Stability in a Depressed Housing Market

by: Richard Suttmeier

Is there stability in the housing market or just a minor blip in what should be the season for home sales to improve?

Housing starts rose by 14.6% in June to a seasonally adjusted annual rate of 629,000 units. The National Association of Home Builders (NAHB) commented that access to construction credit remains a detriment to starting new projects and creating construction jobs. Since there are many potential home buyers opting to rent, multi-family starts jumped by 30.4% to 176,000 units. Single-family starts posted a 9.4% to a gain of 453,000 units, the best pace since November 2010. Single-family permits were flat in June. Keep in mind that housing starts were a June release and that in July the NAHB reported that their Housing Market Index posted just a two point gain to 15, a continued depressed level where 50 is neutral.

Housing starts improved in June, but new home sales did not, as sales of new homes slipped for the second consecutive month. The Census Bureau reported a decline of 1.0% in new home sales to an annual rate of just 312,000 units. Put into perspective at the housing market peak in mid-2005 new home sales hit an annualized rate of 1.4 million units. The inventory of new homes is currently at a record low of 164,000 units.

Home Prices Have Stabilized, but This Is the Peak Selling Season

FHFA House Price Index Rises for the Second Consecutive Month

The Federal Housing Finance Agency reported that homes financed with Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) mortgages rose 0.4% in May, the second consecutive monthly rise. This rise can hardly be detected on the graph that goes back to January 1991. Year over year house prices are down 6.3%. The second graph shows the decline in home prices since April 2007, and note that about half the decline occurred after conservatorship began in September 2008. This is a decline in the value of the collateral that backs Fannie Mae and Freddie Mac mortgage-backed securities.

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S&P/Case-Shiller Home Price Indices

The Case-Shiller 20-City Composite rose by 1.0% in May, but was down 4.5% year over year. From the mid-2006 high to the March 2011 low home prices were down 33.3%. The Index is at 139.87 versus 100.00 when it began in 2000. Home prices are thus still 40% higher since the beginning of the new millennium. A decline of 28.5% takes the index down to 100.00.

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Home builders complain that they cannot get builder funding from community banks. The simple reason for this is that community banks remain saddled with commercial real estate loans including Construction and development loans issued during the inflation of the housing bubble. This is why we look for continued bank failures almost every Friday.

Bank Failure Friday Scorecard – The FDIC closed another three community banks last Friday and each had significant overexposures to commercial real estate loans including construction and development loans. One was publicly traded and on the ValuEngine list of problem banks. Based upon the regulatory guidelines, the FDIC should have begun to close overexposed banks in 2007, but they ignored the guidelines and only began to seize failed banks in 2008 with just 25 failures. One hundred forty banks failed in 2009 with a peak of 50 in the third quarter. One hundred fifty-seven banks failed in 2010. We now have 58 bank failures in 2011 and 380 since the end of 2007. I still predict 500 to 800 bank failures in total by the end of 2012 into 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.