Anyone follow the logic?

I pay careful attention to the NYT's Floyd Norris. But I don't get the logic in today's column on Easy Credit in Mortgages May Backfire.

But if and when a fall comes, watch the volume of home sales, particularly of existing homes. In the early 1980's recession, annual sales of existing homes fell 50 percent, to two million homes...

The most expensive areas, and the ones that have risen the most in the last five years, are concentrated on the coasts, and are presumably the most vulnerable if prices do start to fall.

OK. I got that: the initial indicator.

When that does happen, watch the volume of sales of existing homes. If it falls rapidly, that will be an indication that not much has changed, and the damage is likely to be limited.

Huh? Sales volume declines rapidly and that is OK?

But if sales volume stays high, that could indicate that the mortgage innovations are hurting. Then we could see rising numbers of foreclosures as homeowners discover they cannot sell their homes for what they owe but also cannot pay their suddenly higher monthly mortgage bills. (italics added)

Why would there be large number of foreclosures if sales volume is high? Why would high sales even with declining prices be a sign of worry? It would seem to be just the opposite i.e. while house prices may have hit a peak and are declining, there are still plenty of buyers out there and that a decline of, say, even ten percent brings them to the table.

Or does Norris simply mean houses for sale, rather than houses sold? If he does, shame on his copy editor.

•••

Some interesting comments but the big issue is the last paragraph in which Norris posists that "sales volume" stays high while "...we could see rising numbers of foreclosures..." I think the two cannot coexist. You cannot have high sales volume while people can't sell their houses. You can have many house on the market with few sales. But by definition, if you have high sles volume you have many sales.  It's a minor but critical matter of language. 

Comments

[Richard Wacker]

What (I think) he is saying is that unlike other market cycles where people have sound debt structures (i.e. affordability was beeter and less exotic loans) prices were sticky and volumes dropped because people did not have to sell. Now there is concern that credit is so cheap and too many poeple are over leveraged. These people will have to sell thus volumes could be high as prices drop. It is interesting idea, this is in part what drove the stock market down in 2000. There were a lot of people trading on credit (margin) when the market started to turn they could not cover their margins (pay the billis) and they were forced to sell; driving up volume and lowering prices. I don't see this happening next year. Maybe in 2007 when 20 some-odd percent of the ARM mortgages become flexible. Real wages have not moved over the past 5 years. If wages go up then this proabbly won't happen but I can figure out why wages would go up (not with out sourcing). If Greenspan moves the fed rate past 4% don't be shocked if the bond market reacts and longer term rates jump (alot). I think the bond traders are waiting to see what happens at 4%.. Interesting times in deed...

[Richard Wacker]

Oh yea.. I or you could look at that lower volumes will mean a drawn out decline in prices (think Japan, UK, AU, Boston (80s), LA(90s)).. If volume is high then look for a crash. Too many speculators forced to sell. To much construction. Prices will drop low enough to attract buyers (i.e. real low). This is along the lines of an extreme bullwhip effect.

This is from Greenspan.. this week...

"... arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher. The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions. The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy.

.....But what they perceive as newly abundant liquidity can readily disappear.......

...Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

[David Sucher]

No, Richard, I believe you are making my question far too complicated and are not dealing with the simple question: Norris talking about the volume of what?

Listings? or Sales?

If you have declining prices but people keep stepping up and buying then what is the problem?

The issue to be concerned about, it seems to me, is lots of listings but few sales.

And Norris doesn't distinguish clearly.

[Kent]

David:

I'm not sure if I buy Norris' argument but I think I understand it. I think what he's saying is this. House prices are relatively sticky in the downward direction. As a rule, sellers are loath to come down on price from what they think their home is worth and as a result, during previous downturns you see a drop in sales as many sellers hold out for higher prices. In other words, that's that NORMAL pattern during housing slumps.

If, on the other hand, prices are falling and sales stay strong then it means some sort of different psychology is taking over the market. Rather than holding out and being reluctant to sell, people are dumping their houses for what they can get. That sort of thing could result from a variety of factors, all of them bad. First, speculators and investors could be racing for the exit (panic selling), Second, people could be crashing and forced to sell or abandon their if their ARMs and I/O loans are forcing them out of their houses and the banks are dumping them.

To put it another way, if sales stay strong during a price downturn it could mean that there is less resistance to price drops than has traditionally been the case and prices will need to drop a whole lot farther until sellers finally start resisting.

I'm not saying that I agree with the argument. But that is what I understand it to be.

[Kent]

David: Forclosures = sales because most banks will rather just auction off the property and cut their losses rather than hold onto it. So in the past when families had more conventional loans they might have held out and not sold, today with all the exotic ARMs and I/O loans, families are more likely to be forced into forclosure by something as simple as an interest rate hike. Those foreclosed choses will be sold at auction for whatever they sell for. but they will be sold.