Home Sales Remain in Recession in July 2011

The National Association of Realtors (NAR) says existing home sales “declined in July from an upwardly revised June pace but are notably higher than a year ago” in July 2011.

Econintersect review of the data suggests that the seasonal adjustment factors used by the NAR are adulterated by government incentives over the last few years. This month the NAR announce a MASSIVE jump in their seasonal adjusted data as a result of the same distortions of recent historical data.

Despite protests to the contrary by the NAR, existing home sales are moving in the patterns of past years where the government was not interfering in marketplace – namely 2007. It appears based on non-stimulus data, sales are what would have been expected.

Lawrence Yun, NAR chief economist, said there is a tug and pull on the market. “Affordability conditions this year have been the most favorable on record dating back to 1970, but many buyers are being held back because banks are offering financing to only the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers,” he said. “Those potential buyers represent the difference between an uneven recovery and a much more robust housing market that could stimulate additional economic activity and create jobs.”

The NAR press release continues to hit on cancellations causing “poor” numbers.

Contract failures – cancellations caused largely by declined mortgage applications or failures in loan underwriting from appraised values coming in below the negotiated price – were unchanged in July, reported by 16 percent of NAR members. In addition, 9 percent of Realtors® report a contract was delayed in the past three months due to low appraisals, and another 13 percent said a contract was renegotiated to a lower sales price because an appraisal was below the initially agreed price.

NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said an unacceptably high number of potential home buyers are unable to complete transactions. “For both mortgage credit and home appraisals, there’s been a parallel pendulum swing from very loose standards which led to the housing boom, to unnecessarily restrictive practices as an overreaction to the housing correction,” he said.

“Beyond the tight credit problems, all appraisals must be done by valuators with local expertise and using reasonable comparisons – it doesn’t make sense to consistently see so many valuations coming in below negotiated prices, often below replacement construction costs,” Phipps said.

In an environment following a large price correction, Phipps said a price negotiated between a buyer and seller would appear to be a fair market price. “Banks frequently request numerous sales comparisons, well beyond the customary three comps used in the past, with little consideration that some of those properties may be discounted foreclosures used to valuate a traditional home in good condition,” he said. “To a great extent, banks are exerting influence on appraised valuations with negative impacts for both home sales and prices.”

Maybe there were a bunch of cancellations – but the correlation to pending home sales does say this argument is bogus as existing home sales came in at the levels that the NAR pending home sales index would suggest.

Based on the unadjusted sales in July, there is an 8.0 months supply of homes, up from 7.2 months supply in June.

As seen on the above graph, visible inventory levels are the lowest seen recently for Julys. There seem to be little problem with rising visible inventory levels.  The big uncertainties here center on various shadow inventory issues, as discussed by Keith Jurow (here and here) and  John Lounsbury.

Econintersect will analyze home prices which are undergoing their seasonal boost when the Case-Shiller home prices are released. The situation according to the NAR:

The national median existing-home price2 for all housing types was $174,000 in July, down 4.4 percent from July 2010. Distressed homes – foreclosures and short sales typically sold at deep discounts – accounted for 29 percent of sales in July, compared with 30 percent in June and 32 percent in July 2010.

The unadjusted data is confirming the YoY prices have declined – usually the seasonal decline begins in August. Further bits from the NAR press release:

Total housing inventory at the end of July fell 1.7 percent to 3.65 million existing homes available for sale, which represents a 9.4-month supply4 at the current sales pace, up from a 9.2-month supply in June.

All-cash sales accounted for 29 percent of transactions in July, unchanged from June; they were 30 percent in June 2010; investors account for the bulk of cash purchases.

First-time buyers purchased 32 percent of homes in July, up from 31 percent in June; they were 38 percent in July 2010. Investors accounted for 18 percent of purchase activity in July compared with 19 percent in June and 19 percent in July 2010. The balance of sales was to repeat buyers, which were a 50 percent market share in July, unchanged from June.

The bottom line here is that the data is on a whole a little worse than expected because of the price declines.  Overall the existing homes market remains in a recession – and there are no signs yet of recovery.

Related Articles

Building Permits Contract in July 2011 by Steven Hansen

A Chill Is Being Felt in Housing by Scott Sambucci

June 2011 Pending Home Sales Index Up – Is It Enough? by Steven Hansen

Case-Shiller: Seasonal Home Price Increase Underway in May 2011 by Steven Hansen

Existing Home Sales In June 2011 Much Better than Headlines Suggest by Steven Hansen

New Housing Construction Industry Now In Recovery in June 2011 by Steven Hansen

Housing Inventory: Hard and Soft Shadows by John Lounsbury

CoreLogic Sees Short Sales Growing 25% in 2011 by CoreLogic

Flipping Mad Over Fraud Flips by Frank McKenna

Housing Market Recovery Undermined by Seriously Delinquent Homeowners by Keith Jurow

“Bottoming” New Housing Data Is A Reflection of the Economy by Steven Hansen

Real Time Home Price Index Shows Housing Price Strength by Scott Sambucci

Strategic Defaults: A Bad Situation That Could Get Worse by Keith Jurow

8 replies on “Home Sales Remain in Recession in July 2011”

  1. Extremely interesting, Steve.

    Some things to look at: first, where is the new home financing actually coming from? While QE was operating, there was an “increase” in available FMae&FMac funds for new RE loans. Without that where are FMae&FMac getting the funds needed for new RE loans? While we know where they are not now getting it, where is it from, and is it increasing, decreasing or about the same level. That would tell U.S. whether “banks”, who originate RE loans for FMae&FMac, even CAN make new RE loans.

