Sales Headlines Are Misleading | John Burns Real Estate Consulting

Sales Headlines Are Misleading

Decision makers don’t have time to study all of the data, yet they make huge decisions every day based on what they believe to be the market outlook. Smart decision makers rely on someone who is unbiased to study all of the data and provide a fair outlook.

National sales volumes have not bottomed, as reported earlier this month. New home sales are falling in all regions of the country. Existing home sales have risen sharply in the West and, while they continue to fall elsewhere, it is at a slower rate of decline in more recent months.

Recent headlines based on Seasonally Adjusted (SA) data are misleading. Reporters have been trained to cover the SA numbers each month. While the SA numbers have merit, they bounce around a lot because of sample size, weather, or other issues such as whether Easter is in March or April. These issues are often addressed in the body of the article, or in the later stages of the TV report, but most people unfortunately do not pay attention to the details.

To get a more reliable (but less newsworthy) picture of the housing market, we track a rolling 12-month total of sales. When the rolling 12-month total line flattens or begins to flatten, year-over-year sales have equaled and the appearance of a bottom is beginning to form. This data has some of the same seasonal issues, but is less prone to the wild and misleading headlines that often accompany the Seasonally Adjusted data.

Economic Growth………………………………………………………………….D-
The economic growth indicators continued to deteriorate this month. The employment sector is the worst in more than 50 years, losing 4.9 million jobs (3.6%) in the last year. The employed labor force lost 5.1 million jobs in the past 12 months, equating to a 3.5% decline compared to one year ago – the worst year-over-year decline since data began recording in 1949. The headline unemployment rate has increased to 8.5%, reaching its highest level since late 1983, and the real unemployment rate rose to 15.6% (including part-time workers looking for full-time work). Mass layoff events – job cuts of more than 50 jobs – have risen at a record pace of 85% in the last year. The year-over-year change in the Full CPI (all items) fell below 0 for the first time since 1955, while the year-over-year change in the Core CPI (all items less food and energy) remained flat at 1.8%. First-quarter GDP growth reported an annual rate of -6.1%, which is slightly better than the fourth-quarter rate.

Leading Indicators……………………………………………………………….D-
The majority of leading indicators declined further this month, yet there were a few bright spots. In March, stocks rallied and the Dow experienced its largest month-over-month increase since November 2002. However, this was on the heels of a 39% drop in the Dow over the prior six months. Stocks increased on stronger-than-expected earnings/losses from some large corporations, and increased optimism about the economy. Homebuilder stocks also performed well in March, increasing nearly 20%, yet remained down almost 44% year-over-year. The price of crude oil, which had been generally declining since September 2008, increased 22% in the last month, reaching a monthly average of $47.98 per barrel. Adjusted for inflation, oil prices are back to mid-2004 levels. The Leading Economic Index declined to -4.9% in March from -3.8% in February. A value below zero suggests continued short-term weakness in the economy. Credit became easier to obtain for businesses of all sizes compared to the previous quarter, yet remained near the most difficult credit market in 20 years. The Purchasing Managers Index increased slightly in March, yet remained near its lowest point since the early 1980s, indicating continued contraction in both the manufacturing sector and overall economy.

Affordability improved once again this month, as both home prices and mortgage rates declined. According to our Housing Cycle Barometer&trade (HCB), affordability has reached its best level since we began tracking the index in 1981. The housing-cost-to-income ratio has fallen to just 26%, compared to 44% at the peak of this housing cycle. Declining mortgage rates have played a major role in the improvement of affordability. The 30-year fixed mortgage rate was at 4.85% by March month-end, which was the lowest level in more than 40 years. The median-home-price-to-income ratio has also fallen precipitously, reaching 3.3 after peaking at 5.1 in 2005, and is now much more in line with the historical average of 3.7. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The Mortgage Bankers Association reported a slight decrease in the share of ARM applications, which reached 1.4% in the last week of March, and remains extremely low when compared to peak levels above 35% of total loans in early 2005.

Consumer Behavior………………………………………………………………..F
Many components of consumer behavior improved in the last month, but the sector remains quite weak overall compared to history. The Consumer Confidence Index increased this past month to 26.0, which is an improvement from a 42-year record-low set in February. Both the Consumer Sentiment Index and the Consumer Comfort Index increased slightly this month. Americans continue to spend less and save more, as the personal savings rate increased 4.2% year-over-year for a total of $451 billion in savings. As a result of freefalling home sales prices and a recent deterioration of the stock market, the U.S. lost over $11 trillion of wealth in the past year, reaching a total net worth of $51.5 trillion.

Existing Home Market……………………………………………………………..D
The existing home market improved slightly this past month, but remained weak overall. The median sales price in the resale market increased to $174,000 in March, yet remained down 12% year-over-year, according to the National Association of Realtors (NAR). By comparison, the Case-Shiller index showed an annual decline in paired sales of more than 18% through the fourth quarter of 2008. Annual resale activity in March declined 3% from the previous month to 4.57 million transactions, and fell 7.1% from one year prior, according to the NAR. The months of supply of unsold homes increased slightly to 9.8 months of inventory, which remains high compared to history. Pending home sales volume also increased slightly in February, down 1.4% compared to one year ago.

