No Housing Rebound Until 2013

by: Michael Shulman

I am often surprised when the Street expresses collective surprise at a data point, and that is doubly true for market reaction to this morning’s data on new housing starts. New home construction fell sharply – down 10% to an annual run rate of slightly less than 600,000 units, with single family housing starts down to a rate of 472,000.

What did people expect after the expiration of the home buyer tax credit, with unemployment north of 20% in the real world and Freddie (FRE) and Fannie (FNM) now responsible for more than 97% of all new mortgages? This morning’s data also showed building permits issued fell 5.9% to an annual rate of 574,000. This is on top of April permits falling roughly 11%.

A surprise?

The Street has to forget headlines. Do the math and go to the analysts who have right, such as Ivy Zelman. If you look at current foreclosed inventory. homes foreclosed and not yet listed, homeowners in the process of being foreclosed, homeowners in default, homeowners who should be in default but have not been pinged by their bank yet, homeowners late on their mortgages and homeowners more than 10% underwater on their mortgages you begin to scope out the real magnitude of the problem. Take these numbers, multiply through rescue and recovery rates – for example, two thirds of people receiving loan modifications will eventually default again – and you will quickly see that we are between 25% and 33% through the foreclosure crisis. And that means a huge wave of new inventory hitting the market through the middle of 2013, meaning depressed prices and depressed demand for new homes.

That is the supply issue – what about demand? Federal support for home buyers reached its peak about a year ago with Freddie, Fannie, the Fed and the home buyer tax credit combining to turn a housing depression into a severe housing recession. There is no credit available; Freddie and Fannie are doing 97% of all mortgages. And all of this support is all receding and there is no political support to provide more aid to home owners.

And let’s not forget the multiple billions in IRS rebates – yes, rebates – hidden in various pieces of legislation that has provided (my count) up to $8 billion in cash to the home building industry. That too has ended.

The bottom line: The severe housing recession will be with us for another two years, possibly three, and a rebound to what used to be a bare minimum of new home sales, one million units per annum, will not be seen until 2013 at the earliest. By that time we will have fewer publicly held home builders, some being acquired and some going bankrupt. Investors should forget about putting Humpty Dumpty back together again anytime soon.

Disclosures: No positions.