4 Reasons Why the Housing Market Still Hasn't Recovered

Sometimes leading indicators are deceiving.


Real estate recovery.

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.

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.

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  1. In other notable market failures, unicorns are still in short supply, perpetual motion will need another decade of development and fairie dust has been found to cause cancer.

  2. If rich people would share the surplus space that they hoard we would not have a problem.

    1. That sounds like a Democrat party plank.

      1. I’m going to ring up Babs Streisand to let her know we’re crashing at her place tonight.

        1. I doubt raiding her fridge would be fruitful. She probably eats macrobiotic crap and other trendy liberal food.

          I would, however, jump on her furniture and watch her TV. And maybe order her servants to take the day off after giving me the keys to the liquor cabinet.

        2. The celebrity Capitalists need to be taken down!

          1. Then who’s going to fund Democratic campaigns?

            1. Got that proletariat eviscerated yet, Pup? Get crackin’, fucktard.

            2. Fascists

              1. Well, that at least makes sense. Fascists, being utterly contemptuous of the Rule of Law and itching for the redistributive Superstate, would naturally gravitate to the DNC.

                1. The DNC is antifascist, the fairness side.

                  1. The DNC is antifascist, the fairness side.


                    1. You laugh from ignorance. Not your fault, the RNC sound machine has programmed you.

                    2. I’ve voted for only one Republican: Ron Paul.

                      To be fair, I’ve voted for TWO Democrats; one for a local county commissioner, and the other for a local city-council seat.

                      I was feeling generous.

                    3. RNC?

                      Pup, do you even know what a libertarian is? The Republicans and Democrats are equally despised here. I think you are confused about your audience.

      2. The freedom from hoarding greedy capitalism plank.

        1. Hoarder, wreckers, saboteurs!!

          Things haven’t changed a lot in a century with the useful idiot class, have they?

          1. Those able to hoard have not changed their tune since the Czars. If that property were in the hands of the masses it would be put to good use.

            1. Is this a spoof, Puppy, or do you actually believe that shit?

              1. Fairness for all is not “shit”!

                1. Putting fascist cock-tuggers like you in the position is most definitely “shit.”

                  1. “Fairness for all” is impossible unless everyone has the exact same amount of money and “stuff”… which can never happen in a free society.

                    But you don’t want a free society.

                    1. It sure is fair in a free society. You just think you are free because you have more stuff.

                    2. I paid for what I have. My welfare footprints ended twenty-three years ago, when I collected one of three entire unemployment checks.

        2. I meant the freedom *of* hording.

          1. RP hasn’t killed the goose that laid the golden egg, but he is chasing the fucker around the barnyard with an axe.

            1. I have never used the fascist axe.

              1. You’re panting to. We’re all lucky you’re too incompetent and stupid to succeed.

                1. Fascist name calling, proof that I have won.

                  1. Fascist name calling, proof that I have won.

                    Even the douchenozzle that concocted OWS says you all are old hat.

                    1. I wear not a hat.

                    2. Can’t find one to fit that point?

                    3. What point?

                    4. What point?

                      I rest my case.

              2. But you support said use of said axe.

                1. Did not.

                  1. Yes, you do.

                    Go back to PigFuckerPond or DU. Your shit grows tiresome around here.

    2. They do.

      It’s called renting.

  3. Ever notice how it’s a crisis when houses are cheap, and also a crisis when houses are expensive?

    1. When house prices go down, it’s a national emergency. When gas prices go up, it’s a national emergency.

    2. We need Top Men to save us from rising/falling/stagnant housing prices, now!

      1. Yes we do. We need a government board to determine the fair price of housing and a government agency to provide good housing for the poor.

        1. Cute puppy troll – clumsy but earnest attempts at attention.

          1. Truth to power is only trolling to fascists.

            1. I think you’re confused.

              The fascists are on the other site.

              1. The other side of true freedom from Capitalism.

                1. “Truth to power” was a bullshit term from the moment it was first uttered.

                  1. So you just worship power? Nice to know.

                    1. I don’t worship anything, child-fucker.

                2. The other side of true freedom from Capitalism.

                  Would someone please save me from all those awesome porn sites and cheap games on Steam?

                3. You are definitely lost. This is a libertarian site. The exact opposite of fascism.


                  Do a little reading and check back with us when you are ready to take the exam.

