Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That's only 10% below the all-time peak in 2005.

What's more is that house prices, as measured by the S&P/Case-Shiller 20-City Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.

The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006's peaks some time in 2011 or 2012.

Not so fast, guys!

The recovery in housing has been boosted by just about every artificial means imaginable:

• Interest rates have been kept historically low at 0% – 0.25% for a very long time.
• Fannie Mae and Freddie Mac, the bankrupt behemoths of housing finance, have been bailed out with what amounts to a blank check from taxpayers.
• The Federal Housing Agency (FHA) went on making mortgages with 3% down payments when nobody else was, thus very likely landing taxpayers with another bill for some large fraction of $1 trillion.
• And the government has been handing out cash subsidies for refinancing houses that were about to be repossessed and $8,000 subsidies for first time buyers – now $6,500 for all homebuyers.

Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away?   [Read more…]

Is the U.S. housing market truly at a turning point, as real estate investors seem to increasingly believe? Or is this actually a false dawn, meaning that there are problems ahead for those who turned bullish too soon?

New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4.5 times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recent earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

[Read more…]