Monday, November 2, 2009

Pending Home Sales Dissected

The big jump in pending home sales was greeted by the stock market and the clowns on CNBC with great fanfare.  What is more interesting is that the mainstream media neglects to mention the high cancellation rates which tend to undermine headline numbers.  A "pending sale" is a signed contract, contingent on financing.  As per a comment from a real estate professional in one of my chat rooms:  "For the past 9 months, appraisers have been appraising far under those agreements, on average.  Banks won't lend beyond appraisal.  Contract dissolves.  The real estate industry does not report this fact."  Anothger real estate professional confirmed this with:  "Pending sales can be a leading indicator, but not in the real estate market we are in now.  Prices are still not even close to [market] clearing prices.  F$%king banks are holding back foreclosed inventory.  If they did release, another big drop.  But we are also running out of ready, willing and able buyers at the low end."

So there you have it, from the horses' mouths.  The industry loves to report a "soft" statistic like "pending" sales, but how about the percent of contracts that fall through because the financing failed.  Based on the latest numbers reported by new homebuilders, cancellation rates are still running in the 20% range. The two observations above reinforce my thesis that the "bounce" in housing over the past few months has largely been the result of a last minute rush into homes by first timers looking to take advantage of the tax credit.  I would also assert that, based on the past couple weeks' mortgage applications index, home sales are about to take a cliff-dive.

Anectdotally, over the past couple weeks, myself and others are seeing "for sale/for rent" signs popping up all over Denver like spring weeds.  Not only that, the homes in the over $500k segment do not seem to be moving at all.  As for rents, if I could break the lease on my townhome, I would be able to move into an even higher quality townhome on an even more desirable block, with mountain views, for less than I'm paying currently.  Rents are falling fast - home prices will follow.

If you MUST buy a home because you can't stand the down payment burning a hole in your pocket and you want to take advantage of FHA subprime lending standards, at least wait until after the holidays.  Foreclosures will be flooding the market, desperate sellers will be listing their homes and prices are going to plummet again.  At the very least, please ignore the mainstream media headlines and imbeciles on CNBC/CNN/FOX Business/Bloomberg.


  1. I am trying to rent a townhome in Garland. We probably should have sold the damn thing when the bubble was large. There are 4 homes including mine for rent there and another that was for rent that they put up for sale. I have had a sign in the yard for 2 months now and turned down 1 application and had another back out. I believe there are about 4 other homes for sale on the street. This is a 30 to 35 year old neighborhood.

  2. Hi Dave, what's your take on Roubini's assertion that the unwinding of the dollar/carry trade will cause the dollar to spike higher?

  3. Good question. The dollar carry-trade is a relatively new development fueled by zero percent Fed Funds and a rapidly expanding supply of dollars.

    Before we speculate on the effects of the dollar carry trade unwinding, let's figure out what events would precipitate the unwinding of the dollar carry trade. The yen carry trade lasted for several years. In fact, to a degree, its still going on relative to other currencies, just not dollars, since both the U.S. and Japan have zero interest policies implemented by their respective central banks.

    When do you think the Fed will raise rates to a level which exceeds the rates in other countries? My bet is that it will be a lot longer than anyone realizes. Based on this, I think the more interesting question is "how insane will the dollar carry-trade get?" The yen carry trade financed a multi-trillion dollar hedge fund, real estat/mortgage market, and Treasury bond market explosion. Using that as your measuring tape, the starting pitchers for the dollar carry trade have yet to finish warming up and take the mound.

    When do you think the Fed will stop expanding the money supply (the real money supply, not MZM or M2)? I would suggest that if the Fed starts to withdraw liquidity and raise rates, the U.S. financial system will fold up faster than a circus tent in a hurricane.

    I think Roubini says a lot of outrageous things either to grab attention or because he doesn't fully understand finance. Probably a bit of both.

    I don't really pay attention to his commentary because I believe it's nothing more than superficial analysis cloaked in headline-grabbing hype and an accent that makes him sound well-educated.

  4. Thanks for the explanation Dave... yeah I've lost respect for Roubini, once those pics of him posing with scantly clad girls started popping up on the itnernet!

  5. LOL. Especially since the chick are usually pretty ugly.

  6. thanks for sharing with us..very informative and interesting