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Nothing Can Fix the U.S. Housing Market

Housing-Market / US Housing Jun 01, 2010 - 08:08 AM GMT

By: Kevin_Duffey

Housing-Market

The government could force mortgage rates across the board to 2%, it won’t matter.  They can re-introduce a tax credit worth $15,000 for anyone buying a house, it still won’t matter.  Don’t you get it?  You can’t fix housing with artificial demand.  Tell me where you can find enough buyers of homes that have money for a down payment and who can purchase a home without government incentives, and then have the job and income security to not be at risk of not being able to afford to live there. 


Sure there’s a handful of those folks running around these days, but don’t you think they are already in homes?  Where are the new buyers?  Hint: there are none.

If you read past the headlines, you know that even though there was a flurry of activity in April due to the expiring tax credit, that foreclosures and delinquencies were at record highs.  Look for the trend to continue through 2010 and probably 2011 as well.
Where is this going?  Well, it’s not going to be pretty.  I think the following trends will continue to increase over time:

  1. More vacant homes - It’s incredible how some of the nicest neighborhoods in my area have vacant homes scattered throughout the neighborhood.  They’re easy to spot since they usually have dead grass with weeds everywhere.  Some homes have been vacant for multiple years!  Some with no power so the air inside is stagnant and disgusting.  The longer these homes sit, the more money it takes when someone does buy it just to get it into liveable conditions.  Compounding this issue are the stupid home owners associations who will prevent a sale until they collect back dues.  Rather than encouraging someone to take over the home and starting paying dues to the HOA, they will block the sale in an attempt to collect thousands in back dues.  Ridiculous.
  2. More people living in their homes and not paying for it - This trend is going to skyrocket for two reasons.  First, the economy will continue to struggle and people with a lack of income simply won’t be able to pay their mortgage.  Second, the people who have money are fed up that their neighbors are living in the same home as them, yet not paying for it, so they figure, screw that, I’m not paying.  For more on the strategic default option, click here.  What the end game is for an increasing trend of people not paying their mortgage when banks are already overwhelmed with foreclosures, it’s tough to say.  I honestly think eventually it could get to the point where people live indefinitely in their homes without paying, I’m talking 5-10 years or more.  The lack of resources to force these people out or do anything about it might enable such a situation. 
  3. Continued weakness in home values - If we’re talking real values, home prices will continue to drop.  Guaranteed.  If we’re talking nominal values, they will probably decrease but could eventually increase.  How’s that work?  Well with enough inflationary policies and incentives, government could possibly stabilize housing in a nominal sense, but they would be creating pure inflation.  Consider the following extreme example: if government decided to print enough money to pay off every single person’s mortgage, home values would skyrocket.  But, the policy of this would be purely inflationary and cause your purchasing power to get crushed.  So how do you determine the true value?  While not perfect, consider determining how many ounces of gold it would take to buy your house.  Now track that number and the change in that number for the next ten years.
  4. Abandoned areas of cities - Detroit recently announced that they will be bulldozing 15,000 vacant homes.  In cities like Detroit where the economy is in shambles, this is a situation that will likely pop up in the near future and people move out of the city, get foreclosed on, etc.  Look for this trend to expand outside Detroit.  Perhaps a post-Lebron James Cleveland??

As you can tell, I'm extremely bearish on housing.  There are just too many issues facing housing for any sustainable recovery.  It's best for you to view housing as an expense, and like any expense, you should do your best to limit it.

For investors looking to potentially play this trade, the S&P Homebuilders ETF (XHB) is a potential short opportunity.  Shorting has been a difficult game for more than a year, so you must be cautious when shorting.  Banks should also be an area to be avoided with continued weakness in real estate.  For aggressive traders, a short of the Financial Sector SPDR ETF (XLF) might be an opportunity.

By Kevin Duffey

http://20smoney.com

© 2010 Copyright Kevin Duffey - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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