7 reasons housing is doomed
Posted
Oct 22 2009, 03:06 PM
by
Louis Navellier
Rating:
Buying a house is one of the biggest purchases most Americans will ever make. And right now, the housing market is the one of the biggest anchors holding back the U.S. economy. Though a recovery is under way in many sectors, the housing market remains a problem, and it looks likes it's going to get even worse.
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Why do I say that? Here are seven reasons I'm convinced the housing market will continue to crater:
Reason #1 - Low Housing Starts
On October 20, data showed new housing starts were worse than expected, as builders remain cautious. While the total number of starts edged up a bit from 587,000 to 590,000, the increase was well under Wall Street's forecast of 610,000. Single-family starts appear to be leveling off—not increasing as some had hoped—and multi-family units saw a dramatic 15.2% drop on the month.
Reason #2 - Foreclosures Hit Record Numbers
Part of the reason it's so difficult to pare down the inventory of unsold homes is because of record foreclosure rates flooding the market with properties.
During the third quarter, foreclosure activity hit an all-time record, as 937,840 homeowners received foreclosure letters. That works out to 1 in every 136 U.S. homes.
If that's not bad enough, consider the concerted government and lender efforts to prevent foreclosures right now. Without any workout programs, the number could easily have topped 1 million homes. As it stands, the figures show a 5% increase from the second quarter and a 23% jump over the third quarter of 2008. Ouch!
Reason #3 - Housing Has No Relief at the Top
The Wall Street Journal recently reported that expensive homes continue to represent more and more of the growing foreclosure market. That's because the financing that people used to get to buy expensive homes, such as jumbo mortgages, are increasingly hard to get. Once a mortgage tops $729,750, banks can't sell the loans to Fannie Mae or Freddie Mac, meaning interest rates for homeowners soar, and banks require much more money down for the loan.
The housing bubble killed any complex mortgages, such as zero-down and interest-only mortgages, that could make it easier to obtain jumbo loans. This puts high-end houses out of reach for everyone but the extremely wealthy.
Reason #4 - Banks Are Reeling From Mortgage Losses
In order for banks to feel comfortable extending loans of any size, they need to feel comfortable with their current portfolio of mortgages and willing to lend more cash. And unfortunately, mortgage-related losses continue to creep up, so lending is not going to get any easier anytime soon.
We also saw a number of banks release earnings recently that were weighed down by bad debt charges. And worse, these companies raised their loan loss reserves for the coming months in anticipation of even more problems.
At the beginning of October, JPMorganChase (JPM) reported pretty good numbers, but even this leading bank said that its past-due loans doubled in the third quarter, with a total price tag of $20.4 billion in bad debt. When one of the best banks is facing troubles like this, it's a very bad sign.
Reason #5 - Property Prices Still Falling
In my home state of Nevada, the Las Vegas metro area is a case study in how badly the hosing market has cratered. In August, the median sales price in this metro area was down a jaw-dropping 46% compared with 2008.
While it's true that all real estate markets are unique, it's hard to deny that areas like Nevada, Florida and Michigan more than offset any "favorable" markets that are firming up.
Reason #6 - Housing Permits Drop
Housing permits are a gauge of future construction, since you need legal approval before building. Looking forward, things are bleak, because home building permits fell in September by the largest amount in five months, so we'll see fewer homes popping up in October and November.
Specifically, building permits rose dipped 1.2% to 573,000. What's more, this was also dramatically below the consensus estimate of 595,000. Looks like the housing market isn't just bad, it's worse than most economists thought.
Reason #7 - New Homebuyer Tax Credit Expiring
As a capstone to all this, it's important to acknowledge that any anemic growth in the housing market over the last several months will come screeching to a halt on December 1, when the $8,000 tax credit for new homeowners expires. If we're seeing slow growth—or worse, continued declines—in the housing market even with this cash incentive to buy a home, just imagine how bad it will be when the credit expires and the real estate market enters the seasonally weak winter months.
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