Little Hope for the U.S. Housing MarketHousing-Market / US Housing Aug 31, 2010 - 05:23 AM GMT
Jon D. Markman writes: Just when you thought the housing market couldn't get worse, it did.
New single-family home sales slumped 12.4% in July to a record-low annual rate of 276,000 units, as homebuyers shunned their realtors in the absence of government support. The consensus expectation was for a slight up-tick to a 333,000 unit annual rate, so I suppose it's time to throw out the models. Sales over the prior three months were also revised lower by 9,000 units.
No section of the country was spared, though the West led the parade with a 25.4% plunge. On a year-over-year basis, sales were down 32.4%, the fastest decline since April 2009.
New home inventories held steady at 210,000 units, the lowest level in 42 years, according to Ned Davis Research analysts. Low-to-medium-priced homes were in the most demand. Only properties in the $150,000 - $300,000 price range rose as a share of total sales. So median prices fell to the lowest level since 2003.
Put the existing and new home figures together and the final picture is that total home sales have fallen off a cliff - not just absolutely but also compared to previous housing market recoveries, according to NDR. And furthermore, the trend has reversed to negative for the first time in a year - a fact that will weigh on economic growth through the end of the year at least.
It's gotten so bad that we need a new word to describe the buyers' strike that's going on in the market for new and existing homes - some combination of fiasco, conflagration, and abyss.
What is dispiriting about this is that mortgages are at record lows, making homes more affordable now than in the past 30 years to the average household. This buyers' strike is a vote of no-confidence in the nation's economic prospects that comes through louder than any poll. The only meager bright stat recently came from the Mortgage Bankers Association (MBA) Refinance Index, which showed that low rates have encouraged a 5.7% up-tick in home refinancing, its highest level since May 2009.
From the point of view of homebuilders' stocks, the market had a gleam in its eye when industry powerhouse Toll Brothers Inc. (NYSE: TOL) reported earnings. The company's second-quarter results were a lot less terrible than expected, mostly because of some balance sheet tricks, so TOL last Wednesday jumped 5.8%. I love it when the valuation gods show their sense of humor.
While it would be great to think results, expectations and prices may have bottomed amid such bad news, it's probably not the case.
Check out the price of Hovnanian Enterprises Inc. (NYSE: HOV), which is a great homebuilder that's been through the wars. It took HOV and the other homebuilders about a decade to recover from the late 1980s' housing bubble, and the one that occurred in the mid-2000s was even bigger. Expect another very long slog in these stocks as investors continue to re-price their risk. They'll come back one day, no doubt, just not tomorrow or next year; maybe mark your calendar to buy HOV and TOL in 2016.
Financial television newsreaders were delighted to report that mortgage delinquency and foreclosure rates appear to be past their peak, according to new data reported by the MBA. But what they didn't tell you was that they are both still incredibly high by historical standards.
As many as 4 million households are in imminent danger of losing their homes. This augurs poorly for consumer spending, bank profits and the housing market.
Relying on a report by analysts at Capital Economics, here are the key elements to understand about the MBA report:
The Good News: The mortgage delinquency rate (share of households that have missed at least one payment) fell from the first quarter's record high of 10.1% to 9.9% in the second quarter. The foreclosure inventory rate slipped from 4.6% to 4.4%. And the seriously delinquent rate, which includes those more than 90 days in arrears and those already in foreclosure, declined from 9.5% to 9.1%. All these rates are now below their peaks.
The Bad News: Delinquency and foreclosure rates remain very high by historical standards. The seriously delinquent rate of 9.1% compares with the average of 1.7% seen in the 25 years before 2007. Moreover, the absolute number of households in trouble is sobering: 5.3 million are in some form delinquent on their mortgage. Add in the 2.5 million already in foreclosure, and up to 7.8 million households are in danger of losing their home.
Not all these households will lose their homes, obviously. But CapEcon analysts estimate that the fading of the economic recovery and chronically high unemployment will mean that up to 4 million homes may still be foreclosed. That's enough to double the amount of homes currently up for sale. The inevitable result of high supply and weak demand (as shown by the recent surge in home sales) will be lower house prices and more trouble for profits of consumer-oriented banks like Bank of America Corp. (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC) and U.S. Bancorp (NYSE: USB).
CapEcon analysts point out that the recent divergence between the seriously delinquent rate and the new foreclosure rate suggests that banks are in no rush to realize the losses from the zombie loans on their books. This is one more reason to believe that it will be years before the housing market, banks and the broad economy return to good health.
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