Friday, March 24, 2006

New Home Sales Plummet

Hot off the newswire:

New Home Sales Plummet in February

WASHINGTON - Sales of new homes plunged by the largest amount in nearly nine years in February while the median price of a new home dropped for the fourth straight month, providing fresh evidence that the nation's once-booming housing market is cooling off.

The Commerce Department reported that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes. It was the second straight monthly decline and was much bigger than the small 2 percent dip that Wall Street was expecting.

Data from the Census Bureau can be found here:

February New Home Sales

Caveat Emptor!


Blogger Richard said...

looks like speculator activity is drying up if the drop in the west and south is any indication. note the increase in the NE. my guess is there's more money to be made up here so people might be more impervious to a slowdown. still, this ball is just starting to roll. another 12-18 months and we could see some decent buying opportunities.

3/24/2006 10:15:00 AM  
Blogger skep-tic said...

wow, wall st was way off.

panic selling of HBs starts now

3/24/2006 10:15:00 AM  
Blogger NJGal said...

So new home sales were up in the Northeast? Seriously, what's wrong with people up here?

Does that include condos?

3/24/2006 10:16:00 AM  
Blogger skep-tic said...

new home sales were DOWN 13.4% in the NE year over year. they were up over january, but the YoY stats track the rest of the country

3/24/2006 10:19:00 AM  
Blogger skep-tic said...

you also have to look at the tiny number of new homes sold in the NE compared to the rest of the country. even a few additional sales greatly affect the total number

3/24/2006 10:22:00 AM  
Anonymous Anonymous said...

decent buying opportunities?

So A S#!T BOX selling for $500K at the peak sells for $300-$350K in a year or 2 and this is a bargain!

3/24/2006 10:22:00 AM  
Anonymous Anonymous said...

Well, it seems we won't (not can't) buy for another two years at these prices, which really sucks.

I never dreamed that making over $100K, I'd never be unable to afford a decent home in a neighborhood I like (e.g., Summit).

Besides, even if we find a 'cheap' $700K POS fixer-upper now, we'll be upside down on the mortgage in a year.

Two more years in an apartment really sucks.

Can anyone cheer me up? :-)

3/24/2006 10:22:00 AM  
Blogger grim said...

The data across the entire report seems consistent.

Inventory way up, currently at 7 months. The largest we've seen in a long time.

Median prices down 4 months in a row.

My guess is that we're seeing the results of the builder discounts that became popular earlier this year.

3/24/2006 10:23:00 AM  
Anonymous Anonymous said...

So a $700K POS at peak sells for $450-$475 in 1 year or 2 and this is a bargain!!!!!!
Most of these SH!T boxes need another $50k-$100k in them!

3/24/2006 10:25:00 AM  
Blogger grim said...

The real issue here is that it seems the builders haven't learned from the last crash.

I initially thought they would temper their pace as the market slowed. That doesn't seem to be the case. The builders are going full force with no end in sight.

Race to capture the last bit of market share?

Race to push competitors out of market?

Race to complete existing backlog?


3/24/2006 10:26:00 AM  
Blogger NJGal said...

Thanks skep-tic - I figured that the tiny number of new homes was part of it. We don't have the McMansion towns of the west and south, so that probably plays a role. Convenient though that people ignore the YOY - 13% is a big drop.

Anonymous, my hubby and I are with you - I make, what I would have thought years ago, was excellent money - over 200K - but not so much, however, when you're looking at paying 5K a month in mortgage/taxes, excluding upkeep, etc. and still owe loans. It's ridiculous. I refuse to pay 700K for something that interior wise is a nightmare of the early 80s and needs major repair. I just have to think that the signs point down, and soon enough, we'll find something!

3/24/2006 10:26:00 AM  
Blogger chicagofinance said...

Richard said...
chicago, i'm calling 5.5%. i see hikes of 25bps in march and may, a pause in june then another 25bps hike in aug. you and i will still be hanging around grim's place so let's see what happens. any predictions from you?

3:41 PM


My call [plus $2 will buy you a Starbucks]:

Ultimately we are staring down 2 to 3 tightenings unless we see wholesale weakness. That puts us at 5%-5.25% by June 30th.

I think if there is any sign that economic strength is maintained, or that inflation will creep upward toward 3% annualized, then 6% is not out of the question by February 2007.

Just to point out - we have some potential shocks in the hopper between further terrorist attacks, energy prices, and maybe bird flu.

Always be prepared - never bet the house [even though you see it on Texas Hold 'Em]


3/24/2006 10:29:00 AM  
Blogger grim said...

We should all get together for coffee or drinks somewhere down on the gold coast..


3/24/2006 10:48:00 AM  
Blogger RentinginNJ said...

…”I initially thought they would temper their pace as the market slowed. That doesn't seem to be the case. The builders are going full force with no end in sight.”


The “Tragedy of the Commons” parable illustrates what’s happening here. It’s a case where what’s rational for an individual company is irrational for the group as a whole.

For example, there are a limited number of fish in a lake (or potential new home buyers) and 10 fishing companies. It would be rational for the group as a whole to place limits on the number of fish any one company can catch. This would keep the lake healthy. Absent this limitation (okay for fish, but illegal for homebuilders in a free market), each company will rush to take as many fish as possible, because if they don’t, another company will. Ultimately, this will kill the lake.

