Breaking a trend of rising Pending Home Sales, the index of signed purchase contracts fell in January, down 7.7% from December, according to the National Association of Realtors (or NAR). The drop was more than twice as bad as economists’ expectations — and by “expectations” we mean wild stabs in the dark.

Pending Home Sales, which measure contracts signed in a given month, are considered a leading indicator of actual sales, which typically close 1-2 months later.

Notably, a trend discussed for the past few months here at Cirios persists: Sales activity in the West continues to outperform the rest of the country. In January, signed contracts dipped 13% in the Northeast and 12% in the South, but ticked up 2.4% in the West. New England is being hit particularly hard as Manhattan reels from the meltdown on Wall Street, sending home prices in the concrete jungle off the proverbial cliff. This shouldn’t be news to avid readers of this site — we’ve been on this trend for months.

Nevertheless, despite dour economic news and sickly data, the spin doctors over at the NAR remain hard at work. Lawrence Yun, living proof that being wrong for 1000 days running qualifies you to head up the biggest real estate lobby in the country, postulated that he “[expects] similarly soft home sales in the near term, but buyers are expected to respond to much improved affordability conditions.”

Just like they did this month Mr. Yun? Keep on spinning, sir.

By AUSTIN NELSON

Nationwide home values continue to decline into the New Year.

The National Association of Realtors (NAR) released existing home sales data today for January, indicating an overall 3.1% decline in the median sales price of US homes from the previous month. This drop follows the same national trend we have been seeing since July of last year: Prices have been declining steadily since that time at a rate of 2-5% per month.

The most interesting aspect of today’s numbers is a 5.3% drop in seasonally adjusted, nationwide sales rate. This reverses last month’s numbers, when sales had actually ticked up by 4.4%. Interestingly, the sales rate has seesawed over the past year, showing increases in Feb, May, Jul, Sep and Dec but declining in the other months. Overall, the trend has been down, with an 8.6% decrease since this time last year. The volatility of these numbers could simply be an artifact of an imperfect seasonal adjustment or cycling demand, but the long term trend is clear.

The West region showed no change in its sales rate, continuing its trend as the strongest region in terms of sales activity. In fact, the West has seen a 29% increase in sales since last year, largely due to the fact that the rate was extremely depressed in early 2008. As we have mentioned before, we expect the West to be a leader in buying trends as price declines have been most severe in that area and homes are finally becoming affordable to residents. Continued price declines (median price in the region declined 4.2% last month) will only make homes more affordable as time goes on.

The Northeast region has been the hardest hit of late, posting a 14% decline in rate combined with an 11.2% drop in median prices from December to January. That is a monster drop in a single month. Recent data indicating that New York City’s real estate market is cracking is adding to these drops. But Cirios readers knew about this trend months ago …

This month’s dismal sales numbers are likely closely related to extremely low consumer confidence, as prospective home buyers are holding off on big ticket purchases in the face of the continued and worsening economic decline. Considering that the sales included in these newest numbers were originated in November and December of last year and consumer confidence has dropped significantly since that time, we may be in for further declines in sales rate.

Even if national figures continue to decline, we would encourage readers to look beneath the data. Certain markets are still showing strong increases in activity, even as prices fall. Real estate, still, is local.

By RYAN TAYLOR

The National Association of Realtors announced yesterday that the median home price in the US fell by 12% from a year earlier. Not surprisingly, the fall in prices was driven by the ever increasing number of foreclosure sales which accounted for 45 percent of all transactions.

The pressure on prices is only increasing as job losses mount around the country. The US lost 2.6 million jobs in 2008 and has lost more than 600,000 already in 2009.

While we may sound like a broken record, we continue to believe that buying a house right now is a risky proposition. Unless Washington comes up with a plan where they make housing payments for unemployed workers (not terribly far fetched given the announcement yesterday to subsidize mortgage payments), the housing market will decline because job losses equal a decline in home prices.

The reality is that the pent-up demand often cited by homebuilders and Realtors is fading due the increased uncertainty in the broader economy. A trend being seen in previously strong markets throughout California is that potential buyers are holding back to due to uncertainty about their jobs. Even those with steady jobs are content to wait — houses will almost certainly be cheaper next month, and the month after — why buy now?

