Many housing market analyst, some of them from organizations that knowingly lied about the true state of the market are still trying to call a housing bottom and recovery. Maybe its their job to use propaganda and their position of authority to talk up the markets and encourage people to board a sinking ship all because rates are at historic lows. We know the importance of a housing recovery as it is a critical component of an economic recovery. The recovery would signal a lasting economic recovery is taking place.
The truth is that while housing construction and sales may have bottomed after the largest decline in history, it is highly likely that prices will continue to fall especially if interest rates rise in this very weak market. The one overlooked issue is that while it is likely that housing may have found its natural bottom — a bottom and a recovery are not the same.
As stated earlier, there has been a lot of hype from media and market analyst about home sales, both new and existing, starts and permits which all showed some very modest improvement. While its good to hear there is an improvement in the data It’s a way to early to call this a recovery. Yes, mortgage rates are historically low but, employment is weak, and major banks continuing to stall the foreclosure process. In addition, there is a lot of artificial support propping up the market providing the false sense of a bottom. From artificially depressed interest rates, bailouts, write downs, forgiveness, tax credits and incentives the pace of the price decline has slowed.
April’s data, on the surface, appears to support the media’s claim that housing is in a continued recovery process. The issue is on a seasonally adjusted basis warm weather combined with the lowest amount of precipitation in a decade has artificially influenced the adjusted data. While April did show a rebound it came on the heels of two monthly declines and failed to fully recoup the previous losses. The truth is that on a non-seasonally adjusted basis this was one of the weakest April reports in the past decade for existing home sales.
There is very little evidence that a recovery is officially underway. While the data can be manipulated to argue the case for a housing bottom. You have to remember that a bottom and a recovery are two completely different things. Home building companies themselves continue to cut their inventory. This is a strategic move that has resulted in a decline in inventory to a 5.1 month supply. Even with lower inventory levels it is still taking nearly 8 months to complete a sale. The truth is that demand for homes remains extremely constrained and if the economy slows down (and signs are showing that it is) the recent improvements in the market will vanish.
Many housing units have been converted into rental properties in recent months as excess homes are sitting vacant. The job market is weak wages are being suppressed and debtors have little access to credit. Theses conditions make renting the preferred choice. Then there is the volume of inventory being held off market for various reasons and this does not include the shadow inventory held by banks that is quickly approaching 10 million.
Today, roughly 1/3 of all homeowners are under water on their mortgages. At some point these “vacant” houses, shadow inventory, and trapped homeowners will hit the market. This excess supply will continue to pressure home prices further exacerbating the problem for those already upside down in their home. Home ownership rate in this country has declined back to levels last seen in 1980 before the Savings & Loan crisis.
The real truth is that a “real recovery” may be a very long time away. The economy weak, excessive debt is suppressing growth, unemployment is still high, wages are flat, credit is tight, and trapped borrowers are big head winds for the housing market.
Here is a look at the data so you can decide for yourself if there is fact a true market recovery.