house prices are falling for the first time since the Great Depression" quite a few times recently (examples here and here). The source cited is the National Association of Realtors (the phrase appears in many of their documents).

I'm not sure how these folks came up with it, but its clearly nonsense. We only have to go back to.....1991 to find widespread falling real estate prices. The Case-Shiller indices, probably the most realiable data around, show that nationally prices fell 6.8% between the peak in October 1989 and the trough in February 1994.

Ironically, the NAR has been parroting this line for quite a while now, obviously expecting people to believe that home values hardly ever drop and only do so in the most extreme circumstances. Well, the lie has come back to bite them in the ass. Nowadays, it's more likely to inspire (unwarranted) panic than confidence.