New Home Market………………………………………………………………….F
Some new home market indicators improved this month after many months of weakness. Builder confidence increased at a staggering pace, representing the largest increase in almost seven years. The Housing Market Index reached a value of 14, which was up from 9 in March. The median new home price fell slightly to $201,400, and is down 12% year-over-year, according to the Census Bureau. The annualized new home sales volume also declined slightly in March to 356,000 transactions, falling 31% year-over-year, but months of supply fell to 10.7 months of supply as the overall inventory of new homes declined as well.

Housing Supply…………………………………………………………………..F
The supply of housing decreased this month, remaining near extremely low levels. Starts declined in March, primarily due to the large drop in multifamily permits, which fell to a near-record-low level dating back to 1959. The annual volume of new home completions increased to 824,000 units after bottoming in January, yet remains down 31% year-over-year. Both single-family and multifamily permits declined this month, resulting in a year-over-year drop of 42% and 45%, respectfully. The homeowner vacancy rate declined in the first quarter to 2.7%.

Data Current Through March 31, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -6.1% D-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -4,872,000 D
Employment Growth Rate
– Non-ag Payroll, NSA -3.6% D
Unemployment Rate 8.5% D
Mass Layoff Events, SA (YOY % Change) 85.0% D-
Productivity -0.4% C-
Retail Sales -9.4% F
Core CPI 1.8% B+
Full CPI -0.4% C+
Personal Income Growth, nominal 1.0% F
Federal Deficit (last 12 mos., $mil curr.) -$1,091,051 F
Total Households 111,368,000
Owned Households 74,942,000
Rented Households 36,426,000
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) -4.9% D+
ECRI Leading Index -22.2% F
Manpower Net Employment Outlook -1% F
Corporate Profit Growth (pre-tax) -21.5% F
Residential Investment as % of GDP (nominal) 3.1% F
Interest Rate Spread
10-year Treasury 2.74%
2-year Treasury 0.92%
Interest Rate Spread 1.82% B
3-month LIBOR 1.27%
3-month Treasury 0.22%
TED Spread 1.05% C-
Stock Market (Return over last 12 months)
Dow Jones -38% D
S&P 500 -40% F
NASDAQ -33% D-
Wilshire 5000 -38% F
S&P Super Homebuilding -44% F
Tougher Standards on Business Loans – Large Firms 64% F
Tougher Standards on Business Loans – Small Firms 69% F
Crude Oil Price (Current $) $47.98 C
ISM Manufacturing Index 36.3 F
ISM Non-Manufacturing Business Activity Index 44.1 D
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Housing Cycle Barometer 0.0 A+
US Median Home Payment / Income Ratio 26.2%
US Median Home Price / Income Ratio 3.31 B+
Mortgage Rates, Fixed 4.85% A+
Mortgage Rates, Adjustable 4.85% B
Fixed/Adjustable Spread 0.00% F
Fixed/10-year Spread 2.11% C
Fed Funds Rate 0.13%
Percentage of Adjust. Loans 1.4% A+
Equity/Owned Home (Current $) $104,375 C
Debt % in Home (LTV) 57.0% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Revolving Cons. Credit per Household $8,056
– Growth Rate -0.5% A+
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 26.0 F
Consumer Sentiment Index 61.9 F
Consumer Comfort Index -48.4 F
Personal Savings Rate 4.2% D+
U.S. Net Worth Growth Rate -17.9% F
Financial Obligation Ratio 19.0% F
Misery Index (Unemployment + Inflation) 8.10 C+
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -18.2% F
NAR Single-Family Median Home Price $174,900
NAR Single-Family Annual Price Appreciation -11.5% F
Freddie Mac Annual Price Appreciation -6.0% F
Annual Sales Volume, SA 4,570,000 C+
Existing Home Inventory for Sale, SA 3,737,000 D-
Months Supply of Unsold Homes, SA 9.8 D+
Purchase Mort. App. Index, SA 253.0 C
Pending Home Sales Index, SA 82.1 F
Homeownership Rate 67.3% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 14 F
Multifamily Condo Market Index 8 F
Median Price, NSA $201,400
Annual Appreciation Rate -12.2% F
Constant Quality Price Index (YOY % Change) -5.7% F
Sales Volume, SA 356,000 F
New Home Inventory for Sale, NSA 308,000 C
Months Supply of Unsold Homes, SA 10.7 F
Months of Homes Completed, SA 5.2 F
Months of Homes Under Const., SA 4.1 D+
Months of Homes Not Started, SA 1.5 D
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 824,000 F
Single-Family Starts, SA 358,000 F
Multifamily Starts, SA 152,000 F
Total Starts, SA 510,000 F
Single-Family Permits, SA 361,000 F
Multifamily Permits, SA 152,000 F
Total Permits, SA 513,000 F
Manuf. Housing Placements, SA 57,000 F
Total Supply, SA 570,000 F
Total Housing Stock 130,429,000
Homeowner Vacancy Rate 2.7% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are “A” scores, the average is a “C”, and the worst 15% ever are “F” scores, with distributions throughout.


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