The 14 percent quarterly decrease was fueled primarily by a 24 percent quarter-over-quarter decline in purchase originations — the biggest quarterly drop in purchase originations in more than five years, since the third quarter of 2010.  – RealtyTrac

EVERYTHING EVERYWHERE that is used to further intended policy is adjusted that way to the nth power.   Inflation, employment, housing…Our world has become so delusional and a house of mirrors that it’s impossible to rule out anything.  Policy today should be called:  NHB (no holds barred).   – A friend and colleague of IRD

The National Association of Realtors reported their statistical estimates for January existing home sales today.  According to the NAR, home sales on a Seasonally Adjusted Annualized Rate (SAAR) basis increased .4% in January vs. December.  The NAR claims that the same metric shows an 11% year over year increase for January 2016 vs. 2015.

I’ve never understood the purpose of using an annualized rate number in order to report monthly economic data.  That does not make any sense whatsoever.   To begin with the NAR uses data samples that it describes as “representative.”  However, as anyone who has taken elementary statistics in school knows, all data sampling is highly vulnerable to sampling errors and sampling bias.  To the extent that the data pool for a monthly time period contains errors, annualizing this data compounds the error by a factor 12.

And then there’s the seasonal adjustments.  The NAR will not share its seasonal adjustment algorithms with the public.  The seasonal adjustments further pollute the data samples and therefore further corrupt the annualized metric.

However, we can test the NAR reported numbers using some highly correlated comparative reports.  It just so happens that, understandably,  there’s a high correlation between between purchase mortgage originations and existing home sales.  A week ago RealtyTrac released a report that showed U.S. residential purchase loan originations dropped 24% in the fourth quarter of 2015:   RealtyTrac.  This was the biggest drop in purchase loan originations in more than five years.

You might ask what mortgage purchase loans in Q4 have to with the existing home sales report for January.  Good question.  Existing home sales are based on contracts that close (escrow closes and title changes hands) – as opposed to new home sales which are based on contracts signed.   Unless an existing home sale is an all-cash transaction, it takes at least 30-60 days for a contract to close once its signed.  This means that up to 2/3 of the contract closings in January were more than likely based on contracts signed in November and December.  Mortgage originations for those months should move in lock-step with contract signings.

How is it possible that existing home contract closings increased slighly over December or 11% year over year for January when mortgage purchase originations plunged 24% during the period of time that NAR claims that contracts were being signed and converted into closings?   In fact, per the NAR, all-cash transactions declined slightly in January, which means that the use of mortgages was a slighly greater part of the sales mix for contracts that closed in January 2016 vs. January 2015.  In other words, it’s almost a statistical impossibility that home sales were up 11% for January 2016 vs. January 2015 or even vs. December given the huge decline in mortgage purchase originations.

Anecdotally, the market is breaking down here in the DC area. Homes are being listed and them removed after too many price reductions. If a home does sell, it’s probably a foreclosure that selling 33% below its 2005 price like this one:  Zillow LINK  – Reader comment

The other problematic assertion by the NAR is a claim of low inventory.  I know from the new listing notifications I receive daily for the Denver area that new listings have been soaring since the early fall, especially in the over-$750k price bucket.  Not only that, but the “price change” notifications have been accelerating since the late fall.  I have received similar reports from readers around the country.  The way the NAR calculates “supply,” when sales are overstated, it creates a downward bias in the “months inventory” metric. The annualization of the data exacerbates the problem.

Given the rapidly deteriorating economic condition of the U.S., a claim that housing sales continue to increase is simply not credible, with or without the verification provided by the mortgage origination data.  This is further reinforced by the rise in the cost of buying a home relative to the deterioration in household real income. We found out earlier today that, according to the Case-Shiller housing price index, the price of a home continues to climb.  How is it possible that more people are supposedly buying increasingly expensive homes with declining incomes?

The fraudulent data and lies being broadcast by the Government and various industry associations like the NAR are just silly given the increasing divergence between the statistically manipulated data and the underlying reality.   It’s funny because I play tennis weekly with a successful mortgage broker in Denver.  He is looking to move out the business and into something else because he sees the writing on the wall for the housing market…

This is the type of analysis that is the foundation for the Short Seller’s Journal.  When I pick out short-sell ideas, I don’t look for stocks that will go down just in correlation with the market, I look for stocks that will get demolished when the market moves lower.  To do this I spend several hours a week looking not just a p/e ratios and business models, but I also look “under hood” at company financials and industry fundamentals.  I am also going to roll out a bi-monthly Mining Stock Journal and SSJ subscribers will be able to subscribe to the Mining Stock Journal for half-price.