Posted by Jonathan J. Miller -Monday, January 9, 2012, 9:58 AM Comments Off
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I’ve been outspoken about the misuse of seasonal adjustments in housing statistics. While they are not all bad and are favored by economists for their ability to smooth out a year’s worth of information so one can see where greater than normal changes stand out, there cause more harm than good when it comes to understanding housing.
The basic problem with seasonally adjusting the numbers are as follows:
there is no standardized methodology or period for making the adjustments
the adjustments are rarely disclosed
they often adjust already adjusted numbers (i.e. annualizing NAR existing home sales)
the reader often doesn’t understand what it is
while it may be useful for analysis, the results often contradict current conditions
and most importantly…
the adjustments become skewed shortly after a significant market change.
While seasonally adjusted data can be extremely helpful, they should be used with care. In particular, the statistical methods used for seasonal adjustment may generate misleading results when applied to data with structural breaks, where the underlying properties of the data change significantly during the period studied.
Case in point is the National Association of Realtor’s Pending Home Sales Index that has basically been a mess for the past 18 months after the expiration of the federal home buyer’s tax credit. The disparity between the indices. The NAR press releases sharply contradict the feeling on the street with agents, buyers and sellers, marginalizing the meaning of the report results.
Cash Assets of Foreign Banks: An Example of Seasonal Adjustment Gone Awry [FRB NY]
….a forward-looking indicator based on contract signings, rose 5.1 percent to 94.1 in March from a downwardly revised 89.5 in February. The index is 11.4 percent below 106.2 in March 2010; however, activity was at elevated levels in March and April of 2010 to meet the contract deadline for the home buyer tax credit.
[ongoing correction-pet peeve: it is NOT forward looking, it is current looking. Forward only in the context of closings which lag]
In reality the pending home sale index, because of last year’s tex credit skew, should use the non-seasonally adjusted results. Last year at this time the sales were wildly skewed higher than they should (red line). Later this year NAR will likely have to grapple with declining sales caused by last year’s wild skew downward.
The sharp jump in the M-O-M number is more about returning to a more reasonable level of activity than suggesting some sort of boom. The exaggerated jump was because sales in the second half of the year were artificially low (artificially high in the first half of the year.
The pending home sales indices I created for Washington, DC and Baltimore cover the same period but were release 18 days before the NAR report and show the same phenomenon.
Posted by Jonathan J. Miller -Monday, February 28, 2011, 11:25 AM Comments Off
It’s that time again to update my favorite chart: NAR’s Pending Home Sale Index. Why? Because the seasonal adjustments were wacked out by the tax credit and the results reported are therefore confusing.
The Pending Home Sales Index, a forward-looking indicator, declined 2.8 percent to 88.9 based on contracts signed in January from a downwardly revised 91.5 in December. The index is 1.5 percent below the 90.3 level in January 2010 when a tax credit stimulus was in place. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
In reality, pending home sales were 16.2% higher in January than in December 2010 but 4.4% below January 2010. In the same period last year the month over month transition was up 17.6% but the newly expanded tax credit was ramping up and sales were taking off.
The Pending Home Sales Index, a forward-looking indicator *, increased 2.0 percent to 93.7 based on contracts signed in December from a downwardly revised 91.9 in November. The index is 4.2 percent below the 97.8 mark in December 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
note: pending sales are a current looking indicator because they are based on sales contracts, not forward looking.
I’m not shilling gloom and doom here but pending sales actually fell 19.8% in actual numbers from November to December. To say pending home sales rose 2% seasonally adjusted is in my opinion, wildly misleading. As a provider of research, it is their responsibility to interpret and frame proper context or at a minimum talk about both results and explain why they are different. Avoiding transparency won’t somehow lead the market higher or build trust. In fact, I think most Realtors would rather see this information presented with more transparency and context.
PredictionWatch: Since I can’t find the NAR seasonal adjustment methodology disclosed anywhere, I have always assumed the seasonal adjustment was a 12-month adjustment to smooth out the seasonal variations. Good idea on paper but bad in practice. I predict the PHSI series will begin to refer to the non-seasonal results in the spring as the wild swing in last year’s sales go negative.
Posted by Jonathan J. Miller -Monday, September 13, 2010, 8:18 AM 1 Comment
Ok, our vision for the housing market is getting a bit muddy and over the last few weeks and noted journalists and bloggers have been on a creative tear. I feel that the tipping point for this introspection was the moment the July existing home sales numbers were released followed by the next day’s new housing sales numbers and pending home sales the following week.
The great irony here is that the bad housing numbers should not have been a surprise to anyone who follows housing. The tax credit expiration on April 30th simply “moved chairs around in the room.” There is nothing wrong with the idea of homeownership – it’s the financing that got us here today. The problems to be fixed are the economic factors that drive housing demand and that is primarily employment. The idea that a tax credit would jump start the housing market and therefore jump start the economy was born in the old world (2003-2008) when housing was touted as leading the economy.
Fear and self-loathing
As a by-product of this sudden realization that the tax credit did not revive housing (nor could it be expected to), there has been an outpouring prominent discussion pieces about homeownership and what is wrong with it. Most noticably, the New York Times has been on a Page One tear.
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Prices nationally have nearly returned to their long-run trend in terms of price-to-rent and price-to-income ratios. Some segments of some markets may still be overpriced, and I expect prices nationally to edge downward in the months to come, but another plunge seems both unlikely to occur and unlikely to generate a wave of buying…
Where you think the “natural” price of housing is depends on which of these trends you expect to persist, versus which you think will peter out and reverse. Right now my assessment is that things like the amortizing mortgage, increasing land supply, and huge shifts in inflation/interest rates are largely played out.
