The Golden Truth: Pending Home Sales Dissected

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.

6 comments:

AnonymousMonday, 02 November, 2009
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.
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AnonymousMonday, 02 November, 2009
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?
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Dave in DenverMonday, 02 November, 2009
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.
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AnonymousMonday, 02 November, 2009
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!
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Dave in DenverMonday, 02 November, 2009
LOL. Especially since the chick are usually pretty ugly.
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goldcoinsgainTuesday, 03 November, 2009
thanks for sharing with us..very informative and interesting
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Why Gold?

Gold is the world's oldest currency. You exchange your fiat currency (dollars, euros, yen, yuan) into gold as an insurance policy against catastrophic Central Bank and Government policies which serve to destroy the value of fiat currencies and destroy democracy.

Gold can ONLY be considered an investment to the extent that it remains significantly and historically undervalued in relation to the fiat currencies against which its value is measured. Otherwise it remains the world's oldest currency and is completely free from the counterparty risk associated with currency by Government fiat (i.e. fiat currencies rely on a Government's "full faith and credit.")

Quote Of The Month Courtesy of "Jesse"

Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and other essential commodities, and the world is reaching the point where it might simply start ignoring the New York based markets with respect to essential commodities such as basic materials, oil, foodstuffs, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?

Here is the link to his entire commentary, well worth a read:

http://jessescrossroadscafe.blogspot.com/2010/07/gold-daily-chart-shock-and-awe-for.html

Great Quote From Jim Rogers On Govt CPI Reporting

JR: I mean, we have inflation now. If you go to the shop, whether it’s groceries, or education or insurance or health care, prices are going up for everything. The government lies about it in the US. Some countries lie, many countries don’t: Australia, China, India and Norway. Many countries don’t lie about it and acknowledge that we have inflation. Others lie about it, the UK and the US, but if you go shopping you know prices are up.

Q: Are you saying that the American Consumer Price Index (CPI) published by the US Bureau of Labor Statistics is a lie?

JR: In my opinion, yes, of course it is. Have you looked at it? They’ve changed their accounting several times in the past few decades. When housing was 20% to 25% of the CPI and housing was going up, they didn’t count it, saying rents weren’t going up, and then when home prices started going down, they counted it. It’s the same with many things. It’s staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it’s not really going up because it’s better gasoline, better quality, therefore you’re getting more for your money. I mean, it’s endless, the stuff that they say and for some reason people sit there, although more and more people are catching on, and accept what the government says.

source: www.clusterstock.com

Quote of the Week

"The primary function of a Central Bank is to engage in the massive transfer of wealth from the middle class to the wealthy elite. The Federal Reserve was set up to do this with the blessing and support of Congress." - Dave in Denver

If you refuse to believe the above, please read "The Creature From Jekyll Island: A Second Look at the Federal Reserve" by G. Edward Griffin and then explain to me why the Senate voted down the Vitter Amendment and Congress refuses to pass a law requiring a full audit of the Fed, even though the Fed is using taxpayer-backed money to bailout Wall Street and Europe.