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Tuesday, December 22, 2015 1:24 PM

Existing Home Sales Plunge 10.5%, NAR Blames "Know Before You Owe"; What's the Excuse for Last Month?

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Existing homes sales plunged 10.5% this month which the NAR attributes to an initiative called "Know Before You Owe".

Economists, apparently unaware of "Know Before You Owe", came up with a consensus estimate of 5.320 million sales, SAAR ( seasonally adjusted annualized rate), the same as last month.

New closing rules appear to have depressed sales of existing homes in November which fell 10.5 percent to a much lower-than-expected annualized rate of 4.760 million. The year-on-year rate, for the first time since September last year, is suddenly in the negative column, at minus 3.8 percent. The National Association of Realtors, which compiles the report, attributes the weakness to the "Know Before You Owe" initiative which is lengthening closing times and which likely makes November an outlier. The NAR suspects that the sales delays in November are likely to give a boost to December's totals.

Weakness in the month is centered in single-family sales, down 12.1 percent to a 4.150 million rate. Condos rose 1.7 percent to a 610,000 rate.

All regions show declines for total sales with the Northeast, at a modest plus 1.5 percent, the only one to show a year-on-year gain.

Low supply is a problem in the market, at 2.040 million vs 2.110 million in October. Relative to sales, supply is at 5.1 months which, because of November's sales weakness, is up slightly from prior months. For a balanced market, supply is generally pegged at 6.0 months.

Price data are positive, showing some traction with the median up 0.5 percent in the month to $220,300. Year-on-year, the median is up 6.3 percent which is right in line with the trends in this morning's FHFA report.

For volatility, this report is usually tame compared to the new home sales report. Judging strength right now is difficult but a fair judgment is that growth in the housing sector is probably moderate and a plus for the economy. New homes sales are out tomorrow and are expected to show a gain.
What's the Excuse for Last Month?

Interestingly, "Know Before You Owe" came into play in October 3.

Why did the NAR pass up a golden opportunity to use that excuse last month when existing home sales dipped?

Disturbing Last Month

From Bloomberg last month: The number of homes on the market, at 2.14 million, is actually below the 2.24 million this time last year, an unwanted surprise that the National Association of Realtors, which compiles the existing home sales report, calls "disturbing".

No Longer Disturbing This Month

Now that the plunge has deepened, it's no longer disturbing, it's because of "Know Before You Owe".

I have a simple question: If "Know Before You Owe" took place effective October 3, and that's really what's to blame, then, why wasn't there a huge plunge last month instead of a "disturbing" surprise?

New Rules

Since not even the NAR seems to understand the implications, let's take a step back with a peek at Know Before You Owe Mortgages as seen by PBS.
There are two big changes. One, the forms you get right after you make a mortgage application and the form you get right before closing is going to be simplified.

The terms are supposed to be easier to understand. You’re supposed to understand if you have an adjustable rate, and the rate will go higher after a certain number of years.

You’re not supposed to be surprised if, you know, 10 years from now you have some sort of balloon payment on a mortgage or anything like that. So, that’s the first change.

The second change is before – before closing, you’re supposed to get these documents at least three business days before closing.

And that’s designed so you have time to understand what you’re getting into before you sign on the dotted line.

Now, it seems to make sense, but if you make any changes within that three-day window – so if you decide you want to switch, say, a fixed-rate mortgage to an adjustable-rate mortgage, that resets the three days.

As for people who are trying to, you know, closely time home closings, resetting that three-day window can lead to some headaches.

So what’s going to happen over the next few months is we’ll see whether or not home closings are happening on time or whether, you know, some of these mortgage lenders or real estate agents weren’t actually ready and we see a lot of closing delays.
Before vs. After

The forms are simpler and easier to understand. Those wishing to compare the before and after forms can do so at the Consumer Finance Protection Bureau.

If there were first month glitches, why didn't they turn up a month ago?

What I Said Last Month

Let's turn to my report from a month ago for more details about recent trends.

Please consider Existing Home Sales Decline, NAR Calls Report "Disturbing"; First Time Buyers Decline Third Year; Housing Clearly Weakening.
If there was an "outlier", perhaps it was the September gain, not the August and October declines.

And even though September sales data bounced, prices didn't. The median price declined 2.9% in September.

Bloomberg concluded "This report, which wraps up a busy and mostly positive week for housing data, is a big plus for the housing outlook, suggesting that demand for existing homes may be catching up with demand for new homes."

I responded: "That last statement by Econoday is amusing. For starters, new home sales are not all that strong, and it is new home sales that contribute most to GDP and family formations."

As a followup, please note my November 18 article Housing Starts Plunge 11% to 7-Month Low: Single-Family Down 2.4%, Multi-Family Down 25%

October wiped away all of September's good news and then some. 1.060 million starts was far below Econoday Consensus Estimate of 1.162 million SAAR and also well below the lowest estimate of 1.125 million.

Bloomberg pointed out hidden strength including "important good news" on October permits.

Spotlight on Permits

  • September month permits were down 5%
  • October permits rose only 4.1%.
  • September starts were revised lower from 1.206 million to 1.191 million (a 15,000 -1.24% negative revision).

In aggregate, that hardly looks like "important good news".

First Time Buyers Decline Third Year

The National Association of Realtors (NAR) notes First-time Buyers Fall Again in NAR Annual Buyer and Seller Survey.

"The share of first–time buyers declined for the third consecutive year and remained at its lowest point in nearly three decades as the overall strengthening pace of home sales over the past year was driven more by repeat buyers with dual incomes."

Housing Clearly Weakening

On average, starts are weakening, permits are weakening, new home sales are weakening, price data is weakening, and existing home sales are weakening.

First time buyers, a strong indication of family formation, is at a three-decades low, and the NAR is "disturbed" about trends.

Simply put, housing is weakening, albeit in a volatile way, making it a bit harder to spot the change in underlying trends.

The disclosure forms are easier. They are also down in number, from four to two.  The rule change took place on October 3.

Somehow that rule change had a huge impact in November but only a small (and not even mentioned) impact in October. That's possible, but color me skeptical.

By November, one would have thought lenders would be bright enough to go over the rules with borrowers in advance to avoid closing delays.

Next month could be telling, one way or another.

Mike "Mish" Shedlock

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