The Housing Market Is A Re-Inflated Price Bubble Ready To Pop, Here's Why

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Includes: IYR, XHB
by: Richard Suttmeier

Summary

Since setting a bubble-bursting low in March 2012, home prices have recovered by too much for the average family to enjoy the American dream of owning a home.

The National Association of Home Builders are optimistic that the housing recovery will continue, but many stocks in the housing industry are in bear market territory.

Statistics on single-family housing starts and new home sales suggest that the market for new homes has stalled at 60% of potential.

The demand for new homes that have pushed prices out of reach for the average American family was foreign buyers, cash buyers and investors who bought homes only to create a portfolio of homes as rental properties. This demand has waned!

The problems in the market for single-family homes begins with rising prices. The latest reading of the Case-Shiller 20-City Index shows that home prices rose by 5.8% year-over-year in November. This is reflected in the chart below.

The 20-City Index, which began at the end of the year 2000 at 100.00 ended at 182.86 in November which means that the price of the average home in the 20 major cities are up 82.86% in 15 years. Over a similar time frame the average family income has declined about 7% putting tremendous pressure on prospective buyers.

The 20-City Index peaked at 206.52 in July 2006 and at the bottom of the popped bubble in March 2012 the index read 134.07 down 35%. At the March 2012 low the uptrend for prices was back to a more normal pace of growth. Since then the price of a home is up 36%.

With inflation well below the 2% target rate of the Federal Reserve the index should be around 145 in November not 182, making home prices approximately 20% too high. Instead the index is just 12% below the July 2006 high, which in my judgment is a re-inflating bubble.

Underwater mortgages remain a residual housing bubble issue. I live in Tampa Bay, Florida and 20% of all mortgages are still underwater. In addition, 25% of renters in Tampa Bay pay more than half of their income for housing.

Another measure of the housing market is the National Association of Home Builders Housing Market Index, which has stalled around the 60 level on a scale of 00 to 100. The chart below shows single-family starts in December versus the HMI reading for January.

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The graph above shows the NAHB Housing Market Index versus single-family starts. The HMI (in blue with its scale on the left of the graph) shows the unchanged reading of 60 in January. Single-family starts (in red with its scale on the right of the graph) shows the data for December.

In December, single-family starts fell 3.3% to 768,000 units from an upwardly revised November reading of 794,000 units. At the current pace starts are just above 60% of the normal annual rate of 1.1 million to 1.2 million units. New Single-Family Home Sales shown below is on the rise but clearly well below potential. The latest reading for December came in at 544,000, stronger than expected, but well below potential as shown in the chart.

According to the Census Bureau the Homeownership Rate below declined to levels not seen in thirty years. The current homeownership rate is 63.7% as home affordability is way too high. This chart shows data going back to 1965.

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Below is the weekly chart for the PHLX Housing Index (HGX) which consists of 19 components, nine are homebuilders the others are companies that provide products and services to the housing industry.

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Courtesy of MetaStock Xenith

The best way to show how the housing market stalled at 60% of potential is to show the weekly chart and the Fibonacci Retracements of the popped housing bubble based upon the housing index. The total decline from an all-time high of 293.66 set in July 2005 a year before the home price bubble topped. The decline from this high to the low of 54.31 set in March 2009, was a staggering decline of 81.5%. The horizontal lines from top to bottom are the 61.8%, 50%, 38.2% and 23.6% retracements of the steep decline.

The housing industry as measured by this index traded as high as 252.20 last August. The index has been below the 61.8% of 202.05 since mid-January. The green line on the graph is the 200-week simple moving average now at 194.11. A trend below the green line indicates risk to the 50% retracement of $173.8.

Here's a Scorecard for the Housing Sector Index and ten of the components.

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Note that the housing index is in bear market territory 23.1% below the Aug. 18, 2015 multiyear high of 252.20. All five major homebuilders are in bear market territory by being 26% to 40% below their multiyear highs. Of the five housing related stocks two in bear market territory and three are in correction territory as their business activities are associated ably to more than new single-family homes.

In sum, all of the data and charts in this study show that the housing market is not providing the positive economic stimulus that most analysts and strategist thought it would.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.