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Generational Dynamics Web Log for 24-Dec-2009
CalculatedRisk: Expect a big drop in existing home sales in December

Web Log - December, 2009

CalculatedRisk: Expect a big drop in existing home sales in December

New home sales fell unexpectedly in November, when analysts had expected them to increase.

The CalculatedRisk blog has an interesting analysis of the relationship between new and existing home sales.

New and existing home sales <font face=Arial size=-2>(Source: Calculated Risk)</font>

New and existing home sales (Source: Calculated Risk)

This graph shows that new home sales (red line) and existing home sales (blue line) followed similar growth paths until the real estate bubble burst in 2006 and they started to diverge.

New home sales were supposed to increase in November, according to the analysts, but as you can see from the graph, they took another downward spike.

Since 2006, existing home sales have been doing better than new home sales (relatively speaking) because new home builders couldn't compete with the low prices of all the foreclosed properties (existing homes), according to CalculatedRisk.

"The recent increase in the ratio was partially due to the timing of the first time homebuyer tax credit (before the extension) - and partially because the tax credit spurred existing home sales more than new home sales.

On timing issues: New home sales are counted when the contract is signed, and usually before construction begins. So to close before the original Dec 1st deadline, the contract had to be signed early this Summer. Existing home sales are counted when escrow closes. And the recent surge in existing home sales was primarily due to buyers rushing to beat the tax credit.

November will probably remain the record high since existing home sales will decline sharply in December."

It's not surprising that existing home sales have been doing well, because of the foreclosed homes flooding the market.

As you can see from the above graph, new home sales took a slight upward blip a couple of months ago. Pollyannaish journalists and analysts took this as a sign that the housing crisis had bottomed, and that the worst was over.

But as we discussed in "'Shadow inventory' of unsold homes continues to grow," millions of additional distressed homes are expected to come on the market in 2010. This will trigger a sharp decrease in the market prices of homes, and may even result in panicked selling.

These are trends that analysts at CNBC, the Wall Street Journal, and other media ignore.

Steve Lieseman on CNBC was genuinely stunned on Tuesday morning, when the news came in that revised Q3 GDP growth was 2.2%. There were actually 10-20 seconds of total silence as Lieseman stared at the report, trying to figure out what was going on.

The financial community almost universally believes that the worst is over, and that GDP growth will reach 4% in either Q4 or Q1. As a consequence, they believe that the economy will start ADDING jobs by Q2, while they've been losing jobs for two years now.

These beliefs are based entirely on unrealistic hopes.

As another example, corporate earnings have been falling for over two years now, and analysts believe that they HAVE to start increasing, simply because too much time has passed. For example, here's what appeared earlier this week on CNBC Earnings Central:

"EARNINGS STATS: BY THE NUMBERS

As of Monday, December 21st:

The blended earnings growth rate for the S&P 500 for Q3 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report is currently -14.1% versus an estimated earnings growth for Q4 2009 of 196.1%. Of the 498 S&P 500 companies who have reported Q3, 79% beat estimates, 7% were in-line, and 14% were below estimates. As of October 1st, the earnings growth rate was at -24.7%. (Data provided by Thomson Reuters)"

If you read the above carefully, you'll see that analysts expect earnings growth of 196.1% in Q4. After earnings growth has been negative for many quarters, this is truly an incredible belief, and it shows what ridiculous views mainstream analysts are holding.

All my life I've been reading about how foolish people were after the 1929 crash. Herbert Hoover said that "Prosperity is just around the corner." All kinds of analysts predicted that the market had bottomed and would start going up again.

That whole story has always been something of a joke, ever since I first encountered it when I was in school in the 1950s.

But now we see it playing out again. It's absolutely astounding to see this joke replayed before our eyes.

A couple of days ago, I posted a story on China's real estate bubble. As incredible as what's happening in America, China's real estate bubble is so cuckoo as to be worthy of a cartoon rather than real life.

I know I keep saying this, but the insanity keeps getting worse every day. How can journalists, analysts and politicians be more insane every day than they were the day before?

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (24-Dec-2009) Permanent Link
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Generational Dynamics Web Log for 24-Dec-2009 CalculatedRisk: Expect a big drop in existing home sales in December

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Generational Dynamics Web Log for 24-Dec-2009
CalculatedRisk: Expect a big drop in existing home sales in December