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Substantial Future Home Price Declines Predicted By Goldman Sachs And Peak Theories

Tyler Durden's picture





 

For anyone following the recent collapse in mortgage applications, the recent "strength" in new and existing home sales is nothing but the latest joke to spin the nth bounce from the bottom as the "this is it" moment which Cramer has been trying to do with disastrous results ever since the summer of 2009. Oddly, reading a recent surprisingly bearish Goldman economic outlook (or not so surprising: it lays out the framework for Goldman to start advocating MBS purchases as part of QE3) piece from Sven Jari Stehn confirms our concerns that any attempt at shining light behind the headlines exposes ever more cockroaches. In "Mortgage Applications Point to Near-Term Home Sales Weakness" Stehn highlights the same issues we have been pounding on the table for months: namely that near contemporaneous plunge in mortgage applications is far more troubling and should be given far more impact than new, pending and existing home sales in any one prior period. Goldman summarizes: "The number of mortgage applications, however, has declined sharply in
recent weeks. Specifically, the volume of mortgage applications for
purchase—reported in a timely fashion every week by the Mortgage Bankers
Association—declined by a cumulative 14% during the last three weeks.
Does the decline in mortgage applications suggest that home sales are
set to decline again in coming months?" In short the answer is yes, and the full note below explains it. Additionally, we have provided some technical perspectives from Peak Theories which predict a 7% drop based on recent chart patterns. Needless to say, we believe the drop will be far greater when all is said and done, now that the Bernank has given up on attempting to keep mortgage rates low and only cares about boosting stock prices.

Mortgage Applications Point to Near-Term Home Sales Weakness

Following consistently disappointing news out of the housing market since the summer, indicators of housing activity have recently looked somewhat better. Existing home sales rose 6.8% and 11.8% in November and December, respectively. Moreover, new home sales surged 17.5% in December.  (Note, however, that this increase was due almost entirely to surging sales in the West of the United States—possibly driven by an expiring tax credit in California.) Meanwhile, the rate of decline in home prices appears to be stabilizing. In particular, the Case-Shiller index declined at a slower rate in November and, as the index is a three-month moving average, home prices might have stabilized in November on a sequential basis.
 
The number of mortgage applications, however, has declined sharply in recent weeks. Specifically, the volume of mortgage applications for purchase—reported in a timely fashion every week by the Mortgage Bankers Association—declined by a cumulative 14% during the last three weeks. Does the decline in mortgage applications suggest that home sales are set to decline again in coming months?
 
The chart below plots the month-to-month change in existing home sales alongside the (monthly average of the) volume of mortgage applications since June 2009. The number of mortgage applications indeed appears to lead existing home sales. For example, mortgage applications dropped sharply in May 2010, before existing home sales declined in June and July. Mortgage applications then picked up during the summer, again leading existing home sales. Given the recent drop in mortgage applications, this relationship would imply a substantial drop in the growth rate of existing home sales during January and February.


A set of simple regressions supports this finding. Specifically, we estimate models that explain the growth rate of home sales with the change in the number of mortgage applications. We estimate three separate regression for existing, new and pending home sales between January 2009 and December 2010 (see table below). We make two observations:
 
First, the regressions confirm that the volume of mortgage applications holds useful information for home sales. In particular, we find that existing home sales depend on the number of mortgage applications with a one month lag. New and pending home sales, however, are most closely associated with the contemporaneous number of mortgage applications. This is not surprising given that sales of existing homes are measured at closing and the application for a loan typically precedes the closing by several weeks. New home sales, in contrast, are measured based on the signing of a sales contract, at which point the buyer still has time to apply for the mortgage.
 
Considering a longer sample—back to 1990 for existing and new home sales—leaves our finding qualitatively unchanged but reduces the fit of the regressions and the size of the estimated coefficients. (Note, however, that care has to be taken in including the period between late 2006 and late 2008. During this time the link between home sales and mortgage applications weakened substantially, reflecting upheaval in the mortgage finance industry.  The rising difficulty of obtaining credit seems to have resulted in a higher number of applications per loan granted.)

