Housing Recovery On Hold

By The Greek:

It's becoming increasingly clear that long anticipated housing recovery is on hold for now. Recent data out of the Mortgage Bankers Association and National Association of Realtors only reinforces common sense expectations. That is: with the economy slipping into recession, natural demand cannot resume just yet. That said, housing stock recovery might renew as soon as this bailout is approved, if approved without significant legislative damage.

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Recent housing starts and existing and new home sales data have offered evidence of a real estate market bottoming out, but with the economy slipping into general recession now, we cannot see demand renewing just yet. Today, the National Association of Realtors (NAR) published the Existing Home Sales Report for August.

Existing Home Sales

The NAR noted the annual pace of sales declined to 4.91 million, down from 5.0 million in July. While the decline was foreseen by the consensus, as indicated by a Bloomberg survey figure of 4.92 million, it seems clear that recovery is also yet far off. The economic environment is just not going to be conducive to the traction of new home demand any time soon, and so, despite recent price decline, I see nothing stopping further drops in home values. Investors have been making their way back in to real estate in a selective manner, especially in distressed situations; but the general marketplace simply has no support, if not failing supports in the near term, in my view.

While banks could see some friction removed from the lending process (read ordeal) as a result of the bailout, a renewed inflation threat seems possible as well. However, our nation's greatest expert on the topic, Ben Bernanke, sees no inflation threat tied to this bailout. If this proves true, because others argue the dollar should weaken on money production, then housing should benefit. Even so, I'm hopeful for spring '09 for the beginning of such trend. Still, there are a lot of factors that could mess that up, and so no economist in his right mind would try to pinpoint housing recovery just yet. In between now and then, we could see anyone or more of these factors play a role in economic disruption: messy war with Iran and unforeseen repercussions; energy restriction by Russia over the winter (afflicting Europe directly, the U.S. indirectly); failure to pass the bailout or to reduce its impact through legislative process; global market failure due to unforeseen mistakes by foreign leaders or central banks; the presidential election. Clearly, these do not represent all the risks.

Mortgage Bankers Association Report

The Weekly Mortgage Activity Report from the Mortgage Bankers Association showed a double digit weekly decline, just one week removed from a spike in activity. It seems that nascent mortgage rate easing didn't last long, and possibly quickly absorbed a good piece of shelved demand last week anyway. That rate dip disappeared initially after the Treasury bailout plan was announced. Also, the flight to capital moved money rapidly into short-term money vehicles and out of long-term ones, dropping short yields to near Great Depression lows. People were basically paying the government to watch their money for them, on real terms. So, we blame this week's drop on these two factors and also storm disruption in the South, Southeast U.S.

In conclusion, housing market recovery looks a ways off. However, I believe that if Bernanke is right and inflation does not result from the bail out (and if the market believes him as I expect they will), then you should see housing stocks rise again shortly and before tangible housing demand recovery. Our personal favorite play remains Toll Brothers (NYSE: TOL). Lennar (NYSE: LEN) reported results yesterday and is up 12% at this hour. In fact, shares of Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI) and Centex (NYSE: CTX) are all higher this morning.

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