All cash transactions were 31% of the market. The issue may be that many foreclosures are in condition not up the FNMA lending standards. Distressed sales were 32% of the market. 21% of the sales were to investors.

This trend is healthy because it is only investors buying homes they will fix and rent who can provide the buying capacity to absorb the present supply (which was down to 6.2 months from 7.2 months at the end of November) as well as the shadow inventory of distressed sales which will be created by foreclosures this year. The folks who buy, repair and rent out these homes are helping stabilize values and also creating cash flow for themselves which will be a plus for the economy.

I do not see this as a story indicating that the housing market is in significant recovery. It is, however, a necessary step to recovery. It also shows that recovery is accomplished by letting the market work rather that by taxpayer funded incentives which add to an already massive national debt.

Also notable: 33% of Realtors reported cancelled deals in December, same as November and up from 9% in December 2010. This is a very high number that the NAR says is:

caused largely by declined mortgage applications and failures in loan underwriting from appraised values coming in below the negotiated price.

That and jittery buyers. Here’s an on-the-ground perspective of why this is happening.

And finally, a reminder that last month, the NAR cut 2007-2010 existing home sales by 14.3%.

Below are revisions for each year, and here’s the full revisions report.

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Further Reference:
-NAR December Existing Home Sales Report
-33% Of Existing Home Sales Not Closing. True From Where I Sit
-NAR Cuts 2007-2010 Existing Home Sales 14.3%

by Dick Lepre & Julian Hebron

This is good because October was 4,250,000 even though it was previously reported at 4,970,000. In fact, NAR revised downward sales for 5 years meaning that the housing bust was much worse that NAR had been stating.

MBA Mortgage Applications
Purchase Index – Week/Week -4.9 %
Refinance Index – Week/Week -1.6 %
Composite Index – Week/Week -2.6 %

Yesterday’s Treasury Auctions
The results of Yesterday’s auction of 4-week Treasury bills is worth looking at. Treasury auctioned $30 billion in 4-week notes. The interest rate was 0.000%. The bid/cover ratio (bids received/bids accepted) of 9.07. The 5-year auction went out at 0.875% with a bid/cover of 2.86. Wealth holders are so concerned about the EU, some U.S. banks and recently bloated equity prices that the are willing to let Treasury hold it for nothing or next to nothing.

Reuters reported that the downward revision of the multi-year accumulation of sales information is the result of double counting and will indicate a much weaker housing market than previously thought. NAR said that a benchmarking exercise had revealed that some properties were listed more than once and some new home sales may have been included in existing home sales figures.

It seems that Realtors are aware that home sales have been over-counted for years – heck, one sale results in the seller’s agent and the buyer’s agent counting the transaction in many cases.

CoreLogic was onto this overstating of existing home sales a year ago. Read about it here (last paragraph), and below is a chart CoreLogic released early-2011.

___
Reference:
-Reuters: Home Sales To Be Revised Down From 2007
-WSJ: Housing Bust To Look Worse With Sales Revised
-33% Of Existing Home Sales Not Closing. True From Where I Sit

-by Rob Chrisman & Julian Hebron

And since loan limit confusion continues, READ THIS for current FHA, Conforming and Jumbo loan limits on 1-4 unit properties.

RECAP NOVEMBER 21-25 MARKET WEEK
Washington Budget Debates Fail: A U.S. bipartisan Congressional ‘super committee’ had until November 23 to propose how to cut the U.S. budget by 1.2 trillion over 10 years. They failed one day early. This creates uncertainty that pushes investors towards bonds which helps rates.

Existing Home Sales Worse Than Interpreted: Sales of existing homes were up 1.4% September to October and up 13.5% since October 2010. This was seen as OK for housing but cancelled deals continue to spike: 18% of contracts didn’t close in September (same as August), up from 9% in Sept 2010, then this number jumped to 33% for October. I explained last week why I think this stat is true from where I sit.

GDP Weaker: The second of three 3Q2011 GDP reports showed weaker economic growth than originally stated last month. It dropped from 2.5% to 2%. The 2Q figure was +1.3% and 1Q was 0.4%.

Jobs Better: Claims for unemployment insurance rise slightly to 393,000 last week, just off the seven-month low set last week and the fourth week below the 400k threshold considered to signal an improving jobs picture. The 4-week average dropped to 394,250, also a seven-month low and the start of an improving trend, which bodes better for stocks and worse for rates if the trend continues.

