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The Housing Bottom that Never Came

Written By Brian Hicks

Posted March 3, 2011

I hate to bring this up again… But I can’t stomach the latest fascination with the housing bottom.

We’re not bottoming.

And the press won’t admit that because it doesn’t sell.

Forbes wants you to believe “there may actually be enough demand to snatch up supply, and thus prevent further erosion in housing prices.”

U.S. News & World Report thinks “home buyers are tiptoeing back into the market, amid an increasing number of signs that the fifth year of the housing bust might be the last.”

This week, The Wall Street Journal ran the headline: “Why 2011 May Be the End of the Housing Crash”.

And that coward Warren Buffett just forecast a recovery in the housing market “within a year or so,” saying: “America’s best days lie ahead.” just ran an article called “10 Reasons to be Bullish on Housing” written by Andrew Jeffery, a principal at Cirios Real Estate.

“Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices… If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about,” he said in the piece.

Of course Jeffery will report everything is fine… He’s in the real estate business.

It’d be like listening to all the reasons Willy Wonka is bullish on chocolate.

Jeffery basically says that the only caveat to being bullish is that housing prices will go down.

“And while it may finally be time to be bullish on housing, there is one huge caveat,” he says. “The local bottom that the broad housing market experienced in April 2009 may yet be surpassed to the downside.”

Worse, “it will take years (around four based on current estimates) to work through shadow inventory…”

The new cause for bullishness

Have I lost my mind?

That’s cause for bullishness?

The press is getting way ahead of itself, just as it’s done in the past. And they’re trying it again — because it sells.

Plus, with oil over $100 a barrel again, you can bet money will be leaving the average Americans pocket even faster than before, leaving less for discretionary spending and spending on housing.

And that means fewer dollars for home shopping.

“Every $10 rise in oil prices, if sustained, subtracts a one-half percentage point from gross domestic product growth. Every 1% increase in GDP translates into about one million new jobs. So, if oil prices don’t reverse, the drag on GDP growth could mean 500,000 fewer new jobs created over the course of 2011,” The Wall Street Journal reported recently.

The heart of the matter

I agree with a couple of Jeffery’s bullish cases, but here are the ones I just couldn’t get behind.*

  • Jobs. “Housing follows jobs. While the job market is still bunk in many areas, pockets of strength are emerging. After Google Inc. announced it would be hiring as many as 6,000 new employees, the Silicon Valley powerhouse received 75,000 applications in two weeks.”

  • Jobs.

*italicized text quoted from Jeffery’s article

We’ve added what, about 36,000 jobs in January? That should be great for housing demand.

But if you dig a bit further, here’s what’s really happening with unemployment…

Almost 14 million Americans are unemployed. Of those, more than six million have been unemployed for six months or more; another four million left the labor force after giving up looking for work.

But jobs will lead housing higher, right?

  • Pent up demand among your adults. “Today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk lives at home. As the job market crawls back to life, this trend is likely to reverse.”

A fraction of recent college graduates still haven’t found a job after graduating years ago. Bu sure, there will be plenty of pent-up demand. Apartment demand, maybe.

  • Foreclosures. “Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices. If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about.”

Foreclosures are not slowing.

As I’ve been saying for months now, millions of homes sit empty. Debt-stricken, pressured consumers don’t want to buy. Household formations have slowed considerably.

The glut of unsold homes is smothering any flicker of housing hope.

Loans in delinquency are at some stage of the foreclosure process.

There’s worrisome negative equity, in which the mortgage exceeds the home value, affecting about five million homes.

Peter Schiff still sees a 20% decline in home values just to bring them back to historical trends.

Close to 11% of all U.S. homes stand empty. It’s being projected that banks will repossess another million homes this year, adding to the supply glut. And prices will come down. In fact, some claim that home prices will fall another 10% to 20% before a bottom can even be seen.

  • Inflation. “Things get scary when consumers start believing that prices are rising, or about to rise. Historically, real estate has been a rather good hedge against inflation. As people start to get nervous about inflation, they buy real estate.”

Higher food and energy costs are driving inflationary pressures higher. This will put a real dent in the cash that Americans have left to spend on housing.

In order for real estate to be a hedge against inflation, one thing must happen: Real estate must be able to hold its value.

  • Confidence.

I’m sure the millions that are out of work have plenty of confidence… and cash to buy a home.

A beaten down U.S. consumer is not confident in housing. Less than two-thirds of Americans think homes are safe investments.

In fact, according to Fannie Mae’s Fourth Quarter Housing Survey: “Fewer Americans feel confident about home ownership particularly as it pertains to being a safe investment. That confidence has slipped since the January 2010 survey when the housing market was just beginning to show signs of stabilization.”

That’s down from the 83% seen before the housing boom. Plus, tighter lending standards and higher interest rates aren’t likely to drive confidence higher…

Want honesty?

Truth has become a four-letter word for the press and the greater United States.

We’re not seeing a housing recovery…

About eight million Americans are at least a month behind on mortgage. Another five million are at least two months behind.

And Deutsche Bank says that 48% of all U.S. mortgages could have negative equity by the close of 2011.

That’s the truth the press won’t tell you.

But that kind of story doesn’t sell — it’s not hip or sexy anymore to talk about how the bottom is still falling out. 

There’s a better way to get the news…

Reading Wealth Daily is a step in the right direction. We’re not concerned with flashy headlines or “what sells”. We’re concerned with delivering market news and effective investment strategies to our readers.

Signing up for Wealth Wire is another. It’s a daily recap of the real news and insights you need to grow your wealth and protect it.

Stay Ahead of the Herd,

Ian L. Cooper
Editor, Wealth Daily