November 25, 2009
U.S. New Home Purchases Up, Median Price Falls
"Purchases of new homes in the U.S. rebounded more than anticipated in October [up 6.2 percent to an annual pace of 430,000] as buyers rushed to take advantage of a government tax credit before it expired...Home values may remain under pressure as builders are forced to compete with mounting foreclosures as unemployment climbs."
As we wrote on Monday, two things to consider: 1. the impact of home buyer tax credits that were originally slated to expire on November 20; and 2. the state of October 2008.
∙ Sales of New Houses in U.S. Climb to Highest Level Since 2008 [Bloomberg]
∙ One Of Thirty Underwater Properties New To The Market This Week [SocketSite]
∙ Animating The Unemployment Wave And Wondering About Its Impact [SocketSite]
∙ Pace Of U.S. Existing Home Purchases Up 23.5 Percent YOY [SocketSite]
First Published: November 25, 2009 8:00 AM
Comments from "Plugged In" Readers
Nothing new here
Posted by: Rincon Hill Billy at November 25, 2009 8:19 AM
That's great but aren't new homes being built at a pace of 530,000 units a year?
Posted by: SouthBayJ at November 25, 2009 9:05 AM
umm, I'm all for being bearish, but the 6% rise in SA New Home Sales was compared to September of 2009, not compared to October of 2008 (it was about 5% higher than the SA October 2008 numbers)...
as for the tax credit extension - unclear how much impact this had though I do suspect it was significant, the question of course being, how much demand can be pulled forward, and, were October New Home Sales (contract signings) positively influenced by the extension or did the uncertaintly over the extension (hah!) cancel out some of the new home sales.
I have no idea on the second point - it is too murky.
My guess is we have found the new normal. Since the gov't has decided to pour all of its considerable resources (and fiat currency) behind a housing 'recovery' I would not be surprised if we see very modest upward movement in New Home Sales, and flat to perhaps even slight upward movement in nominal C-S price data all through 2010 (real C-S prices will likely fall 10-15% over the next few years in the mid to high priced baubble areas like SF).
barring a sudden reversal in policy by the cheesemongers (politocrats), the big drops in nominal prices and large upward movement in inventory are behind us.
all of the above is quite different, though, from 2-4% annual home price appreciation (nominal). Maybe starting in about 2015-2017 we will begin to see that again.
[Editor's Note: Sorry, the sentence that ended up on the cutting room floor: "Sales of new homes were up 5.1 percent from October 2008, the first year-over-year gain since November 2005."]
Posted by: polip at November 25, 2009 9:19 AM
On this site, every silver lining has a dark cloud.
Posted by: Snark17 at November 25, 2009 9:19 AM
We closed escrow in August on our first (and hopefully last) house (in Lafayette), after diligently looking but keeping out of the insanity for years (all the while building our down payment). No huge price drops in Lafayette that we could see (although perhaps finally an acknowledgment that the double-digit appreciation train had left the station).
However, the tax credit had nothing to do with it as our income was too high for us to qualify for it. At least locally and in our price range (for a pretty modest house), I'm not sure how anyone can have the income to afford the house, qualify for a jumbo loan (which was a feat in an of itself) yet still qualify for the tax credit.
Maybe our experience is too far outside the norm to matter for discussion purposes...
Posted by: bpslim at November 25, 2009 9:48 AM
Yes clearly this site has an unreasonable bias and the dark clouds have nothing to do with this being the worst downturn since the Great Depression.
Posted by: Rillion at November 25, 2009 9:49 AM
Gotta love all the "nominal" references, giving the implication of pending inflation... We'll be lucky to see inflation greater than 0%(We're @ -.2% NSA now).
I guess that's the most plausible way for house prices to stay out of whack with income and rent ratios... I'd still call that mental gymnastics.
Posted by: J at November 25, 2009 9:56 AM
J - it is very hard to get sustained CPI (price) deflation with a fiat currency and ZIRP.
I agree inflation pressures will be very low, but it only takes inlfation of 1.9%/yr for 5 yrs and flat prices to equal a cumulative 10% real drop in prices over 5 years. Just one good jump in CPi of 4-5% yoy over the next five years will do it.
More realistically, if current turbo charged pro housing policy remains in place, I would see a 5-10% nominal drop in prices in the real SF over the next 5 years or so, so perhaps at 10-15% drop in real prices over that time. Not trivial, but probably not back breaking.
If the accommodative policy of the feds ends abruptly, all bets are off.
Posted by: polip at November 25, 2009 10:18 AM
"However, the tax credit had nothing to do with it as our income was too high for us to qualify for it. At least locally and in our price range (for a pretty modest house), I'm not sure how anyone can have the income to afford the house, qualify for a jumbo loan (which was a feat in an of itself) yet still qualify for the tax credit."