Furthermore, most of the homes on the market today are listed at prices that reflect an environment where demand remains strong. By in large, it’s not strong. Sellers will be forced to recognize this and slash prices — but this takes time.

Of course, the government will be working around the clock to speed up the demand process and you can trust that Cirios Real Estate will keep you informed on the latest developments in the market.

By AUSTIN NELSON

Data released by the NAR yesterday show that pending home sales increased at the national level by over 6% in December 2008. Analysts had been expecting the reading to be unchanged from the previous month. This index theoretically predicts home sale trends for the following month by looking at the number of signed contracts in the month under study.

While the data look rosy on the national level, speaking to a momentary surge in buying activity, a closer look reveals some interesting trends.

The national rise in the index was led strongly by the Midwest and South regions, which saw month over month increases of 12.8% and 13.0% respectively. The Northeast and West, on the other hand, saw modest declines in their indices.

This is especially interesting in the Northeast, which has seen a downward trend in sales volume since the middle of last year. The pressure does not seem to be easing, as prices in the region have also been falling over the last six months after holding up better than most other regions of the country. Home sales in the Northeast are lagging other regions where price declines began earlier, and have been more severe. Until prices have come down a little farther in this region, do not expect to see the bump in sales that the rest of the nation is seeing.

On the other side of the country, the West experienced an uptick in sales volume before activity began to increase in other regions. This is in line with the fact that the West saw earlier and more dramatic price declines than the rest of the nation.

As prices continue decline in the Midwest and South regions and government efforts to decrease interest rates kick in, expect to see continued increasing volume trends in those regions.

Now that the West has experienced one month of declining activity, watch this area to get an idea if the trend of increased volume will be a sustained process or a flash in the pan on the way down. For the buying to persist, prices will have to stabilize somewhat, giving prospective homebuyers confidence that the cheap homes they are buying represent a sound investment.

By ANDREW JEFFERY

In contrast to the silver lining of higher-than-expected home sales tallied in yesterday’s release of Existing Home Sales, this morning’s Case-Shiller November Home Price Index registered the worst year-over-year performance on record.

Property values in November 2008 tumbled 18.2% from the prior year and 2.2% from the previous month. As measured by the Case-Shiller’s 20-city index, home prices have retreated 25% from their mid-2006 peak and now sit close to levels not seen since 2004.

Like a CD stuck on repeat in the guy down the hall’s dorm room while he is away at class (you try listening to Chumbawumba’s Tubthumping for 3-hours straight and not being driven to drink at 3pm), annual price declines were the worst in Phoenix and Las Vegas, followed by San Francisco, Miami, Los Angeles and San Diego.

News that home prices are falling, however, isn’t exactly news. So let’s look at what this Case-Shiller Home Price Index is anyway, and how it differs from the less murky Median Home Price data released every month by our friends at the National Association of Realtors (the NAR).

As Cirios statistics’ wizard Austin Nelson explained last week, the median home price is simply the middle price in a list of sales. So, the NAR grabs data on all home sales in a given month and picks out the one with the same number of sales on either side. The logic behind using this measure, rather than the more commonly understood average, is that it reduces the effect of outliers, or sale prices that are either much higher or much lower than the prevailing trend.

Case-Shiller, on the other hand, uses what are known as “paired sales” to evaluate home prices. By examining sales in a given month, then looking back to find the most recent sale price and date for each house, statisticians are able to back into an annual rate of decline.

For example, if house A sold in November ’07 for $250,000 and again in November ’08 for $200,000, Case-Shiller would say the annual home price decline was 20%. By limiting the search only to sales that have a relevant pair (ie, previous sale), the methodology limits sample size, potentially leaving margin for sampling errors. Sample size is something I’ll let Professor Nelson explain in further detail at a later date.

So, which method is better, paired sales or median price? As is typical with such economic questions, the answer is a resounding neither.

Median Home Price measurements provide good information about the distribution of sales, and in the current environment reflect that since Jumbo mortgages are nigh impossible to get and foreclosure sales are driving most markets, cheaper houses are selling far more often than more expensive ones.

