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Almost four months ago, I made one of the most dramatic shifts in my investment outlook ever. After warning — in advance — that we would experience a devastating housing and mortgage market crash … and after repeatedly refuting all the early — and wrong — bottom callers during the four-year collapse, I wrote the following in my Money and Markets column four months ago:
“It’s time to signal another important shift in my thoughts on the housing market. Namely, that the nexus of the real estate downturn is shifting and that the residential market is poised to stabilize in the coming quarters.”
I went on to say the market wouldn’t turn on a dime. My forecast: Home prices would continue to fall, but at a more gradual pace, while sales would gradually stabilize and inventory for sale would gradually come down.
So where do things stand? Do I deserve a passing grade?
Sales … Starts … Home Builder Sentiment?
It’s All Telling the Same Story …
Here’s a brief recap:
- New home sales rose 9.6 percent in July to a seasonally adjusted annual rate (SAAR) of 433,000. There were gains in three out of four regions in the country. Meanwhile, the raw number of homes for sale dropped to 271,000 — the lowest level going all the way back to 1993. And yet, median home prices were STILL down 11.5 percent year-over-year.
- What about the existing, or “used,” home market? Sales gained 7.2 percent to a 5.24 million SAAR. That was the highest since August 2007. The number of homes on the market is still way too high, but it did fall almost 11 percent from a year ago. Prices were off 15.1 percent.
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| Construction of single-family homes is trending upwards. |
- S&P/Case-Shiller home price index? Prices are down 15.4 percent from a year earlier in June. But that was an improvement from the 19 percent rate of decline seen a few months ago.
- Housing construction? Everybody flipped over the fact that “headline” housing starts missed expectations in July. But the weakness was all in the multifamily (apartment, condo, etc.) segment. Construction of “core” single-family homes rose for the fifth month in a row, while permit activity shot up by almost 6 percent.
- Home builder sentiment? Another good number. The National Association of Home Builders index rose another point to 18 in August, the highest since June 2008. We saw gains in three out of four regions of the country.
I’d call that a pretty decent fit with my May 8 forecast. Most importantly, for investors like you, I said you simply had to get out of the way if you were “short” the sector. The easy money, as they say, had been made.
The Philadelphia Housing Index (HGX), which consists of 19 home builders, construction suppliers, and mortgage-services firms, closed at 93.97 the day my piece was published. It’s up about 16 percent since then.
That’s all history. But it leads naturally to the NEXT question …
Where Do We Go From Here?
I think in the short term, a lot of the good news has been priced into the housing sector. So I wouldn’t be surprised to see industry stocks stall. We may even be in for another bout of weakness.
Why? Near-term home sales have been “juiced” by the $8,000 first-time buyer tax credit. That credit is set to expire November 30, unless Congress extends it.
Buyers have been running ahead of it and snapping up more homes than they otherwise would. It’s just like what we saw with auto sales as a result of the popular “Cash for Clunkers” program. We’ll likely see a “hangover” effect once the government-fueled sugar high fades.
As for the underlying market itself, I expect to see continued pressure on home prices — though again, the declines will be more gradual than we had in the past. The most important factor is still distressed inventory. We still have too much of it, and we’re going to get even more because borrowers are falling behind on their loans at record rates.
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According to the Mortgage Bankers Association …
The overall mortgage delinquency rate jumped to 9.24 percent in the second quarter of this year from 6.41 percent in the same period of 2008. That’s the highest delinquency rate ever recorded (the MBA data goes back to 1972).
More than one in four subprime borrowers is now at least 30 days behind on payments. But it’s not just the crummy mortgages that are going bad. More than 6.4 percent of prime borrowers are also falling into delinquency.
Another 4.3 percent of U.S. mortgages were in some stage of foreclosure. In plain English, that means more than 13 percent of U.S. loans are in some stage of distress (either being paid late or already defaulted on). That’s the worst this country has ever seen!
There was something else noteworthy in the MBA numbers. In its … er … infinite wisdom, the government has NOT tightened the screws on Federal Housing Administration, or FHA, lending standards. You can still sneak into a home with weaker credit and a down payment of just 3.5 percent using FHA, even as private lenders have abandoned such generous terms. That’s driving FHA’s share of the mortgage market through the roof.
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| FHA delinquencies continue to rise. So will Washington force taxpayers to dip into their wallets again? |
Unfortunately, it appears that FHA delinquencies are now starting to rise. The delinquency rate jumped to 14.4 percent in the second quarter from 12.6 percent a year earlier. Are we as taxpayers going to be asked to cough up even MORE money to bail out the FHA insurance program a year, two, or three down the road? I suppose only time will tell. But I’m not exactly brimming with confidence.
Bottom line: The housing market appears to have put in a longer-term bottom when it comes to sales and a longer-term top when it comes to inventory. Prices? Not so much, at least not yet.
As for any recovery, don’t expect a rip-roaring rebound. This is going to be more of a gradual process that will take a long time, kind of like turning a battleship.
Until next time,
Mike
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