Tuesday, May 26, 2009

Everyone Knows that Housing is Bottoming, Right?

Please consider:

Housing Hitting Bottom by June Means Fewest Starts Since 1945 (Bloomberg headline, no article published yet to link to)

and, courtesy of Calculated Risk, a WaPo article titled Housing Bust Leaves Most Sellers at a Loss;
Local Prices Expected to Continue Falling

In the Virginia and Maryland suburbs, prices for single-family homes are down to where they were five years ago. In Prince William and Loudoun counties, a flood of foreclosures has pushed prices so low that bargain hunters have flocked there in recent months, helping to boost sales.

But while in past slumps a surge in sales has signaled the start of a rebound, this downturn is unlike any in recent times and it's premature to call a recovery, said Barry Merchant, senior housing policy analyst at the Virginia Housing Development Authority.

The encouraging signs have been offset by more troublesome ones, he said. After tapering off for a few months, foreclosures in Northern Virginia are starting to creep up again and may keep climbing now that several lenders have lifted foreclosure moratoriums.

Meanwhile, the year-over-year sales increases of the past few months are petering out in some Virginia suburbs, suggesting that interest in the fire-sale prices may have peaked, Merchant said. In April, Loudoun sales declined 12.5 percent from a year earlier.

"If sales are not increasing and foreclosures are on the uptick, then the question is: 'Is there another shoe to fall?' " Merchant said. "Maybe what we were hoping was the bottom was just a bump on the way down." (emph. added)

That there are fewest housing starts since the war year of 1945 is hard to wrap one's mind around. The imbalance in the economy that led to this is almost incomprehensible. Even the current low level of housing activity and current pricing are being propped up by gigantic, unfunded Federal programs. The crash would be worse absent these artifical stopgaps.

Heavens forfend, but what could be happening in this house of cards (no pun intended) is that all the market manipulation/intervention from the bankrupt in all-but-name Fannie/Freddie will be for naught, and that after a spasm of bargain-hunting, the housing market will continue sinking, as the article above suggests could already be happening.

From an asset allocation standpoint, history has shown any economic sector that undergoes a full-fledged bubble, not just a bull market, sits out the next up-cycle in the economy. This was true for gold after it bubbled into January 1980, after which it lost close to 90% of its value till its bottom around $250/ounce. This was true of Japan, which after a 19-year bear market did about as poorly as the Great Crash of 1929-32/3 did in 3-4 years. This was true of the NASDAQ bubble of 1995-2000, which bottomed in 2002 but adjusted for inflation dropped to a new low in the recent bear market of 2007-9. All the above paid zero or close to zero in dividends.

The housing market is unique from an investment standpoint in that a home is a fantastically expensive investment. The message here is simple. Residential real estate is likely to be for years to come nothing more than a place to live that should be treated as an expense. Investments for profit will be better in the financial markets. Inflation hedges involve gold, industrial materials, and foreign currencies, but not residential real estate. Its time will come again, but not soon.

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