Being Street Smart
Sy Harding
A MIXED PICTURE IN THE HOUSING INDUSTRY. Oct. 23, 2009.
In early 2007, after the real estate bubble began bursting and the extent of the problems from sub-prime mortgages became more clear, I predicted the aftermath would have the economy in the worst recession since 1973-74 by the end of the year (2007).
At the time, I also said the problems for the economy began in the housing industry and the recovery would also eventually begin in the housing industry.
Continuing to emphasize the importance of the housing industry, in predicting in February of this year that the stock market would launch into a substantial rally off its very oversold condition, I said the catalyst for the rally would probably be a temporary improvement in economic reports, including housing and retail sales. And that did happen.
Unfortunately, the improvement was indeed temporary. In the last month or two economic reports have turned sour again, with home sales and retail sales declining again (job losses and mortgage defaults rising, and consumer confidence falling).
It became clear that the temporary improvement in home and auto sales in the summer was due to the $8,000 government bonus to 1st time home-buyers, and the $4,500 ‘cash for clunkers’ deal for auto buyers.
The return of negative economic reports raised concerns about the sustainability of the economic recovery. So recently I have been saying that while the market was excitedly anticipating 3rd quarter earnings, I was more interested in seeing the next reports from the housing industry, due out this week.
And we have now seen and can analyze those reports.
The first was the Housing Market Index, which measures the sentiment or confidence of home-builders. Their confidence had been picking up in the summer months, although very fractionally, as they experienced an improvement in ‘traffic’ and sales.
But Tuesday’s report showed the index has fallen again, from September’s already low 19, to 18 this month.
The following day’s report showed why builder confidence is falling again. It was reported Wednesday that new housing starts previously reported for August were revised downward, and starts in September were flat. Even more discouraging, building permits for future starts fell 1.2%.
Meanwhile, the Case-Shiller S&P Home Price Index report a couple of weeks ago was encouraging. It showed that home prices rose 1.6% in July, the 3rd straight month of price increases. Unfortunately, it was old data. We’re interested in what has happened to home prices since the temporarily improved conditions of the summer months.
What makes it compelling that we see later data on home prices is a startlingly gloomy forecast by famed banking analyst Meredith Whitney. Whitney says home prices, which have already declined 33% nationally from their peak in 2006, are set to begin falling again. And not by a small amount, but by another 25% from here.
Few real estate experts think the bottom is in for housing prices. But Whitney’s forecast is seen as too gloomy, even alarmist. Yet, credit-rating firm Moody’s expects a further decline of 10% from here. There are already more than enough people owing more on their mortgages than their homes are worth. So a resumption of price declines would certainly not be a positive for the economy.
The most encouraging of this week’s housing reports, was Friday’s report from the National Association of Realtors that ‘existing home’ sales shot up an unexpected 9.4% in September. That was especially good news since the NAR’s previous report was that existing home sales fell 2.7% in August, which ended four straight months of sales increases during the summer.
The stock market didn’t take any encouragement from the report however, possibly because it’s expected that when the NAR releases more information in a couple of weeks, it will show that roughly 40% of sales in September were to buyers scrambling to get in under the wire before the $8,000 bonus program for 1st time home-buyers expires. The concern is that sales will tumble again, as happened to auto sales once the ‘cash for clunkers’ program ended.
By the way, there are some disturbing reports regarding the 1st time buyer program.
I have heard from a number of 1st time buyers who closed on their homes a couple of months ago and expected to receive their $8,000 bonus immediately. But they have yet to receive it and are being told it will be another month or two before they do. And at a hearing on Thursday the Treasury Department reported that the legitimacy of about 100,000 claims for the bonus is being questioned. That can be kind of scary for those who were assured by real estate agents that they qualify and cannot afford the home without the bonus to pay off credit cards or whatever.
Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.syhardingblog.com.
