Merrill Lynch Analyst: July Housing Numbers Overly Optimistic

by: FP Trading Desk August 28, 2008    

FP Trading Desk

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

While the July home sales bounce had many singing out that happy days are hear again, Merrill Lynch economist David Rosenberg is less than impressed, saying the August numbers are probably going to reveal a renewed down-leg in housing.

 

Mr. Rosenberg says in a research note called "Home Sales - Taking the Lipstick off this Pig" that ] pundits seem happy with the July numbers because it appears the housing market appears is bottoming out. However, he points out that the average number for July and the previous two months is "still the weakest since September 1991."

“It’s probably true that [the numbers] are no longer sliding at an accelerating rate,” he says, but the downward revisions to the May and June figures make the 2.3% increase in July “less than impressive.” Adjust for the size of the population, and home sales are at their lowest level since the summer of 1982, when the economy was trying to pull out of the worst recession of the post-war era.

Digging beneath the surface, sales have been concentrated in “units not yet started”, which rose 9%, though the numbers are not seasonally adjusted. “So, all this improvement in sales seems to be of the ‘spec’ variety,” says Mr. Rosenberg. Sales of “units under construction” were flat on the month. But sales of completed product plunged 18%, not adjusted for seasonality, making it the second weakest July in the past twenty years.

As well, while a lot of attention was paid to the  decline in unsold new housing inventory – falling 5.3% month-over-month and 23% year-over-year – at  416,000 units,this is still 10% above the average of four inventory peaks dating back to 1970. “Further, the level of newly completed homes that are sitting empty has been reduced by only 7% in the past year, which we view as a snail’s pace reduction in the unsold inventory of freestanding units,”  he says.  “The level in this unsold stockpile is more than 40% higher than the previous four peaks, let alone the long-run average.”

Meanwhile, adds Mr. Rosbenberg, builders are having to chase buyers to move product – the median length of time it took to make a sale of a newly-built home soared to an all-time high of 8.5 months in July from 6.0 months a year ago and 3.6 months two years ago as the bidding wars were hitting their peak.

Finally, Mr. Rosenberg points out that the data is lagging where the current market likely is. Existing home sales, for example, are for closings on contracts signed up to three months ago. And a lot has changed since then.

The reality is that a lot has changed in the past four to six weeks as deepening problems . . . have triggered a further tightening in credit conditions, higher market interest rates and a further deterioration in homeowner affordability.

The upshot is that despite the optimistic headlines, Mr. Rosenberg says, “next month’s releases are likely to serve up a heavy dose of realism.”

Related Articles

This article has 2 comments:

  •  
    Aug 28 09:38 AM
    I read yesterday that based on our government's no doubt accurate and unbiased numbers, durable goods orders rose last month... how do you think the growing inventory of packing crates for refrigerators and washing machines impacted home sales? It would seem to me that if durable goods FELL, there would be fewer crates, and therefore less competition for the home builders?
    Reply | Link to Comment
  •  
    Aug 28 11:10 AM
    To cusin stump,

    Your comment makes no sense to me.

    As far as the article, it raises good points about the difficulty of looking at the recent statistics as a bottom. The best you can say is that the rate of descent has diminished.

    Only after things start to rise can you say that a bottom has been reached.
    Reply | Link to Comment
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by FP Trading Desk

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Canada
Housing & Real Estate
Bonds
Dollar/Currencies