The homebuilders know that overbuilding will eventually kill the market, but they will continue as long as there are a few fish left. If Toll Brothers doesn’t do it, someone else will. If the market is going to get crushed by overbuilding anyway, you might as well get your share of the sales.

3/24/2006 11:09:00 AM  
Blogger njresident286 said...

I am all for getting together for some drinks of coffe, as long as the gold coast is not to far from Madison

3/24/2006 11:13:00 AM  
Blogger chicagofinance said...

Anonymous said...
Hi Chicago or Grim,

I'm only vaguely familiar with the bond markets and how rates on Treasury notes affect lending rates. Could either of you point me to a "Bonds for Dummies" site or maybe take a crack at explaining the correlation across the two types of debt.


2:19 PM


This topic gets complicated very fast. I will focus on just one aspect of it, but I’m sure people will see this information and begin to post many different items. Allow me to just focus in one place.

In holding any fixed income security, there are many different types of risk that you face. The primary one that should be discussed relative to your question is the risk that if you lend another party money, you won’t receive your principle back [i.e. credit risk / risk of default of borrower].

In the sense that the U.S. Government is considered free of default risk, in the United States and US$ denominated markets, it is used as a benchmark of all other fixed income securities, either directly or indirectly.

Now we start to dig into the jargon of bond analysts and traders. Whenever you hear the term “spread” or “credit spread”, that is short-hand for saying – How much more interest does this particular borrower have to pay in order to compensate me for the fact that they have a greater risk of default than the U.S. government?

The most important issue is that mortgage securities are collateralized by the underlying real estate holdings, are considered strong credits, and as a result, the additional interest spreads are quite tight [i.e. smaller/lower] to Treasury’s.

To the extent that the Treasury’s are considered the benchmark, and the spreads are tight, the movement of prices in the Treasury market [you just see the “yield” quoted in the press and financial services] DOMINATES.

30-Year Fixed Mortgages are overwhelmingly the most common type of mortgage. Given that a mortgage can be prepaid [i.e. borrower has the imbedded option to “put” the mortgage back to the originator at par value], the spread is wider than merely just the credit spread.

Empirical evidence suggests that the average life of a 30-year fixed mortgage is somewhere around 10 years [I forget – it could be as low as 7-8 years]. As a result, the benchmark Treasury used to price new mortgage bond originations is the 10 year “on-the-run” U.S. Treasury [what you see all the time – “The Ten”].

If you see the Ten at 4.75% and 30Y Fixed mortgage at 5.90%, the spread is 115 basis points.

Of course we all know that if you go to a mortgage broker to get a 30-Y fixed in NJ, you will pay somewhere around 6.25-6.75%.

So you have a rule of thumb – when you see the yield on the Ten in late-March 2006, add roughly 125-175 basis points to estimate what someone in NJ can get a mortgage in late-March 2006.

The spreads change due to market conditions – spreads can “tighten” or “loosen / widen / blow-out”

OK – I have to get some work done.


3/24/2006 11:18:00 AM  
Blogger chicagofinance said...

grim said...
We should all get together for coffee or drinks somewhere down on the gold coast..


10:48 AM

Great idea. We should probably wait for it to warm up a little. It shouldn't be too much longer though.

3/24/2006 11:26:00 AM  
Blogger pesche22 said...

house was listed at 1.9 million
reduced to 1.6.

90 days into listing

empty , new construction ,sign of the times.

oh, its on 1.5 ac. 30k taxes.

3/24/2006 11:53:00 AM  
Anonymous Anonymous said...

Just my opinion... but the sales number whether it's for new homes or existing homes is noise... don't bother with it... just keep an eye on inventory... that'll give you a good idea of the direction of the market.

3/24/2006 12:40:00 PM  
Anonymous Anonymous said...

Chicago, thanks for the synopsis on the 10yr bond and its relation to 30 yr mortgage.

I remember seeing a presentation in an econ class that followed the MBS process from the mortgage originator to the ultimate fixed income purchaser. I just didn't know the details on rates vs. T bills.

Thanks, and I'd love to buy you and Grim a drink. You guys deserve it for all the work you put into this blog.


3/24/2006 01:20:00 PM  
Anonymous Michelle said...

Slightly off this thread's topic...

Who's going to put their money where their mouth is? :-)

3/24/2006 02:32:00 PM  
Anonymous Anonymous said...

Who's going to put their money where their mouth is? :-)

Error: Unable to find site's URL to redirect to.


3/24/2006 03:06:00 PM  
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3/24/2006 07:37:00 PM  
Anonymous Michelle said...

Hmm, that's strange. The url above works for me.

Here's the original link:

It's an article in the WSJ. Here are the first few lines:

Standard and Poor's to Launch
New Real-Estate Product

By Karen Talley
From The Wall Street Journal Online

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Standard & Poor's, a unit of McGraw-Hill Cos., is rolling out 10 indexes that will track housing prices in various regions of the U.S., as well as a composite index. The indexes, which plan to launch in April, will serve as the basis for futures and options contracts that will trade on the Chicago Mercantile Exchange.

The contracts will allow investors to go long or short on a specific housing market -- that is, bet on it rising or falling in value.


3/25/2006 06:40:00 AM  
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4/12/2006 09:54:00 AM  

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