                  1. Or this.

                    1. Why are you calling Reagan a technophobe and communists technophiles?

                    2. I’m not calling anyone anything. I copied the link to demonstrate that fascism is the polar opposite of libertarianism.

                      The association to technology escapes me. I suppose those on the right have a negative disposition towards technology (religious motives?) and not so much on the left, with the exception of labor/green who fear being replaced by it and dislike anything not “natural” respectively. Just speculating.

                  2. Your fascist propaganda does not fool me.

                    1. Your fascist propaganda does not fool me.

                      I think you’re pre-fooled, RP.

                    2. You are confusing your programming with thinking, Brutus.

                    3. You are confusing your programming with thinking, Brutus.

                      Well here I am, Pup, deprogram me. Show me how you’re going to bring about your egalitarian utopia without the mass murder, oppression, poverty and lies that attended every other run you sociopaths have inflicted on the unhappy populations you’ve experimented on.

                    4. If everybody would just share, there is no need for any oppression. Poverty would end.

                    5. If everybody would just share, there is no need for any oppression. Poverty would end.

                      And if everyone doesn’t share…I’m almost certain you all have a backup plan, no?

                    6. Sharing is good.

                    7. Forced sharing =/= sharing.

                    8. Sharing is good.

                      So when someone doesn’t share, what then shall we do?

                    9. Point guns at the greedy fucks who won’t part with half of their income?

        2. But we did have that, RP. It built that wonderful development of the future, Pruitt-Igoe.

          1. Sabotaged by the Capitalists, as usual, like the New York, and Chicago urban renewal housing projects.

            1. Actually, it was self-sabotaging.

              By design.

              1. By the Capitalists to keep the poor “in their place.”

                1. Ha-ha. Spoof. Not even OWS retards are this stoopid.

                  1. Not even OWS retards are this stoopid.

                    Wanna bet?

                    1. Wanna bet?

                      I think you have a point there.

                    2. You mock what you do not understand.

                    3. We mock what we understand all too well. You want control over the most minute detail of the lives of anyone and everyone on the planet, deciding who gets what and when.

                      How is this different from fascism?

                    4. It is not control, it is freedom! If everybody is free they are equal. You are too stupid to comprehend.

                    5. Diana Moon Glampers, call your office!


                    6. So you define freedom as being told how to live your life?

                      freedom definition

                      equality definition


                      Guess I AM too stupid to comprehend…

                    7. Yes, Francisco, you are

                    8. Derp

                    9. Yeah, Frisco, you just can’t understand how groovy things will be when we all share everything. I’m sure the people that invent, produce and strive will continue to do so once everything they make is taken from them and given to others.

                    10. Groovism is Socialism. Just embrace and groove, man.

                    11. This is disappointing. I thought for a minute we had a live one. Either a spoofer or just too stupid to argue with. Too bad. It really does become kind of an echo chamber around here at times. Trolls who will actually debate are hard to come by.

                    12. The vast majority of trolls troll because they can’t debate.

                      Rainbow fucker is a prime example of your average liberal: his entire political philosophy is a collection of bumper sticker slogans.

          2. You must be from St. Louis Brutus.

            1. I am, and I remember it well.

  4. With state and local budgets out of whack, real estate taxes are a big unknown – an additional drag on the housing market.

    1. If we could only abolish competition and markets, we would be free.

      1. With your Team in charge? Shit, they had their shot at abolishing markets, but they failed miserably.

  5. Not totally off topic:

    The projected horrors of Greece leaving the Euro include such signs of the Apocalypse as oil falling to $50 a barrel and the Euro reaching parity with the US $.

    1. Oil should be abolished. It is a declining resource that should be preserved for future generations.

      1. Okay, this has got to be a spoof.

        1. No spoof. Preservation should be a paramount goal of government.

          1. “preserved for future generations”

            Fuck, you idiots want to stop using oil entirely. What use would it be to you libtards in “the future”?

            1. Future generations might know how to use it properly, for the good of all.

              1. It’s already being used properly.

                High gas and electric prices are regressive taxes on the poor you claim to befriend. Plain and simple.

                1. No, the Capitalists make the price high for profits. If the price were low and taxed to distribute the revenue to the poor it would be fair, just like your Republican Capitalist God Theodore Roosevelt wanted.

                  1. Fuck Teddy Roosevelt *AND* FDR.

                    I don’t worship politicians.