PREVIEW NOVEMBER 28 – December 2 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

New Home Sales Up But: Sales were up 1.3% for October and up 8.9% since October 2010. Median prices were down to 212,300, and average sale price was 242,300. This chart shows a slog on the bottom for national sales. Local analysis is critical for buyer and seller decision making.

Case Shiller Home Prices: Tomorrow’s September Case Shiller report is likely to show a similar flat trend. August showed prices across 20 major U.S. metro areas were up 0.2% since July, the fifth straight monthly ’20-City’ gain but barely a gain. Prices were down 3.8% since August 2010, a slightly lower year-over-year loss from last month. Home prices are still at 2003 levels following the 2006 highs.

Critical Jobs Report: The economy added 80k non-farm payrolls in October, and Friday economists expect 110-133k for Friday’s November report. Jobless claims have dropped but maybe not enough for it to reflect in November data. Also holiday shopping hiring is dubious due to lots of short-term hires.

Technical Trading Factors: Looking at stocks, the S&P 500 closed last week at at 1170, down 3.66%, breaking below support at the 50 day moving average of 1206. We got a bounce up to 1192 today on holiday shopping and EU crisis aversion optimism but jitters abound. As for mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—they’ve been resilient at the 25 and 50 day moving averages. Each time these MBS prices drop below (pushing rates up), they rally again (pushing rates down). This resilient theme continued today, with a big selloff this morning and ending the day up 23 basis points.

Bottom Line For Rates: My prediction last week of “rates even to slightly down, recapturing record lows at miscellaneous trading intervals during the week” is what happened. As I say often, rates come and go quickly, so you have to target your rate and give your lender a standing order to lock when it’s there. Here’s how. As for this week, technical and fundamental factors suggest rates even to slightly up, mostly because of holiday shopping optimism and a potential upside surprise jobs report. But we’re still at lows to begin the week because trader rumors persist about the Fed buying 545b in mortgage bonds with a QE3 round to be announced in 1Q2011. This and EU troubles will cap any spikes near-term.

I started noticing it in September. Cold feet all over the place. This afternoon was no exception. One of my clients cancelled his contract to buy a condo for $600,000 even after his appraisal came in today at $634,000.

I didn’t bother telling him how rare it is for a purchase appraisal to come in so high above contract price. Value wasn’t his issue. He went cold because of a new HOA provision that will require owners to live in their condo for two years before they have an option to rent. This type of policy is actually good for long-term value. But it didn’t give him the flexibility he wanted.

This is one of several stories of buyers breaking contracts. I’ve had about two per month since September. All different reasons, most based on something they didn’t like after inspections or reviewing disclosures.

This trend for me, one single mortgage banker, is underscored by a stat I’ve been tracking in the National Association of Realtors’ Existing Home Sales Report. Today’s report for October said that 33% of of realtors are reporting cancellations of purchase contracts on existing homes, up sharply from 18% in September and August, and 8% in October 2010.

Thankfully my stats aren’t this high, but it does confirm shaky buyers are everywhere. The NAR says contracts are failing because of declined mortgages, low appraisals, property inspections (like I noted above as the main thing I’m seeing), and employment losses.

We’re fortunate enough not to have the appraisal issues as much here in San Francisco, not that every deal comes in almost 6% above contract price like the one above. But buyer jitters for the reasons NAR stated are certainly justified.

My buyers aren’t exiting the market, they’re just looking for the precisely correct deal for them. They simply won’t settle. Not settling on price has been a theme since 2007, and now we can add not settling on condition, location, and HOA quality (if a condo) to the list.

But they’re staying in the market. I’m still working with all but one of my buyers who have cancelled contracts since September. That one decided to rent.

NAR chief economist Lawrence Yun also said contract cancellations are because of lower loan limits for conventional mortgages, which I’ll file under “that’s just something Realtors say” because, as a lender in a jumbo market, I can verify that statement is untrue.

And as for the rest of the the stats in NAR’s existing home sales report, they’re of dubious credibility according to many.

In February, Core Logic said the NAR was overstating sales by 15-20% in 2010 (report excerpt | chart: NAR vs CoreLogic data), and today New York appraisal veteran Jonathan Miller explains why NAR’s existing home sales report is misleading for realtors and consumers alike. Miller’s piece is a must-read.

Eurozone Debt & U.S. Super Committee
As the Eurozone debt concern spreads we are seeing flight to quality buying of U.S. Treasuries and mortgages despite the fact that the debt super-committee accomplished nothing. The fact is this: politicians in most countries are incapable of achieving fiscal sustainability. The Eurozone have now seen three regimes changed by the markets. The only good news here is that it drives U.S. bond buying and keeps our rates low.