I agree and am totally confused by this. anyone who qualifies for the tax credit cannot afford a home in the Bay Area, at least in SF and the nicer burbs.
can someone explain this incongruence/
I don't qualify for tax credit due to income, yet i cannot afford a nice 2bdr condo in the city. (disclosure: single with $200K+ income)
Posted by: spencer at November 25, 2009 10:32 AM
This site reads more and more like the end of a Scooby Doo episode.
"If it wasn't for this pesky government intervention there would have been a crash in SF like I predicted.."
Posted by: REpornaddict at November 25, 2009 10:40 AM
"it is very hard to get sustained CPI (price) deflation with a fiat currency and ZIRP."
Any grounds for this theory? Study Japan's economic history since the early 90's much?
Deflation in Japan started in the early 1990s. On March 19, 2001, the Bank of Japan and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing' policy). Despite having interest rates down near zero for a long period of time, this strategy did not succeed. Once the near-zero interest rates failed to stop deflation. Some economists, such as Paul Krugman, and some Japanese politicians spoke of deliberately causing (or at least creating the fear of) inflation. In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still has the lowest interest rates in the developed world, deflation has still not been eliminated and the Nikkei 225 has fallen over approximately 50% (between June 2007 and December 2008).
Systemic reasons for deflation in Japan can be said to include:
* Fallen asset prices. There was a large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989).
* Insolvent banks: Banks with a large percentage of their loans which are "non-performing" (loans for which payments are not being made), but have not yet written them off. These banks cannot lend more money until they increase their cash reserves to cover the bad loans. Thus the quantity of loans are reduced and less funds are available for economic growth.
* Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. People also save by owning real estate.
Posted by: J at November 25, 2009 10:41 AM
Actually, its not impossible to qualify for all 3. We're a good example of this:
1 - Our joint income is approximately $225k. Our AGI is under this amount, which qualifies us for the tax credit
2 - We are purchasing a condo-style townhome on the peninsula (3 bedroom), moving out of the city, for a little over $650k, which qualifies us for the super conforming loan under FHA guidelines
3 - With our combined income, while the mortgage payment will be high, it is not out of reach for us
Posted by: SFhighrise at November 25, 2009 10:48 AM
Spencer, provided you have good credit, you can qualify for an $800K mortgage without breaking a sweat. Are you really unable to find a good 2BR condo for less than $1M? Or is your down payment keeping the affordability down? (sorry, that's a really personal question, but I'm very interested, not snarky. I have been thinking about looking with similar financials, and from listings there appears to be tons of inventory in the $1M range in good neighborhoods).
Posted by: Scooter at November 25, 2009 10:49 AM
"end of a Scooby Doo episode."
Posted by: diemos at November 25, 2009 11:09 AM
Maybe a few more details would help to explain our situation. Purchase price $1.110m (1959 rancher, 1900 sq. ft. on 1.37 acres but still with the original pink tile bathroom, yellow tile bathroom and many light fixtures - charming and we love it but not a fully updated home). We were never planning to get into the market with a condo or a small home and then step up the ladder to the home we really wanted or were going to stay in "forever." So, a condo, for example, wasn't right for us.
After 20% down, the mortgage was still going to be higher than a "super conforming loan." And getting a mortgage for a non-conforming loan was no joke (very few banks were offering them; one wanted 30% down AND 10% of the loan in liquid, non-retirement reserves in the bank!). And we're a couple with 800+ credit scores, no debt, and long-term employment with 6-figure salaries.
Posted by: bpslim at November 25, 2009 11:16 AM
J - I'm well aware of the Japan story.
First and foremost - ZIRP in japan started well after the asset bubble popped. Look at it yourself, heck you even quoted it from the wiki entry. Deflation started about 7-8 years before the BOJ finally caved and went into QE+ZIRP mode. The US Fed, otoh, went with ZIRP plus massive QE (1.2 trillion in MBS purchases is non trivial - the 300 billion in treasury purchases was more less trivial) as soon as the deflation threat becomae obvious. The liquidity pumped and dumped into the system by the Fed has been mind boggling, and by and large, it has worked to stave off >1% CPI/price deflation (a monetarist would quiblle with all of this as the issue of money supply deflation is a whole different story!). Top it off with a nice 700+ billion dolar fiscal stimulus and that is some serious money being thrown out of Bennie's chopper!
Second, culturally, Japan is a different story. High savings rates and demographic considerations have frustrated the intent of those who sought to create some modest inflationary pressure.
Ben made it famous with his speech, but it remains true that if a central bank is willing to throw caution to the wind, it can stop price deflation dead in its tracks with enough liquidity ('printing'). there are, of course, long term consequences and 'collateral winners' (I love that term - so do the bonus boys at the banks). Generating significnat and stable price inflation is tougher, but also can be done.
