Another Leg Down for Home Prices?

Includes: IYR, SRS, URE
by: The Housing Time Bomb

It's been awhile since I did a housing post so I thought this was a good time for an update.

Let's start by taking a look at a chart (click to enlarge) from Zillow that shows the percentage of single family homes that have negative equity (are underwater) in various parts of the country where housing is struggling:

My Take:

It's always good to look at the worst markets when you are looking for a recovery because recoveries always begin in the areas that are hardest hit.

The bottom line here folks is the numbers above are flat-out ugly across the board. Vegas is still getting crushed with 80% of their houses sitting underwater. 8 out of 10! Unbelievable!

Florida is actually showing signs of rapid deterioration this past quarter which is amazing when you think about it because home prices fell 50% or more in most markets in 2008 after the bubble burst.

These steep "discounts"created a mini house-flipping-foreclosure-boom for a while after the crash. Remember all of those ads that you saw inviting you to come down to Florida and take a "foreclosure bus tour?"

Many of these knife catchers in the sunshine state obviously took a beatdown because the negative equity percentages are up significantly, which signals that prices need to drop further before bottoming.

House flipping isn't very profitable if you buy a house at a 50% reduction yet it takes an 80% reduction in order to sell it.

You can rest assured that the only flippers you will see after the housing crisis is over will likely be on a dolphin.

The one area that is showing some signs of life is California but the improvement is far from impressive. Housing markets aren't exactly "stable" when 60% of them are underwater. But I guess that's better than 70%...

The Bottom Line

Turn off CNBC when they start talking about a housing recovery because there isn't one. Things are still deteriorating in some of the worst hit areas which tells you that we haven't yet reached a bottom.

Talk to me about housing recoveries when the percentage of houses with underwater mortgages gets to zero. Anyone claiming to see a turn-around in housing at this point is insane!

It should also be noted that we still continue to do bad loans via FHA. Letting people buy homes with 3% down and a 650 credit score is idiocy at its finest because these are not good loans! Many of these buyers will end up defaulting just like the suprimers did, which will only exacerbate the housing problem.

A banker friend of mine predicts that FHA will be another Fannie (FNM)/Freddie (FRE) within the next few years because the lending standards are so bad.

Also adding to the housing problem is the expiration of the homebuyer tax credit. Imagine what home prices are going to look like now that this program is gone.

This is going to kill the only part of the housing market that has somewhat recovered which is the $100-300k low end of the market.

The tax credit was very effective in getting first time buyers "in the game." I prefer to call it "committing financial suicide" but that's beside the point.

However, the tax credit didn't help the higher end of the market because an $8,000 stimulus is "chump change" when you are paying $800,000 for a house. It's only 1% of the value which makes it irrelevant from an incentive standpoint.

I expect to see another leg down in the housing market as the tax credit disappears. The problem with all of these government programs is you are pulling forward demand that you would have had down the road.

The tax credit program really did nothing but create short term demand and guarantee that we will see pain down the line because via stimulus we pulled forward demand that we would have had down the road.

It also helped further delay the correction in home prices that must take place. Selling homes at prices which buyers cannot afford is a business model that GUARANTEES failure.

The charade is now over folks and its payback time!

Housing prices will continue to spiral downward now that the "money spigot" has been turned off.

When will the government realize that kicking the can down the road is not the answer to our problems?

It would be much more productive to "take the pain" NOW and let housing prices crash to where people can afford them. This is the recipe from which REAL recoveries are made.

Hopefully we will see this cleansing take place now that the government stimulus is out of the picture. If you are a buyer I would stay on the sidelines. Prices are only heading one way from here and that is downward.

Disclosure: No new positions at the time of publication.