Case-Shiller, on the other hand, represents a more accurate level of home price declines for specific homes — far more important to the average homeowners. Of course, a number slapped on a metro area is fairly meaningless when it comes to an individual property, but it’s still more useful than a bucket of houses being sold for different reasons by different sellers in different neighborhoods.

With Case-Shiller a month behind the NAR data, keep an eye out next month to see if the silver lining found in December’s median home sales data is reflected in the paired sales analysis. If it is, you can be sure calls for a bottom in housing will once again abound.

By AUSTIN NELSON

The National Association of Realtors released figures on existing home sales for December, showing an “unexpected” rise in sales volume for the month. Across the US, data showed a 6.5% increase in volume month over month. The surprise increase was bittersweet however, as median home price declined almost 3% month over month and were down 15.3% for all of 2008.

The Western region led both these trends last month, showing a 13.6% increase in sales volume and an 11.6% decrease in median sale price. Furthermore, in 2008 the West saw a 31.6% increase in sales volume and a whopping 31.5% decrease in median sale price. (Click here for more on median sales price figures compared to average prices.)

While this month’s data could simply be a small bump on the otherwise sharply downward roller coaster ride of residential real estate, in the West region at least it is indicative of a trend. As home prices “bottom” out or at least hit lows not seen in a decade, homes start to actually become affordable for the people who live in the area. Combine that with more favorable lending conditions and voila!, you’ve got an increase in sales volume.

This trend is even more accentuated the more you drill down to individual neighborhoods. We have seen neighborhoods in the San Francisco Bay Area that are seeing two fold increases in sales volume as prices reach affordable levels. Indeed, the further the drop in price, the more likely an increase in sales volume will be seen.

The important thing to keep in mind here is that prices are still continuing to drop even amidst the increasing volume. So even though your neighbor successfully sold his house in time to avoid foreclosure, you will likely end up selling yours for less. This is a result of the continued high levels of short sales and foreclosures that are flooding the market. Even with increases in buying activity and eligible buyers in the market, there are still enough properties for sale that the buyer can afford to be a stickler about price.

With that in mind, perhaps the most important number to watch is the housing inventory, which is simply a value calculated by taking the number of homes currently on the market and dividing it by the rate at which homes are being sold (seasonally adjusted, of course). This gives you the approximate time it would take to sell every home currently on the market (assuming the rate stayed the same and no new homes came on the market). That number was on the rise through the middle of last year but seems to have stabilized.

If this month’s data is an indicator of a future downward trend in inventory it could be the first true sign of improvement on the horizon. The question is, how far away is that horizon? And, given the current state of the US economy and banking system, will that improvement have staying power?

In the short run, savvy investors can take advantage of the increased liquidity in the housing markets by buying at a discounted rate and selling right back into the increasing demand. This will require careful analysis of the sales trends for a particular area as well as precise valuation of any property under consideration.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Increasingly, US real estate is becoming a tale of 2 markets.

In low-income neighborhoods, overbuilt suburbs, and other areas besieged by foreclosures, home sales are through the roof.

Data released this week by MDA Dataquick, a real estate information service, show December 2008 sales in Southern California’s hard-hit Riverside and San Bernardino counties up a whopping 300% from a year ago. Southern California as a whole has seen transactions spike more than 50%, while pockets of the San Francisco Bay Area are showing similarly robust numbers.

Prices, however, continue to plunge.

Foreclosure sales are driving distressed markets, and since repossessions disproportionately affect lower-priced homes, data are being skewed downward. Record-low interest rates, bottom-fishing investors and relentless marketing efforts by the National Association of Realtors are all spurring renewed buying activity.

Lenders are so overrun with new business that Wells Fargo (WFC), which plans to cut over 10,000 jobs as it absorbs recently purchased Wachovia, is hiring hundreds of temporary workers to handle mortgage applications, according to MortgageDaily.com.

Meanwhile, buyers are on strike in high-end markets, and supply is creeping towards materially unhealthy levels.