I have been in the deflation camp for some time (monetarist, not price), so please don't confuse my overall position). I did underestimate the willingness of the politicos to enrich the privileged few (a necessary step to stave off the deflationary spiral) and also their willingness to do whatever is necessary to generate some veneer of price 'stability.'
The RE market will find its floor, in real terms, regardless of gov't intervention, so yes a bit of Scooby Doo here, but underneath the mask the villain is still real. The 'crash' is ongoing, but with the right policies, the governmnent has successfully spread the costs from those who made the mess to the entire populace.
Posted by: polip at November 25, 2009 11:27 AM
So if the government cannot do it, is Japan-style deflation going to bail out all of the clowns who overpaid for housing in SF in recent years?
"The New York Times - December 25, 2005
Take It From Japan: Bubbles Hurt
By MARTIN FACKLER
FOURTEEN years ago, Yoshihisa Nakashima looked at this sleepy suburb an hour and 20 minutes from downtown Tokyo and saw all the trappings of middle-class Japanese bliss: cherry-tree-lined roads, a cozy community where neighbors greeted one another in the morning and schools within easy walking distance for his two daughters.
So Mr. Nakashima, a Tokyo city government employee who was then 36, took out a loan for almost the entire $400,000 price of a cramped four-bedroom apartment. With property values rising at double-digit rates, he would easily earn back the loan and then some when he decided to sell.
Or so he thought. Not long after he bought the apartment, Japan's property market collapsed. Today, the apartment is worth half what he paid. He said he would like to move closer to the city but cannot: the sale price would not cover the $300,000 he still owes the bank."
Posted by: sf jack at November 25, 2009 11:27 AM
"I'm well aware of the Japan story."
OK. I just don't see why you would say, "it is very hard to get sustained CPI (price) deflation with a fiat currency and ZIRP.", in light of that.
Every government has a "fiat currency". The Taylor rule suggest that the Fed set negative interest rates, so they have actually reached their QE limit. Yet GDP and unemployment are very weak.
Posted by: J at November 25, 2009 11:39 AM
And I should add that I ask that above because anyone I talk to locally about such matters, among those who believe deflation is a possibility, think such a situation will impact everything but their house.
Interesting how that works.
Posted by: sf jack at November 25, 2009 11:54 AM
It is very hard to get sustained price deflation with a fiat currency and ZIRP if the central bank is intent on avoiding deflation from the outset.
Is that better :)
The Taylor rule does suggest the Fed set negative interest rates. QE is not the same as ZIRP! Buying MBS for prices mcuh higher than the private market would pay (and in huge quantities) is true QE, and is effectively a form of negative interest rates (they are paying banks for 'bad assets.' That is generating free money, way over and aboe the true market clearing rate, for banks. Negative interest rates would effectively do the same thing. Purchasing the huge amount of MBS is just back door monetizing of bad debt, and is nothing other than forced recapitalization of the banks. Is it white collar theft - absolutely! Is it working as planned - yup.
GDP and unemployment are going to remain weak, no argument there - the output gap will persist for a year or two at least. Without the output gap this binge of liquidity/QE would have led to double digit inflation by now (the dollar devaluation has been impressive nonetheless). Price inflation will remain very modest for some time.
And don't expect MBS purchases to stop on 4/1/2010. If they do, I'll be very surprised, as they have been remarkably 'effective' and will be hard to stop now that they have gotten started!
Posted by: polip at November 25, 2009 12:00 PM
sf jack - asset price deflation/inflation is a completely diferent animal from price deflation/inflation (though correlated with lags).
Posted by: polip at November 25, 2009 12:02 PM
"Without the output gap this binge of liquidity/QE would have led to double digit inflation by now"
The question is, what level of binging would keep CPI between 0% and 2%? I suspect more than has been done.
Posted by: J at November 25, 2009 12:24 PM
"(though correlated with lags)"
So, around here, how likely is a deflationary environment in "everything" but housing?
Posted by: sf jack at November 29, 2009 5:39 PM
"Spencer, provided you have good credit, you can qualify for an $800K mortgage without breaking a sweat. Are you really unable to find a good 2BR condo for less than $1M? Or is your down payment keeping the affordability down?"
I have good credit and the down payment. I just don't think i can afford anything more than $750K with a 200K salary. i don't feel comfortable paying $5K + in mortgage without being constantly fearful that i may not be able to make it.
3.5x salary is the max i consider to be affordable.
I also pay 2150 in rent for the equivalent of a $850-950K condo.
i do agree that there is a lot of good stuff out there once you get to the 900K+ level, but i would need to make $275K to feel comfortable in that range.
Posted by: Spencer at November 30, 2009 7:33 PM
I think you it's worth noting that the Yen has risen to 86 to a dollar from just 2008 when it had been stable at 110 or so. But I suppose that could be more due to our monitary policy.
Posted by: Mediated at December 1, 2009 8:36 AM