As we noted yesterday, the raison d’etre of housing subsidizers Fannie Mae and Freddie Mac has changed radically in the past three years. Specifically, the purpose of these two agencies has gone from “making housing affordable” to “keeping houses expensive.”
I think it’s reasonable to argue that house prices today are fairly consistent with incomes and rents. So that equilibrium house price, that bottom in house prices, I think we’re there. And if the prices fall further, that would be, as David said, would be overshooting and, I think, counterproductive.
Posted by Jonathan J. Miller -Thursday, September 2, 2010, 7:28 PM Comments Off
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The Pending Home Sales Index, a forward-looking indicator, rose 5.2 percent to 79.4 based on contracts signed in July from a downwardly revised 75.5 in June, but remains 19.1 percent below July 2009 when it was 98.1. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
As you can clearly see in the chart above, the 5.2% increase has no real meaning, nor did the decline last month. You can clearly see post-tax credit that we are at a decidedly consistent level that is lower than the first part of the year.
There were a lot of silly quotes today about how well the housing market seems to be doing when last week the sky was falling.
John Canally, economist and investment strategist at LPL Financial, said recent data had taken some fire out of those predicting an economic double dip.
“The mood has shifted,” he said, “the burden of proof is back on the double dippers.”
The mood has shifted? (How can you tell when so many people are on vacation?) As you can see the chart above, nothing can be inferred positive or negative from the current level of activity. Of course last week the refrain after the existing home sales and new home sales reports were decidedly dire.
“A double-digit drop suggests to me that there wasn’t just a tax effect at work in July, but a change in sentiment, a change in the willingness to make such a big purchase,” said Christopher Low, FTN Financial chief economist. “It is especially surprising given where mortgage rates were. It is just a reminder of how much work there is still left to do before housing can be deemed healthy again.“
Note: This index is not “forward-looking” at all, unless they mean relative to existing home sales report which is several months behind. Contract activity is the most current way to look at sales, reflecting the market a few weeks prior. That in itself is fraught with problems.
Process: offer made, offer accepted, attorneys converge and hash out agreement, contracts signed.
Posted by Jonathan J. Miller -Wednesday, June 2, 2010, 2:16 PM 1 Comment
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NAR released its PHSI today and there were no surprises. The expiration of the federal tax credit for first time buyers and existing home owners (signed contract by April 30, close by June 30) showed its impact on sales trends.
By the way, my above chart shows how ridiculous seasonal adjustments are – the non-seasonal adjusted line better reflects whats going on.
The pending sales data set is about 20% the size of existing homes and is comprised of existing single family and condo sales. Its dubbed a forward looking index but it really is a current looking index. The “meeting of the minds” between buyer and seller occurs just before contract signing. Its forward looking in the context of closing data but it is not forward looking on the condition of housing.
Consecutive M-O-M Gains
Sales were up 6% from March to April and up 22% from April 09 to April 10. Last month
Sales were up 7.9% from February to March and up 8.3% from March 09 to March 10.
Analysts have expressed fear the housing market will suffer with the end of the government subsidy. But the job market has been improving. The Labor Department is scheduled this week to release employment data for May, and economists surveyed by Dow Jones Newswires are expecting a gain of 515,000 non-farm payroll jobs.
The same thing happened last fall as the initial tax credit within the federal stimulus plan was set to expire on November 30 only to be renewed and expanded a few weeks later. No renewal this time.
Regionally things were not so consistent. Month over month gains in
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1.
NAR attributes the drop as a pullback during November related to the uncertainty surrounding the extension of the first time home buyers tax credit which expired November 30th. However it was subsequently extended and expanded to include existing home buyers who have until the end of this April to sign a bonafide contract. We may trivialize the tax credit’s success in the NYC metro area because of the higher housing costs relative to $8,000 and $6,500 tax credits respectively but from my discussions with real estate agents around the country, it did appear to trigger a large portion of home sales in 2009.
What does the 16% drop suggest? More weakness to come?
Yes, but not in the coming months (remember this is a seasonally adjusted stat).
It signifies that the US Housing market doesn’t yet have its own set of legs. No credit = drop in sales.
The credit extension ends in April, the Fed begins their pullout from the purchasing of Fannie Mae mortgage paper, perhaps influencing mortgage rates higher.
The combination of high unemployment, rising mortgage rates and the expiring tax credit in the spring, combined with the elixir of rising foreclosures causes by sustained unemployment at high levels suggests housing sales will fall in second half 2009.
Housing in 2010: Stability in the first half, with more concern for the second half.
Posted by Jonathan Miller -Tuesday, December 22, 2009, 1:04 AM 3 Comments
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One of the by-products of the credit crunch has been the rise in shadow inventory. Within my own market stats, I consider shadow inventory all units that are complete or under construction but not yet offered for sale as condos (sometimes as cond-ops or co-ops). In many cases the developer was unable to sell the initial block of units offered and is therefore unable to release the units behind them.
The development stalls because the lender behind the developer usually prevents the units to be converted to rentals because the value of the project would fall considerably as a rental on their balance sheet, causing stress to their capitalization ratio.
The lender’s reluctance to make such a decision is referred to as:
pretend and extend
pray and delay
kick the can down the road
a rolling loan gathers no loss
First American CoreLogic tracks shadow inventory. They define shadow inventory as real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. They put the amount of shadow inventory at $1.7M in 3Q 09, up 54.5% from $1.1M a year ago.
Visible inventory, like the amount estimated NAR and Census every month, is estimated at $3.8M, down 19.1% from $4.7M last year.
The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total monthsâ€™ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible monthsâ€™ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.
In other words, even with the surge in activity over the past several months, total inventory hasn’t changed all that much (I agree with Bob).
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More