Second, the recent decline in the volume of mortgage applications points to a decline in home sales in the near term. Given the one-month lag between existing home sales and mortgage applications, the model suggests that existing home sales will slow to a growth rate of about 2% in January and then decline by around 4% in February. New and pending home sales are predicted to decline by around 4% and 5% in January, respectively.
 
Taken together, the predictions from the recent decline in mortgage applications are consistent with our view that the housing market will remain weak in 2011. In particular, we expect only a moderate pickup in housing starts and home sales throughout 2011.

Follows the latest report from Peak Theories Research: Housing Prices to Decline

 

 


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Fri, 01/28/2011 - 14:54 | Link to Comment RmcAZ
RmcAZ's picture

BTFD

Fri, 01/28/2011 - 15:07 | Link to Comment flacon
flacon's picture

This video explains in an easy to understand way why the system is irreparably broken and why there is no fix for this type of problem.

JOHN HOEFLE ON THE LAROUCHE TRIPLE CURVE

http://www.youtube.com/watch?v=sgZ7djZyqxU

Fri, 01/28/2011 - 15:12 | Link to Comment dan10400
dan10400's picture

bad, bad santa claus.

Fri, 01/28/2011 - 15:12 | Link to Comment Jason T
Jason T's picture

concur.  Why Ben would re do the Rudolf Havenstein policy is beyond me.

Fri, 01/28/2011 - 15:20 | Link to Comment william the bastard
william the bastard's picture

That's sum scary chit mang. But then I always trust econ profs that wear long hair and longer beards

Fri, 01/28/2011 - 15:31 | Link to Comment flacon
flacon's picture

Not all economists are Keynesian.  

Fri, 01/28/2011 - 15:20 | Link to Comment Running on Empty
Running on Empty's picture

Was he in ZZ Top ?

Fri, 01/28/2011 - 15:57 | Link to Comment hardcleareye
hardcleareye's picture

Thanks for the link, I be passing that on, good explaination.

Fri, 01/28/2011 - 16:17 | Link to Comment hardcleareye
hardcleareye's picture

Wow...  did a little look see into LPAC...  LaRouche Movement,

http://en.wikipedia.org/wiki/LaRouche_movement

not my cup of tea...  just a tad to much "in your face"!!

Fri, 01/28/2011 - 14:58 | Link to Comment william the bastard
william the bastard's picture

In other words, QE is a FAIL and the next move is for the FRB is to assume the functions (sic) of FNMA, FHLMC.

Fri, 01/28/2011 - 15:54 | Link to Comment TrihumpTheInsultDog
TrihumpTheInsultDog's picture

For once Goldman is correct.

3 bedroom, 1 bath for $8.00 USD

http://www.realtor.com/realestateandhomes-Detail/15422-Chatham-Street_De...

Fri, 01/28/2011 - 15:00 | Link to Comment papaswamp
papaswamp's picture

I see how it works now. Collapse arrived...govt does a stick save for the banksters (and themselves (Congress, Treasury, Fed))...but things are too bad to stop so once the political/banking class is well funded, they can now let everything else go. Wonder how many more predictions will start coming out of the banking sector? So they can say...'see we told you it was coming can't blame us..we are just the messenger'. Bend over people...no lube for you.

Fri, 01/28/2011 - 15:15 | Link to Comment benb
benb's picture

It's not bad at all if you're in the club... I would say this is going to be a decisive year for RRE and Commercial.

Fri, 01/28/2011 - 15:01 | Link to Comment painequalschange
painequalschange's picture

All these articles about real estate need a disclaimer, "Does not apply to San Francisco Bay Area"

 

Fri, 01/28/2011 - 15:44 | Link to Comment WestVillageIdiot
WestVillageIdiot's picture

Also "Does not apply to Manhattan".  Of course the Jerseyites think it doesn't apply to them even though their prices have gotten crushed. 