Jumbo loans – those not guaranteed by the government via Fannie Mae (FNM) and Freddie Mac (FRE) – are nigh impossible to get, leaving would-be buyers of expensive homes in the lurch. Transactions are down in some of California’s — and indeed the country’s –  most prestigious markets, leaving a host of recently minted real estate millionaires wondering if they’re next to get stuck in the subprime slime.

Conventional wisdom among real-estate professionals is that these well-to-do areas are in “wait-and-see” mode. This attitude, while comforting to the rich, is dangerously naïve.

Transparent, real-time sales data is carefully concealed from the buying public by the country’s real estate brokers; it tells a very different story. In these illiquid high-end markets, inventory is building, forced sales are on the rise, and prices are starting to head south.

And contrary to popular belief, value drops aren’t just taking place in far-off exurbs where palatial Toll Brothers (TOL) McMansions litter flattened hilltops. Established neighborhoods — many close to job centers with top schools – are seeing home prices fall for the first time in decades.

These high-priced markets, particularly because of the troubles in the jumbo loan market, have become dangerously illiquid. In many neighborhoods, just a handful of homes are currently listed for sale. If one seller gets antsy, loses his job or otherwise jumps at a low-ball offer, the entire market can gap down. The new, lower price sets the bar at which potential buyers begin their negotiations, putting sellers at the whims of their skittish neighbors.

Due to dramatic appreciation during the boom, many wealthy homeowners are sitting on huge equity cushions. While not something they often complain about, this could encourage quick sales, as sellers don’t need to hold out for the absolute highest price like their poorer, more levered neighbors on the other side of the tracks.

All this adds up to an increasingly bifurcated market. The most distressed areas are currently going through the final, violent throws of a real estate collapse for the ages. The process could still take months to run its course and some communities, sadly, may never recover.

Previously strong areas, on the other hand, are just now beginning to feel the pinch. Many, after decades of unfettered appreciation, have a very, very long way to fall.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Is it a buyer’s market?

Ask most real-estate professionals the above question, and the response will almost certainly be an emphatic “Yes!”

After all, they quickly explain, inventory levels are at all-time highs, sellers are desperate to get out from under their rapidly depreciating homes, and mortgage rates are at historic lows. What more could buyers ask for?

How about not losing their shirts, for starters.

The traditional definition of a buyer’s market is one where supply outstrips demand, pushing down prices: Buyers have the upper hand. As the bull market begins to wane, however, buyers lose their enthusiasm and become concerned about price. The market cools down and buyers shy away, forcing sellers to make concessions and lower prices. This, in turn, creates an environment where buyers can shop around, be picky, and patiently waiting for their dream house to come on the market.

As demand returns, sellers start upping their list prices, refusing to pay for closing costs and holding out for a better offer. Buyers, fearful they might miss out on the next boom, bid up asking prices and ask for fewer concessions. Now that sellers have the upper hand, the market favors sellers as prices move upward. Such is the cyclical nature of real estate.

This story has played out for decades as real estate plodded along, homebuilders like DR Horton (DHI), KB Homes (KBH) and Toll Brothers (TOL) supplied the market with new construction and home prices marched steadily upward, outpacing inflation by the narrowest of margins. A little more than 10 years ago, however, that relationship started to come unglued.

The recent housing bubble turned the prevailing view of real estate on its head. Homes, long viewed as the most stable of all assets, became a speculative tool for even the most unsophisticated investor. The mania, fueled by lax monetary policy and Wall Street alchemy, helped contributed to the financial crisis currently gripping our country. As property values have careened back to earth, real estate assets of all kinds have become toxic.

Nevertheless, the National Association of Realtors (or NAR) and its dedicated minions have tirelessly peddled their lies that ours is a buyer’s market. Let’s take a quick jaunt back in time to some recent headlines and where that traditional assessment of a buyer’s market got us:

Las Vegas: It’s Definitely a Buyer’s Market
USA Today: July 5, 2006
“Real estate looks like one of the biggest gambles in Las Vegas.”

How true. Property values in Vegas have fallen 33% since summer 2006. Not to be outdone by their peers at USA Today, ABC ran this piece just weeks later:

Take Advantage of Real Estate’s Buyer’s Market
ABC News: July 31, 2006

“The National Association of Realtors said that the number of homes for sale has reached new heights, which is good news for buyers. After years of a seller’s market, it’s finally a buyer’s paradise in Phoenix, AZ.”

