Reclaiming Common Sense

Monthly Data move in mysterious ways. That's why we need to look at the annual picture when it comes to housing.

The Monthly Employment Situation Report is one of the most important economic reports that is released during the course of a month. The most important series of reports is the Real Estate Series. The Real Estate Series includes the New Home Construction Report, the New Home Sales Report, and the Existing Home Sales Report.  The "Great Recession" was a combination of three recessions that was measured as a Gross Domestic Product Recession: The Housing Recession, The Jobs Recession, and The Retail Recession. We recovered from the Retail recession, first, followed by the Jobs Recession. We are still in a recovery mode for new home construction, new home sales, and existing home sales. We have not returned to pre-recession levels of construction or sales. There have been many in the media that have said that last month's new home sales data was an indication that we are in a slowdown. This column published an article that detailed how last month's inventory level was finally "back to normal" and that we were ahead of last year's new home sales level through October.

You cannot have normal sales without normal Inventory. Both the existing Home sales and the new home sales have been held back by a lack of inventory. Both are seeing inventory levels stabilize. There are a number of ways to forecast the potential data. Month to month growth, same month growth, current year growth, or trailing year growth can help. The Fall and Winter months see decline in sales and are seasonally adjusted to lessen the blow. What should we expect from the November New Construction Data, the November New Home Sales Data, and the November Existing Home Sales Data? The following is commentary on the non-seasonally adjusted data.

New Home Starts should improve from last November's 69,100 level. The month to month changes project 61,000 to 69,000 starts. The November to November data projects 73,000 to 80,000 starts. Current Year starts project 73,000 to 79,000 starts. The rolling year data projects 75,000 starts. Starts may be slowing, either due to hurricanes, fires, freezing whether or some other condition. The consensus from the four measures is around 73,000 units up to 75,000 units.

New Home Completions paint a similar picture, literally and figuratively. The shapes of the November starts and November completions curves look similar. The month to month data indicates that we should see 88,900 to 102,9000 units completed.The November to November data indicate that we could see 90,300 to 104,000 units completed. There is strong agreement here. The current year data indicates that we should see 99,300 units completed. Last year we had 95,000 completions. We have seen a trend of 4% growth this year. This means that we should see 99,000 completions. Do not be surprised with 95,000 or 105,000. Expect a number around 99,000.

The Units under Construction have soared after plummeting. The units under construction data is in principle a combination of rolling year and current year data due to the extended period of time that it takes to build a home. Take it from someone who has been involved with a new construction home from start to end. We exceeded 1.15 million units under construction last month for the first time since the housing recession began. We saw peak units sold during 2005 and peak sales prices during 2006. The same month data has been over-estimating the possibilities for units under construction. The shape of the graph indicates a slight slow down in the growth of units under construction. The October to November changes indicate that we should see between 1.154 million and 1.166 million units under construction recorded this month.

The Number of units Sold may be underwhelming. The narrative last month was that new home sales were slowing. This column did some research and found that while the past few months have been slower than last year, the beginning of the year was well ahead of last year's level.  The month to month data indicate that we should see 43,000 to 45,000 units sold. The November to November changes project 52,000 to 56,000 units sold. Normally such a divergent pattern indicate that the lower level is more likely. The rolling year sales are up 4.5% from last year. This indicates that we could see 52,000 units sold. The current year data is up 6.18% from last year. This indicates 53,000 units sold. Don't be surprised with a value of 48,000. Do not be surprised with a value of 45,000 or 53,000.

Inventory could dip. Completions are rising. Once they are completed they become inventory. Inventory is expected to grow 0.4% to 1.4% to a potential range of 332,000 to 335,000. The November to November growth is expected between 8% to 16% or between 312.000 to 335,000 units. The inventory level had increased by 17% from October to October. If this continues then we should see 338,000 units. This would be a slight decline from last months 341,000 units. A dip would slow down the serious rise in inventory that we have seen during the past year. That would be okay. Builders want to reduce inventory by the end of the year and still have homes in the pipeline for Spring and Summer.

