In the context of today’s new home sales report catastrophe – and I’ll have a detailed analysis on that later this week – I continue to question the validity of the National Association of Realtor’s existing home sales report.
Last Thursday, the NAR released its September exiting home sales report, which purported that existing home sales occurred in September at a “seasonally adjusted” annualized rate of 5.55 million. Notwithstanding the absurdity of taking a data measurement for a single month and expressing it as an annualized rate, the report itself is highly questionable.
Part of my problem with the existing home sales report – aside from the overall methodology of measurement – is that fact that over the last two years there has been a complete disconnect in the correlation between the existing home sales and new home sales reports:
A Pearson correlation coefficient analysis on the 24 months (9/2013 – 9/2015) of data showed just a 47% correlation between new and existing home sales. Interestingly, I ran the correlation coefficient on the data from May 1999 – Sept 2012 and it showed an 87% correlation.
In my opinion, the low correlation between existing and new home sales which has surfaced in the last two years suggests a high degree of estimation error in the sampling and seasonal adjustment methodology used by both the NAR and the Census Bureau. To the extent that errors are introduced into the monthly calculation, this error is compounded by a factor of 12 when the monthly data is converted into an annualized rate metric.
I wrote an article for Seeking Alpha in which I discuss the reasons why the NAR’s report is highly unreliable in terms of measuring the true level of existing homes sales. You can read my analysis here: September’s Existing Home Sales Report Is Highly Questionable.
I do know that I’m starting to see home listings pile up all over the Denver metro area. Prices are starting to drop as well as “new price” signs sitting on top of “for sale” signs are popping up everywhere. I saw a new flavor a couple days ago: “improved price.” That cracked me up but it was also in a mid-priced neighborhood in which homes were selling as soon as they were listed a year ago. It’s starting to remind me of what it started to look like in Denver in 2008.
In fact, I was driving through an area of Denver that I consider to be a “poster-child” example of a collapsing market earlier today. The Cherry Creek North neighborhood was the epitome of the buy, scrape and build a mcmansion phenomenon that punctuated the housing bubble. Today I was stunned at the huge number of homes on the market (from Zillow.com, zip code 80206):
(click to enlarge)
The average home on the market in this area is over $1 million. Many homes are listed for several million dollars. The big question is, why are this many high-price home owners looking to sell their McMansion? How do you decide to list your home when there’s already 2 or 3 homes listed on your block?
This visual has already appeared in several upscale enclaves. The “poster-child” house representing where the entire housing market is headed is this home on a golf course in Lone Tree, CO. Lone Tree is a upper-middle/upper income area that is popular with local businessmen, athletes, oil industry executives and transplanted Californians (I would never live there, although the golf course is nice). A colleague and I have been watching this house, which was listed for $829k in September and is now offered for $709k:
Zillow.com: Lone Tree Golf Course House.
If the housing market is supposed to be strong, how come the price of this house has dropped over 14% in just 5 weeks? The answer is that I believe this how quickly the dead-cat bounce in the housing market is fading.
My latest homebuilder short-sell idea is going to get cut in half, at least, in price over the next 12-18 months: Homebuilder Loaded With Red Flags.