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Sorry Charlie, But the Housing Bottom Will Have to Wait

|Includes: URE, SPDR Homebuilders ETF (XHB)

"Ha!" my pal the real estate agent said to me the other day. "You've missed the boat on this one, Steve. The housing market bottom is in and you still can't see it." 

And at that moment I just couldn't help myself; I my rolled eyes and let out a long-winded sigh. I had been through this bit before with the guy.

You see, my friend Charles has been taunting me for years now, giving me the old "I told you so" routine at even the faintest rustle in the housing bushes.

And like Linus on a blustery October night, he thinks he is finally seeing the Great Pumpkin: Home prices, he insists, have stabilized. . . and may never look back.

The Housing Market Bottom? Not Quite

In fact, he hammered me with his latest volley on Tuesday, about two minutes after the most recent home price data hit the Street. 

According to the Case-Shiller Home Price Index, seasonally-adjusted home prices crept higher in July, marking the third straight monthly gain.  It was music to Charlie's ears.

Loaded for bear now, he moved in for the kill.

Of course, there was one little problem with his argument. Compared to July 2008, home prices actually fell 13.3% year over year.

That's the cold, hard reality that most people like Charles would just as soon ignore. Instead, they hang their hats on the month-over-month comparisons, trying to turn molehills into mountains — or in this case, bigger commissions.

Unfortunately, "less bad" data doesn't exactly make the best foundation for the next bull market.

And while I, as much as anyone, wish they were true, the facts about the housing market still leave a lot to be desired — no matter how much time Charles spends rubbing his lucky rabbit foot.

That's because the latest brand of housing bulls don't yet realize that without the $8,000 first-time homebuyer tax credit, none of this measly bounce would have happened at all. . .

The Helping Hand of Uncle Sam

Once again, it was your Uncle Sam that skewed the market.

In fact, according to the National Association of Realtors, Uncle Sam's largess will lead directly to an additional 350,000 homes being sold this year. And while that may make guys like Charles a few extra bucks this year, the program's price tag is $15 billion — which, when you do the math, adds up to $43,000 per each additional home sold!

Of course, in a twisted place like Washington D.C., that's trumpeted as a victory.
The rest of us know otherwise.

Even worse is that once the tax credits come to an end, housing will be right back where it started. In fact, the housing market might actually be worse off than it was before, since the tax credits have only managed to pull those sales forward from the future.

Here today, gone tomorrow.

In that regard, it's not much different than what we have seen with the over-hyped Cash for Clunkers program. Take away the helping hand from Uncle Sam. . . and the sales fall right off the table.

Unfortunately, that's not the only way Uncle Sam has been propping up the housing market. . .
Besides tax credits, the government has also been actively working behind the scenes to help keep mortgage rates low. 

The Fed does it by buying up every piece of mortgage paper in sight; the result is lower rates, as they buy on the margins.

However, as good as those low rates may be in the short term, the Fed has committed "only" $1.25 trillion to the mortgage market — and 75% of it has already fallen down the rabbit hole.

That leaves roughly enough money to extend the program — by the Fed's own admission — only into the first quarter of 2010.  When it ends, interest rates will have no where to go but up — by some estimates, as much as 0.50%.  Add higher interest rates to the picture and purchasing power goes down — not up — smothering the recent uptick.

Housing's Dirty Little Secret

But those aren't the only two things that will keep housing on the mat next year. On top of everything else, the dirty little secret in all of this is that there is a "shadow inventory" of foreclosed homes about to hit the market this spring.

In fact, the banks have kicked this little can so far down the road now that there is a tidal wave of homes out there that will need to be dealt with, either through short sales or foreclosures.

According to Ivy Zelman, CEO of Zelman & Associates, that wave could reach as high as 3 to 4 million distressed homes hitting the market, since 3.7 million homes are either already in the foreclosure process or are at least 90 days past due.

That's an important distinction, since a recent analysis of foreclosure rates by the Amherst Group showed cure rates for these loans are practically non-existent. The Amherst data noted a near 0% cure rate of all loans in foreclosure, while loans 90 plus days past due were cured only 0.8% of the time.

As for loan modifications, you can practically forget them — 70% of all loans re-default within 12 months. You can add them to the total pushing the number even higher.

In that regard, Amherst actually believes the real shadow inventory of distressed properties will be closer to 7 million, equivalent to 135% of the average number of homes sold in a year.  

So when you add it all up, the picture you get is lot less rosy than the one my pal Charles is trying to paint. And I haven't even mentioned what soaring unemployment, exploding option ARMS, and the collapse of the FHA will do the market. 

One of these days, Charles will get it right.  

Today's just not that day — not by along shot.