Existing Homes are a different story. The existing home market is roughly nine times larger than the new home sales market. Existing home inventory has been declining same month since December of 2015. We have started to see stabilization in the existing home inventory during the past few months. Sales have been better than 2015, comparable to 2016, and slower than 2017. Lower inventory will do that.

Expect existing home sales to drop substantial from month to month and possible rise November last year. We had 446,000 units sold last month and 425,000 units sold last November. The month to month data indicates a decline of 6% to 20% meaning 356,000 to 419,000 sales. The November to November data indicates a potential rise od 2% to 6% or 433,000 to 450,000 units sold. The current year data has us roughly at 455,000 per month. There is also the possibility of a decline of 2% in rolling year sales so that number could drop by 2% to 417,000.  There is no overlap for the month to month and November to November data so the low range is anticipated. The current year data indicates the higher level.. Anticipate 426,000 units sold.

Shelter inflation has been steady at 3% or greater this year. The month to month data indicates a pop of less than 1%, or around $296,000. The annual growth indicates a increase of 3% to 6% or to between $301,000 to $306,000. The $300,000 threshold is significant. Expect a value between $295,000 and $299,900.

Inventory normally peaks during July and troughs during December or January. The month to month drop could be 3 to 8% to 1.7 or 1.8 million units.  The November to November drop could be 10% or a gain of 2% yield. Last month we saw October to October growth from 1.800 million to 1.88 million, or just over 4%. Last year we had a November record low 1.67 million units. If we grow by 4% from that level we would hit 1.74 million units.  Down could be Up, and that would be a good thing.

Rising Interest rates will kill the housing market? Note the question mark. The Devil is in the details. A person I respect was questioning my belief that the economy will continue to grow and that Retail would help lead the way, He was thinking that because the interest rate has "spiked" from 3.93% last December to 4.63% this December that people with adjustable rate mortgages adjust higher by 30%. That's not how it works. If the average sales price is $300,000 and the average buyer place a down payment of 20% then the mortgage is $240,000, A 3.93% mortgage rate, what we had, would mean Principal and Interest (P&I) of 1135 per month. This year it would mean P&I of $1235 per month. This is only an increase of 8.7%.

Rising Interest Rates will kill the housing market??  We had our best housing market for units sold during 2005. We set our pre-recession average sales price record during the Summer of 2006. The 30 year fixed rate was 6.74%. the week of July 13, 2006  This week it was 3.93%.  A rate of 6.74% would yield P&I of 1555. That would generate a 37% increase in monthly payments. We aren't  going that high any time soon.I am not encouraging an idea that we need to raise interest rates to spur home sales. I am saying that people need to do some research. Also, remember the mortgage deduction is based on interest paid. Higher interest rates, higher interest paid. Again, I am not encouraging higher interest rates so we can increase deductions.

Let's go back to that hypothetical house. If its value increased 3% this year, as the CPI and existing home sales data indicate, then it is worth $309,000 this year. If the mortgage increases by $99 a month or $1188 a year, the hypothetical buyer is ahead by $7800. A $3000 return on $60,000 invested is a 5% return. The buyer needed housing last year. May as well own as rent.  The Stock market is down 2.02% from December 18, 2017 when it the DJIA was 24,792.20. Five percent gain or 2% loss. Remember that rent is also rising by 3% or more this year.

The headline data is the seasonally adjusted data. The seasonal factors used to convert the non-seasonally adjusted data to the seasonally adjusted data change by data set,  category, month, and year. Down could be reported as up. A recorded increase could be reported as a drop. Most commentators examine the seasonally adjusted data. Most do not examine the raw data. Trends are our friends and the trends are starting to change. Inventory is rising for new and existing homes. Sales are still rising for New Homes, same month, and existing hoe sales are comparable to 2016. New home sales and existing home sales generate retail sales. Retail sales spur growth and more jobs and more growth. This column identified the dropping existing home inventory years ago. This column identified the improving inventory conditions months ago. Now a trend of three or more months of improving existing home inventory merits more attention. While the rest of the analysts are projecting doom and gloom, the non-seasonally adjusted data is pointing to continued strength, including new and existing home sales.

The New Home Construction data is scheduled for December 17th. The Existing Home Sales data is expected December 19th. New home sales data will be released December 27th.

It's the economy.