As the months of housing pain have turned into very long years, the increasingly persistent “Are we there yet?” refrain from the media and homeowners is understandable, but the answer is still no. We have not reached the bottom of the housing market.
There has certainly been welcome news over the past weeks. Thanks to the Federal Reserve Chairman Ben Bernanke, interest rates remain at historical lows, with 30-year fixed rate mortgages hitting a mind blowing 3.67 percent earlier this month. In slightly related news, housing “affordability” metrics are at record highs. Combined, these two factors have households flooding banks with mortgage applications.
It is somewhat naïve to conclude from this that housing is back. (Unless you live in the greater Washington D.C. area where construction is booming like its 2005.) Just this week the Federal Housing Finance Agency reported to congress that Fannie Mae and Freddie Mac are still in “critical condition” because of poor performance and the legacy of their bad loans in the last decade.
Three months ago I outlined in this space reasons why we are not seeing a recovery yet. A surge in housing over the past quarter contradicting these claims would have helped start lifting Fannie and Freddie out of their mire (subsequently taking a lot of pressure off taxpayers), but unfortunately the reality has not changed.
Part of the challenge in this debate is how a recovery is defined. I argue that it will be when foreclosures have been worked out of the system, negative equity is cleared away, and prices have stabilized. By that standard, we still do not have a housing recovery.
To back up this claim, let’s consider the strongest arguments that we are witnessing a housing recovery to see if they stand up to the long-term analysis.
Argument #1: With record low interest rates everyone will be looking to get back into homeownership.
The Federal government’s goal of lowering long-term rates has been successful. Led by the Federal Reserve's quantitative easing program and the Treasury’s continued bailouts for Fannie and Freddie, mortgage rates are lower than ever before. Unfortunately, low rates do not always translate into demand.
There have actually been “record” low rates for several years now, but the cheapness of a mortgage is only one factor in the home-buying process. Consider while mortgage applications are up with super low rates, nearly four out of five of those have been for refinancing, not home purchases. That is because household debt is still a massive deadweight on the capacity of families to buy a new home. At the same time, household wealth has been crushed over the past few years. Refinancing is not recovery, and low rates are not a sign of a positive future.
Argument #2: Housing starts and sales of new and existing homes all went up in April and May.
Optimists might respond to the points above by pointing out that housing starts jumped 2.6 percent in April and sales of new homes increased 3.3 percent the same month. Not only that, but existing homes came off the market in April at a rate of 3.4 percent, up 10 percent from last year.
But you know what else has been increasing? Foreclosures.
Data released this week shows that foreclosures have increased to a rate of more than 200,000 a year, an increase of 9 percent from April to May. This means that as much as increased demand is reducing inventories, the banks finally getting through their backlog of delinquencies will keep adding to the pile.
The shadow inventory still has millions of homes to clear away, and this means that prices will likely continue falling for the next several years, even if at a slow rate. Falling prices and continued foreclosure rates don’t qualify as a recovery, no matter how many homes people are buying relative to previous months.
Argument #3: The historically positive correlation between the Wells Fargo Housing Market Index (HMI) and Case-Shiller Housing Price Index suggests we are heading into recovery.