FSU Editorial: "Is Housing Market Booming?" by Stephen Tetreault 10/30/2006

IS HOUSING MARKET BOOMING?
by Stephen Tetreault
October 30, 2006

I keep hearing the hype on bubble-vision that the Housing Market has Bottomed I sure wish I could agree�however I believe that we are very far from seeing the real bottom of this most important sector of our economy and as such it is a very important factor in my recession analysis. We have seen of late that the housing bulls have become giddy as encouraging data on the homebuilding markets in the past few weeks have many market bulls insisting that the worst is over. But I believe these minor improvements are just merely statistical abnormalities and that the housing market still has much further to drop before bottoming and that the drop will be hard felt by many Americans and quite a few will be swept away into financial ruin because of what I believe will be a crippling bear-market in housing that could last through 2009-2011.

This past week former Sir Alan Greenspam (the greatest bubble creator) stated that "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out." Heck, one piece of data and the drop is now done what a stretch to come to this conclusion. He went on to state that "I don't know, but I think the worst of this may well be over." I disagree wholeheartedly but I want to acknowledge another view point to give you a balanced picture. On the flip side we had current Fed-head Janet Yellen, who told an audience in California that "a significant buildup of home inventory implies that permits and starts may continue to fall, and the market may not recover for several years."

This past week, Realtors reported a decline in inventories of unsold homes, even as sales fell to a three-year low. The Commerce Department said sales of new homes rose for the second month in a row (and how quickly the bulls are to decided that 2-months are indicating a bottom instead of just a seasonal blip) the sales were sparked by significantly large price discounts by various builders (sounds familiar�.buyers are only induced by discounts�remember when the so called gurus were calling for a bottom in the American auto sector back in 2001 based on the same premise). The bulls are also pointing toward a reversal in the home builders' confidence index which rose slightly in October after plunging for eight straight months to a 15-year low in September. (again the bulls are so quick to believe that this little blip means that the downtrend is over)�.The government reported that sales of new homes unexpectedly rose 5.3% in September to a seasonally adjusted annual rate of 1.075 million, the most in three months and well above the 1.05 million expected. However, sales in June, July and August were revised down by a total of 67,000 annualized, continuing a pattern of downward revisions to the originally reported data) however they were told that the 6% increase was comforting as sales increased in September after they fell to a three-year low in August. New-home sales are down 14.2% in the past year and are down 16.5% year-to-date.

Now as Paul Harvey was so fond of saying�. �Now for the rest of the story��. I want you to reflect on the data point that went largely unreported the 6% decrease in the less-volatile building permits data (a forward looking indicator regarding demand for new-homes) it was the fastest and largest decline in seven years. Inventories of unsold homes are up 14.4% in the past year. The number of unsold completed homes rose to a record 157,000 in September, up 47% in the past year. We also saw that the overall median home prices fell at the fastest pace in decades. Median sales prices dropped 9.7% in the past year to $217,100, the lowest price in over two years; and its the largest percentage decline in median prices since December 1970 a data point that Greenspam and many others failed to even mention. And overall we have seen that median prices for existing single-family homes are down 2.5% in the past year, (wiping out home owner wealth and equity) this is the largest decline ever recorded. All the while home builders have {just as auto dealers did during their downturn} been piled on incentives like free vacations and new cars, in order to sell pent up inventories of new homes. Worse yet due to fuzzy math accounting these mega-incentives were not subtracted from the sales price reported to the government; hence the contagion could be far worse in the future. During September, there was a 16% drop-off in the number of homes sold for more than $200,000 and this is a troublesome data point and a corresponding increase in sales of homes priced under $200,000�meaning that owners are waiting before stepping up to the plate.

This data to me suggest that the pressure on the housing market and homebuilders will not end for several years due to high inventories and a deteriorating price environment, as the data is showing that both new and existing single-family home prices are falling, which will make unfortunately many American households feel significantly poorer. This will no doubt lead toward a significant slowdown in mortgage equity withdrawals which have been the key and primary driver of this bull-economic recovery, and the diminished how-wealth affect will surely put a big crimp in consumer sentiment and spending and will surly impact new and existing home sales. In essence this is the highly exposed Achilles-heel of our economy, and I doubt that the FOMC can do anything to stop the impending pain.

Something else that I want you to ponder, please remember that home sales are reported when the contract is signed (just as auto sales are reported as the vehicle passes the end of the production line), not at the closing of the sale. And we have seen during this earnings period that almost all of the home builders have reported a large increase in their cancellations during the past 3-4 months and this is very disturbing trend. I believe �unfortunately for the average American� that we are barely into the fourth inning of this down cycle �bear-market� ball game folks and this game could go into extra innings. And those talking-butt-heads who believe that a retracement �drop� in interest rates (that is if the FOMC evens cuts in the near future) will reverse this trend and re-establish the old bull trend are delusional to put it mildly. As a home is a highly illiquid asset when compared to stocks, bonds and other tangible assets. If you recall the basic principles of economic the housing market is very inelastic to dropping interest rates on the way down, just as it was very inelastic to rising rates on the way up, due to the magnitude of the lag affect.

According to my research in understanding bubbles; I believe the risk appetite in property the various property markets will not be restored by any modest retracement in interest rates. From my research I have come to believe that real estate is a proverbial "mega momentum market" as such investors get whipped into a frenzy when the markets start their bullish assent, the housing bulls are always trying to take the lead over one another when the markets are on the way up and can't run away fast enough when the housing market starts to crack and they will trample each other when the real selling starts.

HOUSING MARKET (last week)

New construction of U.S. homes rose unexpectedly by 5.9% in September to a seasonally adjusted annual rate of 1.772 million, according to the Commerce Department. It's was the first increase in housing starts since May and the highest level since June. Starts are down 18% during the past year. Building permits were shown to fall 6.3% to a five-year low of 1.619 million annualized. Permits have fallen eight months in a row and are off 28% in the past year. starts were much stronger than expected, but permits were much weaker.

The volume of mortgage applications fell by a seasonally adjusted 2.2% this past week as mortgage rates inched higher, according to the MBA report. Mortgage applications are down 11.4% in the past year, roughly in line with declines in home sales. We saw that applications to buy a home rose 0.4% last week compared to the prior week, while applications to refinance an existing loan fell by 5.3%. The MBA's data indicated that the overall share of applications for refinancing fell to 45% in the week ending 10/13, down from 46.4% the previous week. While we saw that refinancing activity had increased significantly in the past two months as mortgage rates dropped. However, we have seen a rise in mortgage rates for the third straight week, thus putting a brake on applications activity. We saw that the average rate for a 30-year fixed-rate loan rose to 6.33% last week, and the rate for a 15-year fixed-rate loan, a popular refinancing vehicle, averaged 6.01%, up from 5.90% a week earlier and 5.81% three weeks ago.

Contact Information
Stephen Tetreault
T-Waves
Southern Maine, USA
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