Anyone who bought in that “buyer’s paradise” in Phoenix has seen their home’s value fall by more than 30%.

The point isn’t to criticize realtors for arguing it’s a buyer’s market: After all, one should expect nothing less from a group whose entire existence is based on convincing buyers it’s a great time to buy – irrespective of the truth. Just ask Gary Keller, whose new book, Shift: How Top Real Estate Agents Tackle Tough Times, advises agents to “find every way possible to overcome the media-driven real-estate malaise.”

The traditional definition of a buyer’s market needs a bit of a makeover. A more sensible definition is a market where buyers have ample opportunity to make good investments. To be sure, a home is more than just an investment; it’s a place to raise one’s family, to grow old, to spend time with loved ones. However, as far too many American families have learned in the past three years, homes can become a debilitating burden if bought at the wrong price.

In today’s market, there certainly exist attractive investment opportunities. But to label the market as a whole as one where buyers should be rushing out in search of the American Dream is borderline lunacy. Throughout much of the country, home prices are still too high: Real incomes don’t support prevailing property values, even after the historic declines we’ve already seen. Supply, despite remaining at record levels, is likely to remain so for the foreseeable future. Home prices are undergoing a much-needed correction, and will continue to do so until fundamental demand catches up with supply.

This isn’t to say every home on the market is overpriced, or that every buyer in the past 36 months has gotten a raw deal. There are deals to be had if one knows where and how to look – and, most importantly if the purchase makes good financial sense. To borrow a theme from Toddo, “financial staying power” should be at the forefront of any prospective buyer’s mind.

So ignore the hype, both good and bad. As often is the case, not until the most ardent bulls turn in their horns will the bears return to hibernation. So, as soon as realtors concede it may not be a buyer’s market after all, voila! A bottom we will have.

By ANDREW JEFFERY

It should come as no surprise that with headlines screaming financial Armageddon and the stock market making new lows seemingly every day, last November wasn’t exactly a great month for the housing market.

This morning, the National Association of Realtors, or NAR, released its Pending Home Sales Index, which measures signed contracts that are expected to turn into sales. The data were abysmal, showing a 4% decline month-over-month to a reading of 82.3, the worst since the data has been tracked. Unsurprisingly, economists — who have been squarely behind the curve at each step of the ongoing financial crisis — expected a mere 1% drop, despite widespread turmoil in financial markets during both October and November.

Yet even with the continued slide in home prices, our good friends over at the NAR are optimistic for 2009 (Ahh to be a lobbyist and completely detached from any shred of reality). This outlook should come as no surprise, as the group has been wearing rose colored glasses since the housing downturn began in late 2005.

To counteract the negativity in their Pending Home Sales Index — which is inconveniently based on actual data rather than farcical forecasting — the NAR also released a report today predicting home prices will be flat in 2009. It even went so far as to forecast an increase in the median price of new homes.

The prediction displays the sheer audacity of a group whose very existence relies on convincing buyers its a great time to buy, irrespective of actual market conditions.

Despite an increase in buying activity in certain distressed markets, home prices are falling, and will continue to fall until supply and demand become rebalanced. This will not happen as long as homebuilders keep building, companies keep laying off employees and banks keep tightening lending guidelines.

And while it’s certainly beating a dead horse to say the decline in home prices will persist, sometimes the horse needs to be beaten.

Too many prospective buyers, eager to jump on attractive deals, will step in too early and be underwater (owing more on their house than it’s worth) almost immediately after the receive their new keys. This unenviable position traps a homeowner, making a job loss or other economic misfortune that much more dire.

There will be more than ample opportunities to buy houses on the cheap when prices have stabilized, and prudent buyers should continue to wait, save their pennies and let others, bolder yet perhaps less wise, catch the falling knife.

By AUSTIN NELSON

Have you ever wondered what the heck it means when you read that economic data is “seasonally adjusted?” How can non-seasonally adjusted data show one trend while seasonally adjusted data shows something completely different? Which dataset is the most reliable?