Fri, 01/28/2011 - 16:35 | Link to Comment TrihumpTheInsultDog
TrihumpTheInsultDog's picture

Jerseiachians cousin to the Appalachian.

Fri, 01/28/2011 - 15:02 | Link to Comment random shots
random shots's picture

Long Treasuries, long housing!

Fri, 01/28/2011 - 15:05 | Link to Comment buzzsaw99
buzzsaw99's picture

My buddy bet me $100B that the Jets would win the Superbowl. Now the deadbeat won't pay. Too bad I'm not the squidly GS because then the goobermint would step in and pay me what's mine. Bad luck that.

Fri, 01/28/2011 - 16:09 | Link to Comment Common_Cents22
Common_Cents22's picture

But didn't you buy insurance from your fat buddy Al I. Greenback? (A.I.G.)?  He is so fat he is too big to fail.   He'll get a bailout to make you whole.

Fri, 01/28/2011 - 18:22 | Link to Comment JustPrintMoreDuh
JustPrintMoreDuh's picture

A hundred billion? ... sucker!

Fri, 01/28/2011 - 19:45 | Link to Comment eatthebanksters
eatthebanksters's picture

I boght the CDS for $2 bucks..

Fri, 01/28/2011 - 15:07 | Link to Comment Sophist Economicus
Sophist Economicus's picture

This is bullish for stocks, right?

Fri, 01/28/2011 - 15:09 | Link to Comment bronzie
bronzie's picture

Martin Armstrong predicts that the bottom of the current housing downturn won't be seen until 2032 ...

some of the reasons his prediction is likely to be prescient:

- boomers downsizing into coffins and urns

- clouded titles / uncertainty of ownership due to fraudclosure, robo-signing, etc

- 2 years of visible inventory on MLS

- ?? years of inventory not on MLS - almost every major city has a glut of condos that are yet to be completed / sold - in San Diego there are literally thousands downtown - Boulder,CO has 390 units in the Pelloton alone - builders don't usually list new property on the MLS

- ?? years of shadow inventory - REO, yet-to-be-foreclosed, still occupied but not paying mortgage, etc

- ?? years of shadow inventory - people "waiting for the market to come back" - they don't want to be owners but are hanging in there for awhile longer - they will sell or capitulate at some point

- increasing unemployment (22%+ according to shadowstats.com)

- increasing duration of unemployment once the job is lost

- aversion to buying an asset category after it has bubbled and the bubble bursts - this aversion typically lasts a full generation

- banks leaving the mortgage market - Fannie & Freddie (ie, the govt) currently originating more than 95% of all mortgages

did I miss anything?

Fri, 01/28/2011 - 15:20 | Link to Comment spartan117
spartan117's picture

You can add the following:

- Increasing property tax rates.

- Increasing insurance costs.

Fri, 01/28/2011 - 16:41 | Link to Comment Blindweb
Blindweb's picture

When the peak oil crisis really gets rolling whole cities like Phoenix are going to deline 90%.  Even if prices are still falling, at some point it will make sense to buy in a small city, with a strong sustainable local economy and access to rail and water way. 

Fri, 01/28/2011 - 19:46 | Link to Comment eatthebanksters
eatthebanksters's picture

what the fuck does he know anyway?  

Fri, 01/28/2011 - 15:11 | Link to Comment FLUSA.com
FLUSA.com's picture

I sold a lot of homes in the last year...ALL CASH...however, we are getting the houses far under current appraised value (BTW...who pays appraised value anymore...the only time I have ever been burned in Real Estate is when I bought at appraised value)..... I expect the downward trend to continue as nobody has a sense of urgency to buy now....plus the efforts needed to be approved for a loan are great, basically you can get a loan if you don't need the money. Also, many of the bank owned home asset managers don't even want to talk to someone with a "pre-approval"...cash is king...I can easily see another 20% drop in values...even more in the areas that saw extreme price increases (California, Nevada, Florida)...

