US Housing Numbers: The Truth Behind It All

Continuing our series looking at the truth behind current economic data, today we turn to housing numbers.

Housing has been in the news lately, with a few “green shoots” of news. Most recently, home prices ticked upward last month, even though they’re down compared with a year ago. Many analysts are reading this as a sign that the worst is behind us, and we could be in for a quick recovery.

Don’t be so sure.

We Won’t Foreclose… For Now

First, there’s one important fact that most analysts have forgotten, or at least aren’t revealing.

That is, the six largest lenders - businesses like Citibank (C), Bank of America (BAC), etc - and Fannie (FNM) and Freddie (FRE) got together earlier this year and declared a three-month moratorium on foreclosures.

They all agreed, they’d stop foreclosing houses for a quarter, to try to give the economy a little breathing room.

Now, what would you expect from such a move? Reduce supply, and prices should rise.

And that’s exactly what happened. In fact, given the lack of foreclosures… historically low interest rates… and the government’s $8,000 tax credit for new homebuyers, the extremely modest increase in prices should tell you just how sick the sector really is. Under normal circumstances, we’d have a bubble starting.

The moratorium ended in April… and homeowners who couldn’t make payments for the typical 90-day grace period are just going under now. We’re about to see a mini-wave of foreclosures, which will likely knock the price back down in a hurry.

Grab a Beer, The Commercial’s Coming

That, of course, isn’t even including commercial real estate troubles. As consumers stop consuming, businesses have been shrinking, malls are being abandoned… and everyone’s still waiting for the bad news to really hit the bottom line of real estate companies.

There’ve already been a few high profile bankruptcies - like up-and-coming retailer Steve and Barry’s, and mainstays like Circuit City and Linen’s And Things - which are contributing to very high vacancy rates. General Growth Properties, one of the largest owners and operators of malls in the country, went bust earlier this year… but other businesses haven’t followed that path yet. Thus far, commercial real estate hasn’t hit a crisis like residential real estate did.

That may or may not continue. Until that plays out, I wouldn’t want to be near real estate.

Even The Good Bets Are Going Bad

And, of course, we have the problem of multiple ARMs being readjusted in the coming years… through 2011. At this point, all the sub-prime group is washed out… but the Alt-prime and, yes, straight-up prime foreclosures haven’t hit yet.

They’re starting to. With 12.5% of all homes already in foreclosure, the percentage of new foreclosures has shifted from 49% sub-prime a year ago, to 58% prime today.

Simply put, too many people took out ARMs that they can’t afford at the new rates… and, with unemployment officially just under 10% - and unofficially over 20% - even the best loans aren’t a guarantee anymore. Lose your job, then lose your unemployment benefits - as around 150,000 people did last week - and you can’t afford your mortgage, no matter how reasonable it was a few years ago.

Where Will We Get Demand?

Finally, while foreclosures are going to help increase the supply of houses on the market… where’s the demand going to come from?

The housing bubble hoovered in all interested parties. If you wanted to buy a house, you did it sometime this decade.

Now, who’s going to buy? The family that just got foreclosed? Doubtful - even if a bank would lend to them again, they just got burnt, their credit is shot (so rates will be sky-high), they’ve lost most or all of their worth in the lost house, and they were having financial difficulties to begin with (or else they’d still have the house).

The newly employed? There’s just about none of them - with unemployment in the double-digits in most markets, and everyone fearful for their job - not to mention the fact that, once fired, workers are having immense difficulties finding new employment - no one’s about to splurge on a huge purchase that will hang over your head for 30 years.

Sure, there’s a small, conservative portion of the population that saw housing was going crazy, sat on the sidelines, and now are getting great deals with great interest rates and government grants encouraging them to buy.

There aren’t many of those folks. In 2005, almost 70% of people owned their own home - with the remaining 30% mostly low-income or no-income renters who wouldn’t be able to afford a home, regardless of how good a deal they got.

Housing Hasn’t Recovered

In short, we’ve got to see a sustained recovery - with a falling unemployment rate - before we’re going to see any real recovery in housing. Foreclosure moratoriums and government grants may pump up interest in the short-term, but it can’t last.

Come December 1st - when the $8,000 government credit program ends - expect homeowners to suffer again (and it doesn’t help that winter is usually the dead period for real estate, anyway). Our recommendation - go short REITs and homebuilders before then, and enjoy the fall.

Good targets are KB Home (KBH), up 35% so far this year, and Vanguard REIT ETF (VNQ), up 28% over the past 3 months. Both are due for pullbacks, as the mirage of the housing recovery gets exposed.

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