“I can't explain myself, I'm afraid, sir, because I'm not myself you see.”
“It would be so nice if something made sense for a change.”
-- Alice, in Lewis Carroll’s Alice in Wonderland
Let’s start with what’s clear right now—the simple fact is this: our nation’s housing markets have gone mad. Up is down, and down is up, and quite literally so. I’d not be surprised, in fact, to run into a Mad Hatter having a tea party in front of his dilapidated house (that he hasn’t paid the mortgage on for years, of course).
And that’s just the point. Our nation’s housing data has more in common with Alice in Wonderland than it does with anything resembling reality right now. And my thinking here isn’t the figment of a misguided perma-bear attitude, lest some readers mistake my stance: I, for one, am rooted firmly in reality. Housing will recover and return to strength. It must.
But not yet.
In fact, the disconnect between housing reality and the Wonderland we’re all now living in was the subject of a formal note last week from researchers at Standard & Poor’s. Like me, they were vexed to see that seasonally-adjusted housing data has looked so positive, while the unadjusted data looked far less so.
Most media outlets, after all, have been trumpeting the positive, seasonally-adjusted data as proof of recovery.
Here’s an example: the raw S&P/Case-Shiller data found a -0.2% dip in home prices in January (using the 10 city index), yet the seasonally-adjusted data reported by most media outlets showed a 0.4% increase month-over-month. This sort of dichotomy has been apparent for some time—and not just within the S&P/Case-Shiller data, either.
Consider the insight of Gluskin Sheff Chief Economist David Rosenberg:
“Now it would be one thing if January was an unusually weak seasonal month for home prices deserving of an upward skew from the adjustment factors; however, from 1998 through to 2006, they rose in each and every January and by an average of 0.6%.
“But what happened is that home prices collapsed in each of the past three Januarys — by an average of 1.8%, or a 25% annual rate. And, seasonal factors typically weigh the experience of the prior three years disproportionately so what looks like steady gains in housing prices may be little more than a statistical mirage.”
In other words, the disparity between adjusted and unadjusted data suggests that seasonal statistical corrections are doing more than simply correcting for any seasonal effects—especially if you believe that the underlying seasonal patterns of the housing market have been significantly disrupted by what statisticians would call “exogenous” variables. (That is, something other than seasonality.)
In its note, the S&P/Case-Shiller Home Price Index Committee suggested that foreclosures and “other market dislocations”—code speak for extraordinary mortgage market support from the Fed, as well as a substantial tax credit program for consumers—have affected home prices beyond what would normally be seen by seasonality. “[W]e believe that current market conditions are making the seasonally-adjusted data less reliable indicators,” the committee said.
“[T]he Committee believes that, for the present, the unadjusted series is a more reliable indicator and, thus, reports should focus on the year-over-year changes where seasonal shifts are not a factor.”
Welcome to Wonderland, indeed.
So, for now, we see builders swinging their hammers again a little bit more, pushing March housing starts up 20.2 percent from one year ago—those numbers coming fresh off of an all-time record low in new housing starts in February. And we see that existing home sales soared in March, too, up 6.8% as borrowers rushed to claim a tax credit before expiration. Is this what recovery looks like? Only if you believe this is reality.
I tend to see reality in terms of a not-so-hidden overhang of distressed mortgages that must eventually be dealt with—7.9 million, at last count. And whether through short sales, or the tried-and-true foreclosure to REO pipeline, there are undoubtedly millions of such homes yet waiting to enter the nation's available housing supply.
Likewise, we are seeing vacant housing units reach a record, as well, hitting 19 million in the first quarter of this year according to data released Monday morning by the Commerce Department. Depending on whose estimate you believe, that adds another 1.5 to 2 million excess housing units that will undoubtedly constrain upward movement in home prices.
Is there anyone out there that really believes that an unavoidably increasing and likely substantial supply of homes will somehow drive home prices upward further this year? Perhaps only those that live in Wonderland.
Paul Jackson is the publisher of HousingWire Magazine and Housingwire.com. Follow him on Twitter: @pjackson