(Page 2 of 2)
Wells Fargo publishes an index charting the demand for new homes. Albert Sung points out at SeekingAlpha that this HMI is a leading indicator for where housing prices will go. The HMI fell in 2006 and Case-Shiller declined in 2007. The same thing happened in 1989 and 1991. In a vacuum this analysis could be right. However, demand for new homes does not a recovery make.
We had a massive oversupply of new homes built in the middle of the last decade that have taken a while to sell. There are plenty left in Las Vegas if you’re in the market for an unlived-in-house, but the inventory of new homes is about the lowest level on record (going back to 1963). Naturally the HMI would register an increase in demand for new homes from here. But at the same time there are waves of foreclosures that are putting downward pressure on housing prices. And let's not forget that interest rates can basically only go up from a 3 percent to 4 percent range, so the future is full of downward pressure on housing prices.
Demand for new homes is not the benchmark for recovery, so reaching a bottom on the HMI is also not the bottom of the housing market. The reality is that this recovery will be different than those in the past, and there is going to be a significant gap between when the Housing Market Index climbs and when Case-Shiller prices follow it.
Argument #4: Homebuilder profits are up, leading to improved builder sentiment
The argument for happier builders is prominently preached by real estate analyst Lou Basenese, who pointed out last month that the top two American homebuilders—D.R. Horton and Lennar Corp.—have been crushing their earnings estimates. He then suggests that the increasing HMI reading (see Argument #3) indicates improving builder sentiment. The problem is that someone forgot to tell the builders they are feeling good about the housing market.
Construction companies have been voicing their negative sentiment with their wallets and shedding jobs— about 50,000 since January. You would think will all that positive sentiment that builders would be gearing up for their great summer. But in fact, according to the Bureau of Labor Statistics, nearly 30,000 of those construction jobs dropped this year were lost in May, right when the housing market was supposedly taking off again.
So where are we on this long road to recovery, if we are not there yet?
Start with the fact that outstanding household mortgage debt is still twice the level it was in 2000. And add to that that one in five homes are still worth less than the mortgage that was taken out to buy it. Combined you get very limited amounts of money for buying new homes at this moment.
Next, consider that mortgage rates will be going up in the future (though when is anyone’s guess), meaning it will cost more to get a mortgage and that housing prices will be pushed down by decreased demand. CoreLogic reports the shadow inventory has fallen to 1.5 million homes. Some would say the figure is much higher but even at that level there is still substantial pressure on housing prices.
As I wrote back in March, the limited money for housing and subsequent low price for housing is not necessarily a bad thing. However, as prices fall underwater housing situations get work or homes that were in positive equity slip into negative equity, and that puts increased pressure on the fact that homeowners still have a lot of debt.
In addition to the limited money and falling prices, add on the continued woes for the labor market. Unemployment impacts the ability of families to afford homes, and in particular as the unemployment rate for college graduates remains high, it will translate to fewer than normal buyers of homes in the coming years, also negatively impacting the sector.
Finally, don’t forget that historically, housing prices always go past their “historical norm” when declining from a bubble. The bubble has dissipated to the point that housing prices are about where they should be for today, but there is going to be an “over correction” with all the downward pressure on prices from limited demand and future foreclosures.
Even if you put the good news into this calculation, the result is still nothing close to a recovery. At best there is light at the end of the tunnel. That light is several years away, though. It is absurd to think that housing prices have reached their bottom. It is equally absurd to think that foreclosures and underwater debt will not create massive headaches for the years to come. Don’t be deluded by a few positive stories. Stay buckled in, because destination recovery is still a ways down the road.
Anthony Randazzo is director of economic research at the Reason Foundation.