The in-depth answer to these questions requires a PhD in statistical analysis. For those of us who don’t know a kernel regression from a Henderson 13-term moving average filter, the short answer is that seasonal adjustment is a process by which consistent seasonal effects are removed from a time series of data. And yes, you can trust them. Well … sort of.

The effect of seasonal adjustment can be most easily explained through an example. Suppose you are looking at a series of data measuring gasoline consumption in the United States to identify trends related to the price of a gallon of gas. A logical hypothesis is that when gas gets more expensive, people drive less.

In examining this dataset, however, we would expect to see increased consumption in the summer months when everyone hits the road for their vacations. Gas prices often rise during the summer when that additional demand constricts supply, so if you were looking at data from a single year without considering seasonal effects, you might wrongly conclude that people actually consume more gasoline when prices rise.

In fact, much of the increase in fuel consumption during summer months has nothing to do with fuel prices, so the seasonal effects need to be removed from the series before any meaningful analysis of consumption versus price can be undertaken.

Looking at non-seasonally adjusted figures by themselves is a bit like saying pumpkin sales spike in October, without mentioning Halloween.

So how does one “remove” seasonal effects from a dataset? By examining several years of data, patterns in the movement of the data can be identified that happen over and over again in the same way each year. From these patterns, statisticians create (through a variety of near-magical statistical techniques) a “filter” that allows them to subtract the seasonal effects from the dataset of interest, theoretically leaving only non-seasonal effects, like that of price on gas consumption.

And VOILA! you have seasonally adjusted your data. The same techniques are applied all the time to financial and economic datasets, so much so that most people accept this “seasonal adjustment” without thinking twice about it.

Our advice is to think twice about it – especially with housing data.

One of the most common patterns in home buying is that sales tend to slow during the winter months. This makes sense, since moving in the winter sucks, and its easier to move kids from school district to school district over the summer. Now, housing economists — particularly our friends at the National Association of Realtors — are adept at spinning even the worst reports in a positive light.

Data released today showed abymsal existing home sales in November, which should come as no surprise to anyone who’s opened a newspaper in the past couple months. Nevertheless, the Realtors managed to find a silver lining.  Chief economist Lawrence Yun “[hopes] the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001,”. If data don’t improve this winter, look for Yun and his crew to start blaming bad weather, snow and a whole host of things that make conditions look better than they are.

The lesson: Never accept data or data analysis at face value.

As my grandfather always said, there are lies, damn lies, and statistics. Unless you can understand how a particular piece of data is derived and can trust the collection and analysis methods that went into its creation, it is as informative as a two-year-old’s fingerpainting.

Seasonal adjustment is no different. Even though almost none of us can understand the mathematical techniques and statistical assumptions that go into the production of official economic figures, you can still look critically at datasets to determine whether they make sense.

In many cases, non-seasonally adjusted data is available along with seasonally adjusted data. Compare the two. Do the changes make sense?

For instance, if all of a sudden non-seasonally adjusted home sales are on par with activity over the summer, one could logically conclude the efforts to unfreeze the mortgage and credit markets may be working. If data bumps along about the same as last year, well, they better get a bigger bailout.

Also think about the source of the data. Does the source have a reason to overly stress or even inappropriately apply a seasonal adjustment to suit their needs? If so, you probably shouldn’t be trusting any data that comes from that source, seasonally adjusted or no. The data source should also have citations for the methods used to complete the adjustment. Even if you don’t know what the citation means, there are those that do and the information should be available to those experts to review.

All this being said, in most cases seasonal adjustment is a completely legitimate analytic technique. Government data has standardized techniques for seasonal adjustment that are well accepted and continually scrutinized. And while many take issue with the government’s collection techniques and even the way they count, say, unemployment, rarely are seasonal adjustments accused of being used to fudge official numbers. Most institutions that put out data reports on a regular basis are also very open about their techniques: These are the ones that can be trusted.

To conclude, with all the sources of data that are available in today’s information age it is becoming increasingly important to develop a healthy skepticism for any particular piece of information. Data is only as reliable as its source and its application.