-Month’s Supply Dropping Does Not Mean What it Used To-Annualized Seasonal Adjustments Gone Wild
Inventories — month’s supply — declined for three reasons none of which mean what they have in the past
1) HAMP keeping foreclosure inventory off the off of the market while foreclosures remain in hot demand. The amount of foreclosure-ready inventory in the foreclosure pipeline has never been greater and much of this will end up as listed MLS supply. However, at the time it is jammed up due to HAMP. This is a sad unintended consequence of mortgage mod initiatives and foreclosure moratoriums. Obviously, there is demand at the low end and HAMP has kept bad owners in houses and real buyers who can afford them, away.
2) Seasonality – many just can’t or won’t sell during the school season so they let their listings expire in September and relist the next year. This is why inventory fell 7.5% MoM. Over the next couple of months when sales fall sharply and inventory remains flattish — which is usual from Sept to Oct — then month’s supply will jump back up as sharply as it dropped.
3) Epidemic Negative Equity combined with tougher financing keeping 10s of millions from selling and re-buying. In past years, everyone could sell and re-buy even if they had no equity in the house due to exotic finance. Now, you must have at least 10% to pay a Realtor and put a small down payment on an FHA loan. Mid-to-high end buyers must have 20% to 26% equity because of the larger down payments required. In the harder hit states, this takes the majority out of the housing equation indefinitely. However, if prices were to meaningfully move up all of this negative-equity driven shadow supply would appear as millions were finally able to get out. Paying attention to a historic indicator such as month’s supply based upon listed inventory in this unprecedented market will get you into trouble.
Annualized Seasonal Adjustments Gone Wild
Annualized Seasonal Adjustments went wild in September. September’s spike sets the market up for a serious disappointment in near-term just like the auto sales did when the sales rate went from 8 million to 14 million and back to 8 million. There is no difference.
Seasonal adjustments can’t account for activity prompted by the tax credit and increased foreclosures and short sales…so seasonal adjustment algorithms generally use the source series data itself in order to distill out the seasonal pattern over a period of years (i.e. multiple years of input data).
But one time events will dramatically effect the seasonal adjustments. There was no tax credit last year or the year before so the SA algorithm picks up the activity simply as extra-seasonal activity — that’s all it can do.
This is exactly why sales and pricing on a SA basis have been completely goosed-up this season. We are simply seeing an extra seasonal increase in activity but it it all the result of the homebuyer tax credit so SA is just telling you all it can ever know.
This is why focusing on actual sales — distressed vs organic — has and will continue to tell the real story going forward.
Source: Mark Hanson Advisors
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.