    As FMae&FMac sell off and take losses on foreclosures, they cannot simply re-loan out that money for new RE loans. Unless those “losses” are being “covered” by U.S. in other ways. Non-agency RE loans are all being cashed out, and not being re-lent out.

    NAR’s point might be that they (FMae&FMac, etc) cannot make loans. Banks are known, you must be aware, to tell U.S. that they are making loans – to small businesses, to new home buyers, etc – when they are NOT, in fact, making loans. Taking apps, sure; actually making loans, nada, nyet, zed.

    Add in by subtraction out the mandated reduction in FMae&FMac portfolios, and add on by subtraction out the “interest” being paid back to the Fed/QE – this depends on whether the Fed is re-investing those funds, or “banking” them – and we might see a further substantial reduction in RE loans being approved from those lending sources.

    After the collapse of the securitization mess, and the write-offs of bad RE loans by the originating/servicer/Big Bad Banksters, ARE they making and holding ANY loans made for RE purchases? Do you see any evidence of that, at all?

    So, the question is who has money, and who is willing to lend it?

  2. The “appraisal” issue is also very different. Depending on where you are. Sand states, plus Detroit and Georgia, are Q factors. As are most West Coast and Rocky Mountain states, due to current large declines in home values, many double digits.

    The question might seem odd to you, but what really IS a comp now?

    For a subdivision foreclosure, there is one number – very low. For a non-foreclosure seller or buyer, there is a huge difference between what they would like and what they will ever get. Look at the price per sq ft for listings vs sold homes in Phoenix in the Comford Reports. Almost double.

    Negotiate those terms! Appraise them! Go out and find a comp for that one!

    Now, if you are making a RE loan in THAT market, what actually IS a true appraisal “comp”? Or, take Seattle or Portland or Boise or the whole state of Utah, please! Where prices are still dropping, at almost Phoenix levels. How do you originate a “safe” RE loan in those markets – unless your loan amount is very tight – aka, very low?

    Are these conditions exactly the same where you are? Probably not. But, they might be closer than you think.

    The “shadow inventory” issue is also very different. You appear to be looking at only pre-foreclosures and existing unlisted REOs.

    As we have pointed out on SA, while AZ might be almost out of shadow REOs, and Cal and Nev are getting better; the state of being, in Florida, even if you are not a Miami football fan, is terrible. With the robo-signing delays and the length of time in the foreclosure process, there is a backlog almost as bad as in NYC. True, the weather in nicer, but the RE market is worse, bcuz they might start doing foreclosures again, whereas NY hasn’t even started to deal with their delinquencies.

    But, take the listing problem in Phoenix, please. People buying foreclosures are NOT listing their “new” homes for sale. Might, when they try to rent them out and find that they cannot.

    But, IF you are deeply underwater, why list your home, now or evermore? IF you have a mortgage, where are the “deficiency” funds going to come from? Your 401k? If you want to move up, why sell now? Unless you absolutely have to sell, why do it? How can you do it?

    RE agents in Phoenix cannot find enough quality new listings, at reasonable, buyer affordable, prices. They assume that this will force buyers to pay more, and sellers to start to list, again. Why do you think that they are going to do that? Taking a “paper” or real mortgage loss of more than 62% this year, when prices are now falling by another 10+% more. Should they assume that this current bottom price is the best that they will ever get? Maybe it is and they will; probably isn’t and they won’t.

    And, to use one of John’s &/or Steve’s SA “warning labels”, we have NO betting position on how this one will play out.

  3. JGB –

    from my perspective, the primary issue is not the availability of loan money – but the decline of the value of real estate. Most states have a non-recourse mortgage. This means that a borrowers ability to repay is a secondary consideration – the primary being the future value of the home.

    We are in a deflationary cycle for real estate. what will be the future value? and worse – what is the present value (comps)? the USA never had this issue in an inflationary cycle. if the comp was off, within a year it was good.

    are we are in a home value death spiral? consider that the value of a home should never have risen much beyond 100x’s the rental value. this is the price floor as this is the commercial value of the real estate.

    i agree with the points made in your comments. the big problem is understanding the shadow inventory – and when you throw in potential retirees and others who would like to move, the shadow inventory is massive.

    many believe this problem was caused by easy money (greenspan et al). of course it was a factor, but i believe the trigger for both our economic and housing issues came from a demographic shift (boomers). if i am right, home values will fall until they reach their commercial value.


