Why a Housing Recovery Is Far Off by Ian Shepherdson
Summary: Bulls see a housing bottom, but the glut caused by homebuilder overbuilding should prolong the downturn. From boom peak Q4 2005 to Q1 2007, new home inventory levels rose to 7.9 months from 4.7 months. Nominal mortgage rates aren't historically high, but the Office of Federal Housing Enterprise says a 2005 mortgage cost 5.9%, when house prices rose 10.7%. House prices rose only 3% this year, so real mortgage rates are at 3.5%, a big change from -4.8%. Historically, real rates and home sales are tied in, so prices should fall 10-15% according to Barron's' calculations. If home prices are static, then sales could fall another 20%-25% -- down 40% from 2005. Rising mortgage applications offer only illusory hope: Subprime borrowers apply everywhere for approval, and cancellations are up. Pending existing sales and National Homebuilders Association indexes are weakening, and if the downtrend continues, housing-related industries like construction, furniture and appliances will suffer. Personal spending in Q1 was precipitated by dramatically lower energy prices in Q4 2006. Oil prices are up again and retail reports are bad, even as employment and wages rise. Barron's expects a longer, wider housing slump.
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