Fri, 01/28/2011 - 18:32 | Link to Comment Rainman
Rainman's picture

Bankers are hanging on tight to the big number dwellings in coastal and trendy regions of SoCal. In Santa Monica, 177 homes are on the NOD list. Only 1 on the MLS. That's just one city. Sooner or later the shadow must give way. www.doctorhousingbubble.com

 

Fri, 01/28/2011 - 19:48 | Link to Comment eatthebanksters
eatthebanksters's picture

then the banksters will buy them for themselves...can you imagine an $18,000,000 BelAir love palace for a banker year end bonus?!

Fri, 01/28/2011 - 15:13 | Link to Comment johngaltfla
johngaltfla's picture
Substantial Future Home Price Declines Predicted By Goldman Sachs And Peak Theories

 

 

Thank you Captain Obvious! Goldman really is on top of things, ain't they?

Fri, 01/28/2011 - 15:20 | Link to Comment papaswamp
papaswamp's picture

I don't know what that made me laugh, but it did...

Fri, 01/28/2011 - 15:17 | Link to Comment bunkermeatheadp...
bunkermeatheadprogeny's picture

Smart money has been renting for the last few years.

Dumb money has been taken out of individual 401(k)s to keep up on mortgage payments.

Fri, 01/28/2011 - 15:21 | Link to Comment william the bastard
william the bastard's picture

Since mid 2005

Fri, 01/28/2011 - 15:17 | Link to Comment chet
chet's picture

But a certified Realtor has assured me that homes never go down in value.  Why would he lie to me?

Fri, 01/28/2011 - 15:28 | Link to Comment TheGreatPonzi
TheGreatPonzi's picture

You can't blame them. It's their business to claim that everything is always fine.

The sad part is the people who believe them.

Fri, 01/28/2011 - 15:30 | Link to Comment bunkermeatheadp...
bunkermeatheadprogeny's picture

So in other words, buy FAS

Fri, 01/28/2011 - 15:39 | Link to Comment PulauHantu29
PulauHantu29's picture

How to value a house?

1. price to income less then 2;

2. house price should be less then 12X rental value;

3. cost to build: Builders in Oklahoma, Arizona and Texas now tell me it costs $50-$60 bucks to build a two story house...$5 more pesf for one story.

So think before you buy. Remember it costs you 6-10% to sell that house later so for you to even break even (which is HIGHLY unlikely) your house must appreciate at least 8-10%....

 

Good luck!

 

Fri, 01/28/2011 - 15:57 | Link to Comment thefedisscam
thefedisscam's picture

"3. cost to build: Builders in Oklahoma, Arizona and Texas now tell me it costs $50-$60 bucks to build a two story house...$5 more pesf for one story."

??? what did you omit? Cannot understand what you are saying

Fri, 01/28/2011 - 16:12 | Link to Comment Common_Cents22
Common_Cents22's picture

50-60/sq ft is pretty low.  How are they getting those costs down?   A very cheap 2x4 simple build with crap finish and little insulation?

Fri, 01/28/2011 - 16:57 | Link to Comment SunSword
SunSword's picture

Maybe on a slab? No crawl or basement? No attached garage (maybe no garage at all)? All frame construction (no brick/masonry/stone)? Slap in a window airconditioner and a septic tank? Minimal attic insulation?

Seems to me that you'd have to build like that to get $50/SF.

And I'm guessing -- gravel drive to state road. No landscaping, no curbs, no sidewalks, no storm sewers?

Fri, 01/28/2011 - 18:11 | Link to Comment honestann
honestann's picture

Not at all.  Just to scope out the situation we just drove to some new homes and looked through them.  Some of the nicest brand new houses, quite luxurious looking to me, cost $75 per square foot.  In fact, that's what their billboards say, and that's what they cost.  I checked, that cost is based only on the square feet indoors and does not include stairways between floors or garages (and they all have 2 car integrated garages).

I'm sure less luxurious digs cost considerably less, and these are the posted retail/selling prices.  As soon as we started walking away they started calling us back with offers of $25K discounts or $50K worth of free accessories.  So yeah, the cost to build these can't be more than $50 per square foot, and these are somewhat upscale places.

