Housing Still on Life Support - And There Is More Pain Ahead

Includes: IYR, XHB
by: No Guilt

Housing bulls are calling for a 20% increase in new homes in 2011. The problem with that is that housing starts are already at a 50 year low.

The 2010 numbers were actually below the 500,000 mark to a dismal 475,000 starts. Even if housing starts were to rise 20% to 575,000, we'd still be well below previous 50 year lows. The bottom line: We don't need any more new houses.

We don't need any more new houses, yet the people who build, sell, finance, and promote houses tell us otherwise. The National Association of Realtors have been in denial since the get go. In 2006, prices weren't going down, they were just increasing at a slower rate. In 2007, it was just a "blip" in the housing bull market. 2008 was buy low sell high. 2009 was buy lower sell high. 2010 it was housing affordability is high. There is no objectivity at all by the people who have an incentive for higher housing prices.

"House prices will bottom out in 2011, and, by 2012, the house-price metric shows a gradual increase," said Freddie Mac Vice President Frank Nothaft.

Comical. Every year from 2007 on, housing was predicted to bottom that year, and then start going up the next. Then the next year rolls around and "this is going to be the bottom". It's like clockwork. Groundhog day.

David Crowe, chief economist for the National Association of Home Builders, said:

We're coming in to 2011 not having had a very good latter half of 2010. Home sales will struggle but will follow employment growth … we are confident we'll begin to see a pickup in activity.

The new-home sector saw so little increase in housing starts in the past year that a 20 percent increase may sound like a lot, but it's not when compared to a normal year.

Now these guys want to start comparing housing to a "normal year"? When housing was shooting up to the moon it was a "new normal", housing couldn't go down. Now that housing is in the gutter they want to compare it to normal years?

You know what else isn't normal?
- Generational low interest rates
- 8,000 dollar home buyer tax credits
- 3% down FHA loans
- Phony and Fraudulent backstopping all mortgages
- 69% home ownership rates

A hundred years ago, people used to buy homes with cash. Then we moved to 20% down payments and during the housing bubble we had people borrowing 110% of the purchase price to pay for the home, plus closing costs. These people were NOT home owners. If you borrow 110% or 100% to buy something, you don't have any EQUITY in it. They were renters with the option to buy. People could kick and scream and cry all they want that their beloved home is being taken away from them, but it wasn't their home to begin with.

Why does this matter? It matters because traditionally housing & autos (cyclicals) help lead us out of a recession. Don't expect help from the dead housing sector. The economy is improving, but housing will stay weak. Low interest rates, overzealous borrowers, and poor underwriting standards pushed housing to bubble territory.

What's in store for 2011?
Housing bulls will talk about "pent up demand", but if you want to talk about pent up demand to buy, what about pent up demand to sell? How many people want to sell their home but are waiting until the market stabilizes a little bit before putting it onto the market?

Housing bulls want to talk about "housing affordability" being at 10 year highs. How affordable was housing in the last 10 years? Housing is more affordable than it was...if you have a job. How many people are unemployed or underemployed, 20%?

We have a foreclosure crisis, a large number of delinquencies, and over 25% of mortgage holders under water. If housing and employment are to stay weak, how people will strategically default?

Financial professionals will tell you that you aren't supposed to spend more than 28% to 32% of income on housing PITI (principal, interest, taxes, insurance). I know people that were easily spending over 50% of income on housing PITI. The average person cannot afford the average home and that's bearish for housing.

The actual demand to own housing has gone down as attitudes and preferences have changed. Quantity demanded is based on price, but demand is based on attitudes and preferences. Remember, "why pay your landlord's mortgatge"? Now people realize that having the vast sum of your net worth tied to illiquid real estate isn't such a great idea. 2010 is also a more mobile era. People don't graduate from high school and then work at the town factory for the next 30 years of their life. People move from city to city. Laying roots and taking out a 30 year mortgage isn't the same in today's economy as it was in yesterday's.

The housing market is on life support and there is more pain ahead. Who is John Galt?

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

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