                    1. Also, high gas and electricity prices ARE regressive taxes on The Poor.

                      Just in case you were too busy ‘batin’ to that picture of Chairman Mao.

                  2. No, the Capitalists make the price high for profits.

                    So why don’t the capitalists double prices now and make even more money?

          2. I’d like to believe you, RP, but I don’t want to insult your intelligence.

          3. Rainbow Puppy|6.17.12 @ 5:03PM|#
            “No spoof. Preservation should be a paramount goal of government.”

            OK, spoof? Or stupidity?

        2. Poe’s Law?

          1. “Angry Johnny” Poe? I like her! Why does she have a law?

  6. Hey RP, are you being sarcastic or are you the new troll of the week?

    1. Maybe he got tired of the mutual butt-licking over at FireDogLake.

    2. Looks like a rookie attempt at trolling. He hasn’t grasped the quality-over-quantity paramountcy yet.

      The secret is to jump in, make a stupid inflammatory comment, and then disappear for a while while your trap fills up with troll feeders. He’ll learn.

      1. You are wise, master Yoda!

      2. Obvious spoof. Someone was missing MNG and Tony and White Indian and all those guys.

  7. Why call an increase in prices a “recovery”, anyway? From the perspective of a young couple hoping to buy a house, a fall in prices is a real recovery in the housing market.

    There’s a reason that the housing market is especially subject to booms and busts, and it doesn’t have much to do with construction. It’s because land prices are subject to speculative booms, since they aren’t making any more land in response to higher land prices. The bubble can’t keep expanding forever, so sooner or later, it doesn’t. Land prices were rising based on expectations of future increases, not current value for use, so when the bubble bursts, prices don’t just stabilize; they fall.

    We wouldn’t have this whole mess if we taxed land more, and other things (buildings, wages, etc.) less. Land speculation would be unprofitable, so bubbles couldn’t occur to such an extant in the first place.

    1. Yes! The collapse of the system! Everybody can afford a good home in a short time as the Capitalist system of greedy bankers collapses!

    2. they aren’t making any more land

      Tell that to Dubai.

    3. Yes, we’re one more tax away from prosperity….

  8. I think RP is a spoof, but not a funny one, so INCIF powers activate!

    1. RP might as well as gone with “Rainbow-farting-Unicorn” – it wouldn’t have been much less obvious.

    2. Yep. Spoof or someone who’s been here before. Mildly amusing. Seems to be hitting the right buttons to get people to respond. Who’s fault is that?

      1. Yes…obvious…I’m just desperate to debate. I’ll respond on the off chance he isn’t a spoofer.


      2. It’s going to flameout in one thread. He pales in comparison to the masters like Juanita, Dan T., and Hobie Hanson.

        1. Since when is Hobie Hanson a master?

  9. “If everybody would just share, *there is no need for any oppression*.”

    Freudian slip there, Rainbow Pussy.

    1. Stop being selfish and give me 3/4 of your income! Not only is RP better than us morally, he’s also ominscient since he would also know, in the absence of market price signals, what to produce and at what volume.

      1. Rainbow Pussy = Paul Krugman?

  10. Don’t waste your time reading anything between the bottom of the original post and the top of this comment.

  11. This article is on point. As a home inspector in Atlanta I have seen the market slowly grow then slowly deflate.

    1. The housing market is on a life support machine called a Keynes2008, which is powered by our children’s future suffering. Its furnace must be fed with $1T in new printed money every year or so to keep the housing prices level while all other prices rise relative to them. It’s called dismembering Peter’s femur to sodomize Paul.

  12. Rainbow Puppy|6.17.12 @ 1:46PM|#
    “If rich people would share the surplus space that they hoard we would not have a problem.”


  13. 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…..c-3_9.html 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.

  14. 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.

  15. now its totally become a political matter which ended after the elections

  16. Ok cut the House Fairies some slack for being compassionate. It’s the thought that counts, right?

    The legislators that gave us the CRA mafia, runaway freight trains Fannie/Freddie, and the Fed printing press have hearts of gold, and they defecate chocolate bunnies!

    Results are a brutal way to judge people. Instead of criticizing the Collectivists for destroying trillions in wealth, we should drop to our knees and slob their genitalia in gratitude for their good intentions!


  17. Housing sales are WAY up in April and May here in SoCal, even though prices are flat. Inventories are WAY down. People are scrambling to buy while rates are still low.

    THe doom and gloom will dissipate soon enough.

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