Housing Market: Not As Bad As Feared

New homes sales came in Friday. There were a few out there that were quick to point out a 17% drop for the year. Fine. I'll point out the 37% increase for the 2.5 years prior. In the end, we are exactly where we started before the big rise in the housing market. Not below it. But, exactly at that point. So, was it so bad?

Our economy saw a highly lubed financing opportunity for homeowners. Those home owners took that opportunity and went with it. Now the free ride is over, and now we are sitting at growth levels that are probably normal. With the lowered interest rates, some Americans were able to take some cash out of their homes, reduce their debt burden, and help fuel the economy along.

Here are the charts for new homes sales and existing homes sales, respectively:

There are many out there that think this little bubble is going to continue to burst, and with that send our economy into a tailspin. Hardly. The vast majority of Americans that refinanced are finding themselves in a better situation because of their lower monthly payments. True, there are some that have found themselves in a sticky situation because they got some kind of A.R.M. that is moving higher with interest rates. But, that obstacle won't kill our economy. Our economy was supplemented during this timeframe. But, our economy hardly depends upon the real estate industry.

What fuels our economy is consumer spending. With 65% or so of our economy fueled by consumer spending, and numbers coming in fairly strong for the Christmas season, I think we'll be weathering the downturn just fine, now that we are at normal sales figures and normal interest rate levels.

Comments

[ysisgarner:]

The above graph, if it was for a stock, would show hoses bottoming a 800,000. This would be a 50% drop, just like other times in past 40 years. JRP

2007 Jan 28 10:31 AM

[Sr. Pessimist:]

65% consumer-spending-driv... is not good. Laguna Beach, CA is a highly-affluent area. I was out last night for dinner, shooting pool, and having drinks at two bars. There was not a lot of nightlife. The retailers are hurting, in fact. Best Buy and Circuit City both had high sales, but that is not to say that their share of retail was healthy. They lost a lot of money trying to compete with each other selling LCD TVs. If we had a healthy consumer economy, I would have seen booming nightlife last night. This was the second time I went to that area and things were rather bleak and barren.

Plus, inventory is worse than the numbers say, because of what another author calls "phantom inventory," or houses that would be for sale if it made sense to sell them. The banks got bit real bad by the mortgage defaults, and although they won't say it, they are in trouble. The loan requirements are all of a sudden different, and I see offers I didn't see before.

Construction companies are dying, not just hurting. I talked with my auto mechanic a while back and despite her quality service, she said her business, as well as the others around her, is hurting. And let's face it. You can't survive on a $65,000 a year job. Just roll out the numbers, after taxes, a $1500 a month apartment for two, and a $500 a month car payment (which is less than a $30,000 car if you want to own it), you basically have $1000 left over to eat, clothe yourself, and what-not. Now factor in if you have a responsibility, such as a woman or a child. You can't make it.

Plus, I graduated with Summa Cum Laude from Cal State Fullerton with a BS in computer science. I am one of the best computer programmers you could ever meet. When I started hitting the job market, I could never get any answer but "no." I realized that either I start my own business, or I won't make it, and because I am multitalented, I was privileged enough to have that option. The generality implies, though, that there is no new economy. Just people retiring. There's nothing to replace them. There's no way to start out a life for yourself, even if you have the most highly-acclaimed engineering skill in one of the most highly-affluent areas in the US. This means there is a rapidly aging economy with a rapidly aging mindset among the performers, and they will soon be out of the economic picture.

Generally speaking, you can't afford to live, no matter how good you are. So given the skill-value state of Americans among the rest of the world and the demographics of those few who have opportunities to perform in the economy, things are bad long term. Plus, the mortgage default from ARMs is worse than anybody expected. People would state $150,000 a year in income, but yet have a mere $50,000, and the mortgage officer wouldn't even bother to check the tax return statements. People lied because other people lied, and in order to compete and get an opportunity to buy a house, if they didn't lie like everybody else, they wouldn't get a mortgage for a place to live.

