Is the housing market recovering?
Posted
Jul 29 2009, 11:29 AM
by
Anthony Mirhaydari
Rating:
The bruised and battered housing market is finally showing signs of life.
In the last few days, we've learned that new and existing home sales rose 11% and 3.6% respectively in June compared to May. June housing starts are up 3.5% to 582,000 -- the highest reading since last November. And home prices, as reported by the Case-Shiller Home Price Index, actually increased in the three months to May. This breaks a string of 34 straight months of decline.
So is it time to pop the champagne, call up your real estate agent, and return to the heady house-flipping days of 2005? Not quite.
I hate to be the bearer of bad news, but there are still a number of issues hanging over the housing market. First, interest rates look ready to rise as the U.S. government finances its massive budget deficit just as corporate and international borrowers look to bypass tightfisted banks and raise cash directly from the capital markets. This will push up historically low mortgage rates and squeeze affordability. Check out my post from Tuesday on this topic.
Two, according to Gluskin Sheff economist David Rosenberg, as the mortgage problem becomes upwardly mobile and moves from subprime borrowers to upper-crust prime borrowers, more expensive homes are being foreclosed upon. In his words:
"…an increasing number of high-end homes are now entering the foreclosure sales process, which are skewing these price indices higher after a prolonged period when the data were being pulled down by the preponderance of ever-cheaper subprime units hitting the auction market. As an aside, at the beginning of the year when prices were sliding more than 2% per month, half the sales were coming from foreclosures auction and many of these were low-end units; now the foreclosure share is down to 30% and more of these are higher-end homes seeing as prime-based mortgage default rates are now rising faster than subprime."
Three, a recent moratorium on foreclosures is ending. Banks, mindful of their damaged public image and hoping for great things from the Obama Administration's homeowner assistance plan, decided to take a wait-and-see approach. They waited. They saw. They were disappointed. And now, as unemployment continues to rise, banks are once again clamping down on delinquent homeowners. This promises to unleash another flood of distressed property onto the market just as buyers were beginning to overwhelm supply.
And finally, the reason everyone got excited about the home sales data earlier this week was because it indicated that supply was falling, boding well for further price stabilization. New home inventory plunged from 10.2 months' supply to a three-year low of 8.8 months -- down from a high of 12.4 months in March. Moreover, the number of units under construction fell to a 42-year low.
But there is a huge glut of vacant homes will mop up demand and dampen prices. Of the 130.8 million housing units in the United States, 18.7 million are vacant. At the current rate new households are being formed, which Rosenberg puts at 800,000 annually, it will take more than 20 years to work off this inventory.
Plus, there are a large number of homeowners, especially those with negative equity, that are eagerly waiting for an improved housing market to sell into. A recent Zillow survey found that one-third of all homeowners would be willing to sell their home if prices improved. This means there is a "shadow" inventory of between 11 million and 30 million homes. Add to this a rental vacancy rate of 10.6% or 6.6 million units (an all-time high) for apartments and rental homes, and it's clear we have far too many homes given the falling number of the employed.
Surely, this means we've yet to fully deflate the home price bubble even as prices have fallen 33% since the peak in 2006. In this context, the 30% rise in the S&P Homebuilders Index (XHB) looks like a false dawn.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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