I read through the usual suspects in the mainstream media yesterday
after the Case Shiller numbers were released and see headlines such as "Home Prices Flatten in October After 5 Months of Gains" and "Mortgage insurers rally after housing data"
and wonder just how many of these reporters and analysts actually
bothered to look at the data versus repeating sound bites. This has
been a bad three quarters for the fundamental bears, but there is
absolutely no macro or fundamental reason to turn bullish. As a matter
of fact, the only reason I can see to buy stocks is that the stock
prices are going up. That, in and of itself, should give one pause.
Let's take a close look at the "raw" Case Shiller numbers, not the
seasonally adjusted ones for which I cannot source the method of
adjustment for seasonality. Don't worry, if one looks at the data over
a long enough time frame, you can easily recognize the patterns of
seasonality, and more importantly notice how dramatic they have become,
leaving open to question how effective the seasonal adjustments are,
whatever they are.
Starting with a bird's eye view of key markets over two decades you
can see that the housing boom was enormous and the crash was severe,
but nearly all major markets ticked up significantly over the last few
months, although we are still at roughly 2003 pricing levels, having
lost about 7 years appreciation. The question is why. Well, the US
government has put more money and resources into re-blowing the
residential housing bubble than any other time in its existence.
Click any graph to expand.
Despite this, significant headwinds persist in inventory, foreclosure
and distress pipelines, unemployment, etc. Yeah, I know, you have heard
this all before, but let's put it in context this time around.
This chart shows us the month to month changes over the same time
period. As you can see, last year was bad, but we again ticked up
significantly for several months in a row for an improvement. That
improvement has quickly disappeared with several markets dipping back
into the negative. and all markets trending sharply downward.
This is a negative, not a positive turn of events. Put this in
perspective, with hundreds of billions of dollars of government aid,
MBS purchases, tax credits and bank support - we are still seeing this
sharp month to month downtrend. It is no wonder why the housing tax
credit was extended, but to what good?
As we drill down on the trend view, we can see that the upward trend in
most markets has stopped, with a few markets actually turning back down
again, and right after the spring/summer selling season and the
perception of the proximal expiration of the tax credit. This is a
negative, not a positive turn of events.
The chart below illustrates the seasonal ebbs of month to month price
changes. On a month to month basis, we see hills in the spring and
summer and valleys in the fall and winter. During the onset of the
bursting of the (first) bubble, this cycle was compressed, but was
still there. and lasted throughout the bubble. With the onset of the
government stimulus (ex. housing credits and MBS market manipulation),
the peaks were significantly exacerbated. Now we are entering into the
winter months again, and guess what's happening, as has happened nearly
every winter cycle before. The only difference is that this dip is
extraordinarily steep! I would also like to add that the month to month
price changes coincide exactly with the S&P 500 move downward and
upward for 2008 and 2009, to the MONTH! What a coincidence, huh? If
this relationship holds,,,, well you see what direction the month to
month lines are going and how steep they are, don't you?
As you can see when we drill down into the month to month numbers, the
improvements either weaken significantly or disappear into numbers that
show further declines - and this is in the face of government bubble
Let's chop the data up using bar graphs that give the reader a greater
feel for the seasonality of the moves, and you will still find the
latest numbers showing what looks like a downtrend, again...
Remember, the CS index measures matched sales pairs. That means that
it attempts to follow the same properties being sold, so the
seasonality will mean much less than if one were simply measuring
transactions, irrespective of the property. The seasonally adjusted
numbers look more positive, but still show a downtrend. Since I could
not find the specific methodology on the "de-seasoning", and I am
easily able to discern the seasonal trends over time, I am much more
comfortable with the raw index data.
So, what does it mean if we get another significant downturn? Well, not
only are the 2003 to 2007 vintage mortgages in trouble, but those 2008
and 2009 mortgages are at risk as well. What are the chances of this
happening? Fairly significant. For all of those guys who swear we are
on the brink of a booming economic recovery, recall that it was housing
depreciation that set all of this off to begin with. It was not a dip
in GDP, not unemployment, not a dip in corporate profits, definitely
not a change in analyst's earnings forecasts and not a crash in the
stock market. It was a crash in housing. What happens if we get another
housing crash (or more accurately put, the continuing of the current
one) after a few hundred billion of stimulus and a 62% run in the
S&P to guarantee that the stocks are nice and ripe in their
overvaluations? Inquiring minds want to know...