Housing-market data might paint a better outlook than reality warrants
By Rachel Beck
Saturday, Jul. 07 2007
Here’s a scary thought about the housing market: Things may be far worse than
what’s already being revealed by the troubling government and industry
At issue is what goes into sales price data and what does not. When those
numbers are crunched, many of the incentives that sellers are using to lure
buyers – including cash rebates – aren’t being included. That suggests prices
may be falling faster in many markets than is now being reported.
The same goes for how the mortgage-application indexes don’t account for the
implosion of lenders. That could have the effect of masking a slowdown in
demand, which is why the housing market could be in for rough sailing much
longer than most anyone anticipates.
Not long ago, the housing market was leading the economy’s growth. But the
business has slumped over the last two years in many parts of the country, with
sales of new and existing homes plunging. The mortgage business also is under
intense stress as borrowers with weak credit increasingly default on their home
Since what happens in housing has a far-reaching effect – it has rattled
financial markets, caused dramatic tightening of lending standards and shaken
consumer confidence – every bit of data is scrutinized for hints of whether a
recovery is near or more trouble lies ahead.
There certainly has been plenty of bad news, but it might not even be giving a
full picture of how difficult things really are.
For instance, the Commerce Department reported last month that the median sales
price of new homes fell 0.9 percent in May from a year ago, after tumbling 10.9
percent in April.
But those numbers don’t include the thousands of dollars in lavish incentives
like plasma televisions, pool installation and closing costs that sellers are
increasingly using to woo buyers. That means a home selling for $600,000 gets
reported for that price even though all those extras technically are reducing
the net sale price.
Sales incentives at Lennar Corp., one of the nation’s biggest builders,
averaged $43,700 a home in its fiscal second quarter, up from $24,700 in the
same quarter last year. And it isn’t just builders piling on the incentives –
it’s spilling over to the existing-home and foreclosure market, too.
“In effect, they are reducing the new sales price but that is not showing up
anywhere in the actual sales data,” said Peter Schiff, who runs the investment
firm Euro Pacific Capital Inc. in Darien, Conn.
Another report with some distortions is the Mortgage Bankers Association’s
weekly survey of mortgage applications, which has long been considered a
reliable indicator for new and existing home sales, and a gauge of housing
activity in general.
Over the last decade, the year-on-year change in the MBA’s “purchase
applications index” has shown a 76 percent correlation with the year-on-year
growth rate of the combined new and existing single-family home sales, lagged
by one month, according to Goldman Sachs.
That might not be holding true now, since the index fails to account for some
of the turmoil in the mortgage finance business. The purchase applications
index is now showing a 9.5 percent rise for June from year-ago levels.
For one, the MBA survey refers to mortgage applications, not originations,
which legally bind borrowers to the mortgage. That is not a problem when
lending standards are stable, but in times when lending standards are
tightening – as they have been in recent months – more applications are
rejected, and therefore, originations go down, according to the new Goldman
Another problem is the survey represents about half of all mortgage
applications, but Goldman says that subprime is slightly underrepresented.
Lenders who have gone out of business – a regular occurrence in today’s
markets, with dozens of mortgage lenders having imploded in recent months –
might not be included in the sample. That could overstate its results.
The MBA acknowledges that its survey includes only lenders offering mortgages
through retail branches, and that most lenders that have gone out of business
aren’t in its sample because they were primarily subprime lenders relying on
mortgage brokers. They also weren’t included when applications were soaring a
few years ago, notes Jay Brinkmann, vice president of research and economics at
the Washington-based MBA.
He also points out the six-week to two-month lag time between a mortgage
application filing and a home closing means the jump in May’s applications
might not be reflected until the June home sales data are reported in July. “We
have to wait until then to see if there is really a decoupling,” Brinkmann said.
How that plays out could tell much about the state of housing today, and
whether the problems in that market are a lot more troubling than appears on
Rachel Beck is the national business columnist for The Associated Press. Write
to her at email@example.com