Fact is, though, they still cost triple what they should.  Thank the central banks and fractional reserve banking/scamming practices for that.

Fri, 01/28/2011 - 15:50 | Link to Comment sergeyvz
sergeyvz's picture

> Bernank has given up on attempting to keep mortgage rates low and only cares about boosting stock prices.

Sure. He did refinance his mortage about a year(?) ago, and now wants to sell the remaining AIG shares in his 401(k)... :)))


Fri, 01/28/2011 - 19:51 | Link to Comment eatthebanksters
eatthebanksters's picture

+1    LOL!!!

Fri, 01/28/2011 - 15:51 | Link to Comment cheesewizz
cheesewizz's picture

Primary Dealers loading up on MBS?

Fri, 01/28/2011 - 15:59 | Link to Comment Miramanee
Fri, 01/28/2011 - 16:29 | Link to Comment TideFighter
TideFighter's picture

Fannie properties going to auction thru services such as auction.com:

31% of properties sold

60% of sold property (winning bids) result in the property being resold in the very same auction (auction officials rejecting bid)

4% actually closing at an average of 55% of appraised value

 

Fri, 01/28/2011 - 20:39 | Link to Comment Rainman
Rainman's picture

...interesting.....wonder if non transact winning bids are picked up in the NAR sell stats. Brilliant puff job on the numbers if true. Nothing like a churn to liven things up for the sell side.

Fri, 01/28/2011 - 17:12 | Link to Comment Gimp
Gimp's picture

There are houses in my neighborhood that have been empty for over three years, the ones that are selling are going for 33% of the price at the top of the market. That is the reality, forget the bullshit you hear on TV.  No one is buying unless the price is right..

Fri, 01/28/2011 - 19:42 | Link to Comment eatthebanksters
eatthebanksters's picture

Why are the rich getting richer and why is the continuing erosion of home values a debacle?  If sales are constant or going up and loan volume is dow, that means cash buyers are moving into the market...more often than not the cash buyers are rich investor/speculators.  Real buyers, Joe on Main Street, need a loan and are lucky to have 20% down with an income that can support the monthly loan fees.  Welcome to the Banana Republic of America...someone pass the mangos and papayas!

Fri, 01/28/2011 - 19:53 | Link to Comment eatthebanksters
eatthebanksters's picture

BTW...if Egypt falls and North Africa burns, home prices may fall to zero...

Fri, 01/28/2011 - 22:21 | Link to Comment SmittyinLA
SmittyinLA's picture

The 100% paid off baby boomer geezer sell off will lower prices more than anything in the history of America, people will be able to buy on the commitment of paying property taxes and even then some will balk at the price, the most important selling price factor will be how many fruit trees in the yard and how close to work the house is, and in many cases you'll have to go out of state to find work. 

Things are going to get much much worse.

Sat, 01/29/2011 - 07:08 | Link to Comment JonNadler
JonNadler's picture

So Goldman is buying real estate? Are they betting on inflation?

just like they knocked gold for years and then we find out they were all buying it

Sat, 01/29/2011 - 13:07 | Link to Comment buzzard beak
buzzard beak's picture

Two things are going on here. One, rates went up. Two, some of the last remaining bulls capitulating. The foolish optimists who have been waiting for that rebound are finally throwing in the towel.

But housing does not behave like a liquid market, so don't think I'm saying this is some kind of herald of a big upward move. Not at all. Housing will come down a bit more in most areas, then probably stay pretty much flat for a while.

Rates are going to be very important going forward. Looks to me like they're on a slow jerky trend upward. Other than that next big events to watch are GSE reform (the government backstop is scheduled to expire at the end of 2012, nobody's got a clue what to do after, I guess Obama's successor will decide) and the tapering off of defaults as we finally get through the ARM resets and late-deciding strategic defaults (but I expect very gradual tapering off that might be in the news already late this year but won't result in fewer distressed properties till 2013 or later, depending on the locally varying speed of the foreclosure process).

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