Wall Street Strategies
Hello! Sign in or Register


Keynes Fails on Housing, Recovery Still out of Grasp

8/25/2010
By David Urani, Research Analyst

The housing sector has been through a lot over the past few years. In fact, one could say it's been the focal point of the bad conditions in the economy. It was only natural that we would seek to prop it up with the implementation of the $8,000 tax credit for homebuyers. The full extent of the program from late 2009 through early 2010 cost in the range of $30 billion. You would think we would have something to show for it, but the answer is no. The truth is, now that the tax credit incentive is gone, we are sitting on lows for home sales not seen since the 1990's. Yes, the home sales environment now is the worst it has been throughout the entire housing downturn. And the tax credit is by no means the only thing we've done, having spent tens of billions more on mortgage liquidity measures through the Fed and the $75 billion HAMP mortgage modification plan. So much for basing our recovery on the Keynes textbook. Here's a breakdown of where we are and where we're going in the housing market:

Existing home sales in July fell by 27% from June as the buying frenzy for the tax credit was removed. The result was the lowest level of single-family home sales since 1995. At a 3.83 million unit annual pace, demand in July was 14% lower than the previous cycle low set in November 2008. All four major regions showed declines of more than 20%, including a 35% drop in the Midwest. The result goes hand in hand with a record low for new home sales set in May (note: existing home sales data lag new home sales because of how they are recorded).

In 1974 the nation was facing a difficult housing situation as three years of home supply sat on the market. In an effort to clear that inventory, a $2,000 tax credit was offered for a year for newly constructed homes. Consequentially, as we saw with the 2009-2010 tax credit, home sales surged and that inventory was in fact cleared. That tax credit was hailed as a success, thus the popularity for another one in 2009. What we should have noticed, however, was that the tax credit did nothing to fundamentally strengthen housing. New home sales did increase after a long lull, but existing home sales had never really weakened. High rates of sales from 1975 through 1978 led way to a prolonged housing crash as the savings and loan crisis of 1980 took home sales into the dumps. Interestingly, in the 1980's, home sales recovered without incentives. What we see now is in much of the same vein – tax credit incentives brought home sales back out of the dumps but what we failed to recognize is that the fundamentals this time around were in a true downturn and had never actually recovered by the time the tax credit expired. In essence, we created a mini-bubble that only endangers those who recently bought a home only to face a difficult market now that it's over, with a high chance of real estate re-devaluation.

As we can see in the chart above, pricing has held somewhat, but we see this as a lag effect, similar to the pricing delay experienced when home sales began to plunge in 2007. Notice that in past housing busts, we never really saw a prolonged decline in prices, only sales. This recession's housing bust is unique in that it reflects a true bubble in home values. That bubble is now poised to deflate further now that the tax credit is gone, with both the supply and demand sides of the equation in dire straits. We covered the demand side, now let's look at supply.

Foreclosure filings for July increased from June, reaching a total of 325,229 for the month. That makes 17 consecutive months that foreclosure filings have been above 300,000. Both new delinquencies and foreclosure completions rose during the month, indicating an all-around bad report. New delinquencies had been on a steady decline, indicating stabilization in the health of homeowners. However, the latest uptick in new filings indicates that we are by no means home free yet, and in fact weak pricing continues to put more borrowers underwater. In addition, the rate of foreclosure completions (repossessions) continues to rise and now rests at the second highest level on record, second only to May. Essentially, that means that the rate of vacant homes hitting the market is at an all-time high pace, threatening to add to the excess supply in the market. In fact, existing home supply has already risen for four of the last six months and is up 22% year to date. So, the decrease in sales combined with the increasing supply can only lead to weakness for home prices.

With all of the programs we've initiated to help housing, we've pretty much tried everything for all angles. I'm afraid to say we don't really have any other options aside from the extreme/highly expensive. When it comes down to it, it's going to take a turn in employment to truly get housing back on track. When you take a look at employment trends versus existing home sales (below) you can see a clear inverse relationship. Not only will employment improve potential homebuyers' confidence, but it will also put unemployed homeowners back on the job and out of the foreclosure process. Although I do expect to see some bottom feeding in home sales in the months ahead, with some modest increases, the continual high rates of foreclosure are likely to keep inventory rising anyway as demand is unlikely to strengthen enough to offset repossessed inventory. Only when employment turns will I be confident in the housing market, and given the latest figures, we simply aren't there yet. 

David Urani
Wall Street Strategies

More Articles by David Urani


 

Add a Comment!

Name:
Email:
Comment:
 
 
Submitted comments are subject to moderation before posting.


Home | Products & Services | Education | In The Media | Help | About Us |
Disclaimer | Privacy Policy | Terms of Use |
All Rights Reserved.