Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Is the U.S. Housing Market Recovery for Real?

Housing-Market / US Housing Dec 31, 2009 - 05:29 AM GMT

By: Money_Morning

Housing-Market

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That's only 10% below the all-time peak in 2005.



What's more is that house prices, as measured by the S&P/Case-Shiller 20-city Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.

The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006's peaks some time in 2011 or 2012.

Not so fast, guys!

The recovery in housing has been boosted by just about every artificial means you can imagine:

  • Interest rates have been kept at a historically low level of 0%-0.25% for a very long time.
  • Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the bankrupt behemoths of housing finance, have been bailed out with what amounts to a blank check from taxpayers.
  • The Federal Housing Agency (FHA) went on making mortgages with 3% down payments when nobody else was, thus very likely landing taxpayers with another bill for some large fraction of $1 trillion.
  • And the government has been handing out cash subsidies for refinancing houses that were about to be repossessed and $8,000 subsidies for first time buyers - now $6,500 for all homebuyers.
Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away?

Even if we wanted to provide gigantic subsidies to housing finance in every form for evermore, we couldn't afford to. The U.S. government is running trillion dollar deficits, and something has to change. So at some point the feather cushions that have surrounded every aspect of the housing market will be taken away.

To see how far housing might fall, look at the Case-Shiller index's bottom after the last housing bust in 1989-90 (as the 20-city index did not exist back then, we used the 10-city index). The index bottomed in September 1993 - more than two years after the U.S. economy had begun to recover - at a value of 75.81. Nominal gross domestic product (GDP) rose by 109% between the third quarter of 1993 and the third quarter of 2009.

However, the population rose by about 20%, so nominal GDP per capita rose by 74%. (Real GDP per capita rose by 27%, a pretty mangy performance over 16 years.) House prices can be expected to inflate about as fast as nominal GDP per capita, in a large country like the United States where space is not yet at a premium.

Thus the Case-Shiller Index this time around might be expected to bottom at 132 (75.81 x 174%). Its current value is 157, so we can expect a further 16% drop, even if you assume the bottom is no lower than after the milder housing downturn of 1989-90. That bottom will probably be reached around the end of 2011 if the 1990-93 post-recession pattern plays out.

Oops.

To give you an idea of what that might mean, the Case-Shiller 10-city index passed 132 in June 2002. That means, on average, everybody who has bought a house since June 2002 can be expected to be underwater on the deal when the bottom is reached.

Every mortgage with a 10% down payment made since about April 2003 (when the Case-Shiller index was 147 - 90% of which is 132) would be underwater. Every prime mortgage with a 20% down payment - not that many of these were being made in those years - made after February 2004 would be underwater.

Of course, that's an average. In Dallas, there would probably be few foreclosures beyond those we already have seen, because prices didn't go up so much. On the other hand, in Las Vegas, pretty well every mortgage made since Bugsy Siegel started developing the Flamingo in 1946 would be kaput.

The housing market is unlikely to turn around while there's so much cheap money about, or while the feds are subsidizing home purchases to such an extent. However, at some point next year, reality will hit the U.S. economy and the federal budget - maybe simultaneously.

The house purchase subsidies are likely to be extended for one more six-month period, through December 2010, over the midterm elections, but not beyond that. At some point, the losses on the FHA mortgage portfolio will become large enough that some of them will have to be taken "on budget." And at some point, either resurgent inflation or soaring commodity prices will force Ben Bernanke to raise interest rates - or crash the Treasury bond market because he won't do so.

At that point, reality will return to the housing market too.

Meanwhile my advice is: Don't get sucked in!

[Editor's Note : There's a reason Martin Hutchinson is building a reputation as one of the sharpest prognosticators in the investment world today: He can see things that "the system" is trying to hide from individual investors. Today's analysis of the new U.S. healthcare bill is a case in point: Hutchinson sees the costly pitfalls.

But that same vision allows him to spot the top profit opportunities available to individual investors. And Hutchinson scours the globe in search of the "hyper-profitable" investment plays that he recommends for his Permanent Wealth Investor trading service.

Hutchinson's experience as an international investment banker has taken him to major markets such as Great Britain and the United States - and to smaller ones such as Macedonia. Wherever he traveled, Hutchinson found one fact to be the same: No matter the market's size, he was always able to uncover the most profitable investment opportunities.

In a new report, in fact, Hutchinson not only uncovers the very best profit opportunities available today, he guarantees triple-digit gains. To check out this report - and these new investment picks - please click here.]

Source: http://moneymorning.com/2009/12/31/housing-market-false-bottom/

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules