New Home Sales - ABX Still Plunging
A: Sorry for the lack of content, this new site upgrade is so damn tedious. Anyway, lets take a look at what is going on with new home sales and the distressed ABX markets. The new home sales report was slated as good news by the media, but when you break it down, it really wasn't! Meanwhile, the ABX Indices are continuing their fall as the demand for credit protection picks up; those are bets that profit as the ABX markets fall. Its a sign that investor sentiment is negative and anticipating future defaults and foreclosures down the road.
First, the new home sales report (via Forbes.com) -
New home sales unexpectedly rose 4.8 pct in September to a 770,000 unit annual rate, the Commerce Department reported today, rebounding from an 11-year low in August.Ehh, numbahs! Spin em every way you can. This report is not very accurate and gets revised often. I wouldn't be surprised if next month's report revises these numbers down. Making bets on this report is a fools paradise.Analysts were expecting a 775,000 unit rate, which would have been a decline from the originally reported August 795,000 unit rate. However, downward revisions cut August sales by 60,000 to a 735,000 unit rate, the lowest since 720,000 in Oct 1996. The revisions also reduced the July and June sales rates by a total of 107,000.
September sales were off 23.3 pct from the same month in 2006. September inventories of unsold homes fell to 8.3 months' supply after the upwardly revised 9.0 months in August.
Barry Ritholtz has it right in his post, "No, New Home Sales Did NOT Rise" - 
First, we see the headline number. This month, September 2007 sales of new one-family houses were up 4.8%, at annual rate of 770,000 (SA).Confused? Look at the chart I posted above via CR. Calculated Risk shows you the chart of New Home Sales and installs grey recession bars going back the past 35 years. It should visually show you that this report in no way is worth cheering about!Second, we look at the year-over-year data, which in this case was 23.3% below the September 2006 estimate of 1,004,000.
Third, we look at margin of error. The monthly gain of 4.8% was within the "estimated average relative standard errors" of ±10.3%. This means the data point was not statistically significant.
Based on this data, we know for sure that year-over-year sales decreased; What we can tell about month to month sales is that they may -- or may not have -- increased (we just don't know).
Lastly, we need to consider Cancellations. The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. As we have seen, the Cancellation rates of Home Builders have been huge:
Firm . . . Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (MDC) 57%
KB Homes (KBH), 50%
Lennar Homes (LEN) 32%
D.R. Horton (DHI) 48%
Beazer Homes (BZH) 68%
NVR (27%)
As for the ABX markets, well, the stabilization I talked about three days ago didn't last! As you can see on the chart to the left, the 'AA' rated market continued the selloff after a brief rest. It's a sign that investors are betting on much more carnage in the mortgage markets in the near future. Expect defaults and foreclosure data to continue to rise and distress in the secondary mortgage markets to continue! Holders of residential mortgage backed securities do not have a favorable market to selloff assets to; as noted by Merrill Lynch's $8.4B write down that was recently announced; yes that is a "B" for Billion! They told the street to expect half that in losses related to subprime mortgage, structured bonds, and bad loans in the 3rd quarter. Do you really think this is the end of it and that Merrill is the only one holding bad assets on their books?
The problem here is one of uncertainty! As I said a number of times, there are two main issues:
a) we do NOT know who holds what assets on their books
b) we do NOT know what the value of these assets are on the open markets
...because there is NO market, as evidence by the selloff in the ABX indices! If your wondering why this is important, you need to understand why the secondary mortgage markets are here in the first place. The secondary mortgage markets are where existing mortgages and mortgage backed securities are traded! It allows the originators of mortgages to selloff holdings, so they can free up capital for more loans. Well, these markets are in turmoil! That is why I continue to report on them. As long as the distress continues, we should expect more bad news from brokerages, lenders, banks, and any other institution holding these assets on their books. The problem will continue to be the unfavorable valuations for those that must sell at these distressed levels, and the lack of transparency for investors and the street as to who holds what on their books. The story is not finished.
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