"The crisis cannot end fully until home prices in the U.S. are at least stabilizing."
- Alan Greenspan, Former Fed Chairman
Housing is the number-one investment by the majority of Americans. It financed, through equity withdrawal, the last boom market. As Mr. Greenspan pointed out, there can’t be a true revivial in the economy until the people’s number-one asset stops dropping in value.
Here are six reasons why that won’t happen soon.
Reason 1: There Is No Demand
Year over year, new home sales fell 32.8%. And the price of those houses continues to fall. The median sale price of new houses sold in May 2009 was $221,600 – down 3.4% from a year ago.
May is the most recent number for new home sales. The bulls would make the argument that sales are stabilizing. They are wrong. You could make an argument that you’d buy a new house with a cheaper monthly payment based on low mortgage rates. But that’s changed since in the past month.
Now you have both falling housing prices and rising rates.
Reason 2: Since May, Mortgage Rates Have Gone Up…
According to Greg McBride, the senior financial analyst at Bankrate.com, it’s unlikely we’ll see mortgage rates below 5% in this cycle.
This is because the yield on the 10-year note, which most heavily influences mortgage rates, is going up. It’s going up because the U.S. government must sell debt to finance its $12.8 trillion in stimulus, bailouts, backstops and B.S.
According to Bloomberg, “the yield rose 0.06 percentage point to 3.7 percent after the Fed kept the size of its $1.75 trillion bond-purchase programs unchanged, failing to ease concern that record government borrowing may lead to higher interest rates.”
It is no wonder that the Mortgage Bankers Association cut its projection of mortgage volume this year by 27% to $2.03 trillion.
The group said “its estimate is well less than the one it made only three months ago because the government's residential-refinancing program has not taken off as expected and then interest rates started heading up.”
You can’t buy a house if you can’t afford the payment. Expect the June housing sales numbers to be lower again.
Reason 3: Too Much Supply
The biggest problem with post-bubble housing is too much supply. Three or four years ago, used homes were selling at an annual pace of 7 million units, with fewer than 3 million up for sale in any given month.
Today existing-home sales have fallen to less than 5 million with 4 million on the market at any given month. And the average time a house sits on the market has grown from three months to 10.2 months.
Reason 4: Option ARM – The Next Wave of Default
Back in 2005 to 2007, you could pick up a mortgage in which you paid only interest and no equity. The bet was you could refinance (after the value of your house went up, of course) before the reset date hit and you had to start making full payment.
The bad news is the bet didn’t work. Over the next two years you will have a wave of borrowers who must start making full housing payments – sometimes 50% more than what they are making now. Many, if not most, will owe more than their house is worth and will likely just walk away.
Reason 5: Jobless Claims Are Going Up…
Today the Labor Department said that jobless claims rose by 15,000 to 627,000 in the week ending June 20.
As I said in this space about two weeks ago, when jobless claims fell “unexpectedly,” you should expect future numbers to rise. This is because the jobless claims from the automakers had yet to hit the government’s statistics.
If you count all the upstream parts makers and downstream dealers, those without jobs will add up to more than 700,000. That’s on top of the number of people collecting unemployment insurance, which also climbed this week by 29,000 to 6.74 million.
According to Bloomberg, the Federal Reserve is looking at the half-full glass of the economy by saying the slump is “slowing.” But the reality is that more job losses is more job losses, deceleration or not.
And people who don’t have a paycheck can’t get a mortgage. At least not anymore…
Reason 6: Market Psychology
Bubbles don’t reflate until the next generation of suckers...
If you take a historic look at investment bubbles, you will notice that prices in bubble assets, be it tulips or Microsoft, never return to their highs in a generation. You can’t burn the same people twice on the same product.
Remember when Microsoft, Disney and Wal-Mart were the “must-have” stocks to own? Have you looked at their ten-year charts?
The very nature of a bubble is that at some point everyone who is going to buy, buys. Then it pops. There is no one else to drive it higher. No greater fool.
The same will be true in real estate. At the top, more than 68% of families in the U.S. owned houses. Every one of them saw the value of their house plummet, at least on paper.
Right now you have speculators on the sidelines waiting to buy housing on the cheap. They aren’t wading in because they don’t want to catch a falling knife. Many will play the inevitable suckers rally.
But over the long term, market psychology is such that at the bottom four false rallies down the pipe from now, the common wisdom on Main Street will be that “it’s better to rent than it is to own.”
When you start hearing that from your barber or taxi driver, you’ll know it’s time to start buying.