2007 Jan 28 12:20 PM

[Michael Church:]

While i do agree with your assessment of mortgage apps and the no-doc loan, i think your anecdotal experience is a bit far from reality. And fortunately the US economy is much larger than the "nightlife" scene in Laguna Beach. Fact is you obviously frequent one of the more inflated regions of real estate. Obviously the chill in these regions will be more prounounced, hence you get what you see. However, real estate is still very much regional and a good portion of the US real estate market never went anywhere close to bubbliscious. Housing will be weak for a long time coming. However, the end of the world scenario that many expect is unlikely to come to fruitition. This is a supply issue. Too much was built in the past 6 years. However, demand in the form of rising wages has remained firm. While investing in housing may not be fruitful for some time, its implications outside of its own sector are less powerful than many purport. So long as rates remain low, the housing will remain just another situation to monitor. Nothing more nothing less. The sub prime market will suffer, and at the margin will work to dampen real estate. But the story ends there. 65k a year outside of laguna beach is a extremely nice living. Laguna Beach is a choice. Rents in less glamorous region like philadelphia come in around 700-1100. Anyone making 65k with a 900 rent and 500 car payment (which is for purchase. lease would be around 250-300) has roughly 1900 in excess after tax income each month. Which when heating is tagged as well probably comes in around $1,400 a month in excess after tax income. I think 60 dollars a day in disposable income is more than enough to get by on. And this is by very conservative measures.

2007 Jan 28 06:42 PM

[Sr. Pessimist:]

I'll agree with you that my experience is extremely limited. Orange County is seriously messed up, Laguna Beach among the particular. I am a recovering child abuse survivor, and have lived a horrible life I don't feel I can make up for as long as I live, even though I'm only 28. My consumer spending is a mix between funding my startup and emotive self-healing. Looking at the trend of my emotional recovery, I'll likely continue to become less pessimistic about the financial feasibility of living in America as time goes on. I also think I have a distorted picture of what it takes to live on, because I have to consistently repair my body from heavy workouts and the grueling mental exercise of programming and market analysis with instant rest, escapes, and nutritional supplements that are not cheap. It's refreshing to hear that I am again wrong about how bad life really is, actually. I'd like to come to be able to honestly expect more likely and positive things just being around. Thanks for your comment.

2007 Jan 31 02:40 AM

[Saul Sterman:]

Brian,

It sounds like you need professional help. Though Seeking Alpha is probably not the best forum for this, don’t stop posting and keep on talking. We may be a bunch of hard nose Alpha seeking individuals, but we are human too.

Try and give some financial / investment analysis together with your emotional experiences, otherwise the SA editors will have to delete your posts. Seeking Alpha is a serious financial forum. I read somewhere that approximately 20% of all Americans experience (deep) depression sometime throughout their lifetime. Your insights could be more useful than you think to the SA community.

Hang in there buddy!

To the SA community,

There is an old Jewish adage that says “he who saves one life saves an entire world”. I suggest that replying to Brian should be done without any verbal abuse.

Bill aka NoDoodahs,

You have a tendency to shoot from the hip sometimes. Apologizing afterwards may be too late in some instances. Please take notice. You and I can exchange ‘pleasantries’ as much as we want, ‘cause we both have thick skin. In fact I’ve been looking for an article of yours on Seeking Alpha that I disagree with so that I could rank you out without using a four letter word. As I haven’t seen any of your opinionated (- just trying to get your goat) articles recently on Seeking Alpha, I conclude that you wish to take from the community without contributing to it. Posting comments may increase your site traffic, however submitting an article every now and then would not only enlighten us but would afford me the opportunity to take-you-on ‘head to head’ with an interesting intercourse.

See, no four letter words! The above is an example of what not to do with Brian.

Saul Sterman

2007 Jan 31 04:07 AM