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The U.S. Housing Market's False Bottom

January 1, 2010 by Marco Santarelli

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…]

Filed Under: Economy, Housing Market, Real Estate Investing Tagged With: Economy, Housing Market, Housing Starts, Real Estate Economics, Real Estate Investing, Real Estate Market

The U.S. Housing Market's False Dawn

September 15, 2009 by Marco Santarelli

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…]

Filed Under: Economy, Housing Market, Real Estate Investing Tagged With: Economy, Housing Market, Housing Starts, Real Estate Economics, Real Estate Investing, Real Estate Market

Total Housing Starts Dive 12.8% in April to Record Lows

May 19, 2009 by Marco Santarelli

Housing starts dived downward in April, falling 12.8% compared to the previous month, to a new record low and a seasonally adjusted level of 458,000, according to data released today by the U.S. Census Bureau. On an annual basis, that qualifies as a 50.2% drop.

The drop was driven primarily by the volatile multifamily sector, where starts for buildings of five units and more dropped 42.2% to a seasonally adjusted pace of 78,000 last month. Starts for buildings with two to four units also declined 62.5% to a level of 12,000 units. Combined, the two represent a 46.1% reduction in multifamily activity last month, to 90,000 units.

“The market for multifamily homes is in a deep slump,” observed Patrick Newport, U.S. economist for IHS Global Insight. “Multifamily starts and permits both fell to all-time lows in April. The recent drops have been mind-blowing. Multifamily starts averaged 380,000 over the first half of 2008; in June 2008, they jumped to a 423,000 annual rate. They have dropped steadily since, and [last month] plummeted to 90,000 units. This sharp decline is related to financing. Some builders are overwhelmed with debt. Others cannot find funding to finance projects with positive net present values.”

In contrast, single-family starts picked up 2.8% on a monthly basis to a seasonally adjusted level of 368,000 units. On an annual basis, that figure represents a 45.6% slide, but this second monthly increase for single-family starts appears to be generating optimism in some industry watchers.  Additionally, single-family permits showed a small gain in April, increasing 3.6% to a seasonally adjusted pace of 373,000 units. (That’s 42.3% below April 2008’s numbers.) [Read more…]

Filed Under: Economy Tagged With: Housing Starts, Real Estate Market

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