  4. Steve, said you: “Most states have a non-recourse mortgage”

    Said we: Close, Steve-error-ee-no – do you even remember Steve Allen? – but not quite correct. What most states actually have is a choice – that the lender can pursue going after The Land…; or after The Deadbeat.

    For every mortgage, there is also The Promissory Note.
    For every car, there is the state registered Title, and the contract to purchase.

    If the land has appreciated, they “take” The Land. If the land has not, they hold onto The Debt – and pray? If the debtor has beau-coo bucks, they “take” the debtor, down.
    In Jersey, they call out Bruiser LaRue!

    A mortgage is only an interest, one among many, in the land. The promise to pay is merely another debt. But, one is property law, the other is contract law. In BK they are also treated quite differently, or so they tell me.

    So, what makes MERS so very interesting is that what MERS did was totally foul up the title. What MERS did not do was alter the promise to pay. Who owns The Land/Title is very different from who still owes on the contract, and debt.

  5. Steve, said you: “the primary issue is not the availability of loan money – but the decline of the value of real estate”
    “are we are in a home value death spiral?”

    Said we: Yes, and sadly yes. But.

    One of the things that truly saddens me is that we do not remember where we were in the Summer of ought-8…, NO home financing from any source – not Wall Street investment banksters with “packaged securitized (joke?) RE loans”, and not from FMae or FMac., thanks to China; and not from any local bank, CU or SnL!

    IF there is no funding available from the large commercial banksters, who used to use FMae; and there is no funding available from S&Ls & CUs & small local banks, who use to use FMac; WHERE will it “originate” from?

    And, if there are NO funds available for U to buy any new or existing home, precisely what price will “all cash investors” be willing to pay for (y)our homes???

    Steve, the primary issue was, in ought-8; and is now; who will loan money, and at what home values, for any and all RE transactions?

    If there are none, the “market” value of your home is zero, zed, nada, ziltch, whatever.

  6. Steve (and John) ask yourselves this:

    IF it is true that MERS did totally foul up The Title – in the underwater sand states, and the non-recourse states – and the “lender” still has the contractual right to recover The Debt; why are they not pursuing that?

    True, once lost, the Title cannot be recovered.

    However, IF they pursue The Debt, and obtain a Judgment; they then can “execute” on that Judgment against any and all of the assets – including the property title – that the Deadbeat has.

    Convoluted, yes. Illegal, no. Doable, yes. Simple, no.
    Some substantial recovery, yes.

    So, why are they not doing it?

    Are they stupid?

    Oh, we apologize, that violates the 2nd rule of the law!

    The first is, of course, if you do not know the answer to The Question, do not ask the question. The 2nd is, of course, if you DO know the answer to The Question, make GD sure you do not ask it.

  7. One of my “puzzlements” is…
    the fixation that owners, especially apartment owners, have on “The Cap Rate” of their investment.

    According to the Apartment Owners Assn they have an “entitlement” to an investment cap rate of at least 10%. After all the vacancy losses, after all the repairs, after ALL of the other expenses, they are “entitled” to expect, at a minimum, 10% return on their “investment” dollars. And, an annual increase in rent, justified by their expected Cap rate!

    So, ask yourselves THIS –
    Steve, John, whomever (you choose) –
    giving due consideration to the huge numbers of people living in pre-REO homes and not paying any rent or mortgage payments;
    and the huge number of U.S. who have lost our jobs, wives, lovers and homes;
    (not necessarily in that order)

    And the huge increase in “multi-unit” – aka apartment – construction.

    Is there ANY “economic” – or any other – sense…
    to be found in the construction, and/or ownership in “rental” housing?

    Well, we ALL love…
    well, at least YOU do…
    to disparage NAR’s assumptions and numbers…
    but, can you, or anyone else of U.S., expect that our rental property, or our homes, will be worth a Cap rate of not less than 10% more – while BO is still The Pres, or after his successor is elected, to save U.S.?

    What you think you do see may not be what you are getting!
    What you would very much like to see…
    may have absolutely NO resemblance
    to what you think you would like to see.

  8. JGB – – –

    I do not want to try to rationalize why anyone would be building rental properties in 2011, for many of the reasons you mention. However, the data shows that there is where the growth is in building permits and housing starts. Maybe, eventually delinquent mortgagors will be forced to move out of their defaulted but not yet foreclosed homes and they will need to rent someplace to live? Why not in bank repossessed homes that cannot be sold? Maybe people will opt for a new apartment that hasn’t been subject to abuse and neglect?

    I can’t really answer your questions – but I will acknowledge that they are good ones.

    As far as the NAR is concerned, they have such an obvious track record of mentioning 10-20% of negative market factors and 110-120% of positive market factors that your comment about them really is not something to be put on the same level with your other questions.

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