No Signs Of Recovery For The U.S. Housing Market

The National Association of Realtors released the February existing home sales data on March 21st, and the data eerily reinforced the miserable state of the United States housing market.  To summarize, home prices have now suffered through five months of year over year declines, while sales volume is in a nine-month tailspin, year over year. Because of the seasonal nature of home buying, the year over year metrics are a more reliable indicator of housing market health.

The dour news further supports the questionable actions of the Fed last week, loosening the minimum dividend requirements for some of the big Wall St Banks. Based on long-term valuation metrics, home prices are probably within 10 to 20 per cent of bottoming on a nationwide basis (median prices are down 12.2% from mid-year 2010 after the housing stimulus bounce) but that number could be much larger as normal bubbles tend to over correct to the downside (Tokyo commercial real estate is still down more than 80% since 1990).  Few imagine the possibility of commercial real estate in Los Angeles or New York City dropping 80% in value.  A hiccup in the economy or unforeseen global crisis could cause major problems once again for United States banks. The margin for error has thinned considerably with the Fed’s new rule on distributions.

The one positive sign in the February sales data was the national inventory of homes, which dropped 1.2% year over year after six consecutive months of YOY increase. But hold the applause. This is partially resulting from the drop in foreclosures from the MERS (Mortgage Electronic Registration System) scandal, which artificially halted the stream of housing inventory coming on line for sale in some regions of the country.

This chart from Mark Hanson of M Hanson Advisors paints a grim picture.

housing data

This chart surprised even a housing bear like me.  The majority of California home sales are still not clearing out the natural sellers (those sellers who want or need to sell in order move).  Instead, as fast as inventory is being cleared, new inventory is coming online.  Over a two year period of time, a notice of default will turn into foreclosure supply (read: new home supply) a whopping 80% of the time.

The next few months will be critical for the housing market as the majority of United States home sales occur between April and July.  Inventory also increases during these months.  Though the 30-year fixed rate mortgage indicator (FMRI) has pulled back from the 5.25% level at the beginning of February towards 5.00%, it is still up significantly from 4.60% five months ago.  Furthermore, at some point, the foreclosure pipe will unclog, keeping unnatural supply elevated.  The numbers are astonishing, but since the peak in 2005, traditional organic home sales (you selling to me) are down 83%.  Yet, as if turning a blind eye, most economic pundits agree that we have experienced an economic “resurgence.”  Go figure.

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