Consumer Metrics
The Consumer Metrics Absolute Demand Index started falling again late last week. This is a sensitive leading indicator. It is most certainly not supporting to the rosy 4thQ GDP forecasts we saw pitched in the media over the weekend.

Chicago Federal Reserve National Activity Index
This Index moved to -0.13 for October from a previous reading of -0.22.

Existing Home Sales
-4,910,000 (seasonally adjusted annual rate) for September
-Was -3.0% month/month but +11.3% year/year
-18% of contracts didn’t close, same as Aug. Up from 9% in Sept 2010
-Lots of inventory which must be sold but economic uncertainty and tough mortgage qualifying restrain buying.
-Full report of Existing Home Sales

Philadelplia Fed
-General Business Conditions Index 8.7, up from September’s -17.5
-Measures manufacturing, 0 is line between growth/contraction
-First positive reading in 3 months
-Full report and chart

Leading Economic Indicators
LEI weas +0.2% for September. The pop in LEI is almost entirely due to a drop in the 10-year Treasury yield. At present, LEI puts too much stock in the value of monetary policy.

MBA Mortgage Index
-Purchase Index, Week/Week Change -4.7%
-Refinance Index, Week/Week Change 2.2%
-Composite Index, Week/Week Change 0.6%
-Positive Existing Home Sales data mitigated this soft purchase index.
-The best solution for the housing sector would be to encourage the clearing of existing inventory and shadow inventory by providing more FNMA lending for rentals. The fact is that there are folks who are in homes they own and haven’t made payments on for months. The goal might be to have them stay but as renters.

FOMC
The FOMC meeting ends today. I don’t believe that the usual discussion about rates or money supply are paramount. The Fed must explain what its plans are for Eurozone dollar liquidity.

Initial Jobless Claims
-408,000 for week ended August 13
-Up 9,000 from previous week’s revised 399,000
-4-week moving average 402,500, up 3,500 from previous week
-This shows a continuing weak jobs market.
-The “we got under 400,000″ euphoria of last week has dissipated.

July Existing Home Sales
-Level (Seasonally Adjusted Annual Rate) 4.67m
-Month/Month -3.5%
-Year/Year +21.0%
-Median existing-home price $174,000, down 4.4% from July 2010
-Distressed sales were 29% of sales
-Inventory fell 1.7% to 3.65m, a 9.4-month supply
-All-cash sales were 29% of transactions
-Investors account for the bulk of cash purchases.
-First-time buyers purchased 32% of homes
-Investors accounted for 18% of purchase activity
-Rest of sales were to repeat buyers, a 50% market share

Philadelphia Fed
The Philadelphia Federal Reserve survey of August manufacturing activity in that region dropped a mind-boggling -30.7.

What I find most compelling is that despite higher than expected inflation (which, after all is said and done, should be the driver of interest rates) we saw a major bond rally yesterday which continues today.

The technical patterns of the 30-year bond future which I use the forecast rate movement are extremely bullish and indicate the possibilities of a move in yields into uncharted territory.

Leading Economic Indicators
-Leading Indicators – Month/Month change for July +0.5%.
-Because of volatility and the way this index is constructer I would deem this datum useless at present.

Mortgage Applications
Purchase Index Week/Week: -0.1%
Refinance Index Week/Week: +23.1%
Composite Index Week/Week: 15.5%

Even though we are at a strange time when a larger than normal Existing Home Sales take place for all cash, the downward move in the week-to-week Purchase Index for mortgage applications is an indicator that the housing market has a long way to go to recover. I do not subscribe to the notion that somehow people have permanently soured on homownership. Housing prices need to get back in line with incomes. The delay in foreclosures of long-delinquent mortgages is stretching out the time frame. CoreLogic’s most recent estimate of shadow inventory was 1,700,000 units.

Consumer Metrics
Meanwhile the Weekly Composite Index from Consumer Metrics shows a significant upward trend.

This index is interesting because it uses data which, compared to most other releases, is nearly live. This graph is a composite index of ten sectors:

Automotive, Entertainment, Financial, Health, Household, Housing, Recreation, Retail, Technology, and Travel. The largest gain is retail.

This graph should be a reminder that it is the consumer who will lead economic recovery. Fiscal policy and monetary policy and all else happening in Washington means little.