I hate to sound like a broken record … I really don’t enjoy being tagged as the “doom and gloomer” of the bunch here … I wish I could do something fun like my good friend Sean Brodrick, who gets to traipse through Canadian uranium mines and tell you all about the red-hot prospects in the sector!
But right now, it’s my job to deliver bad tidings. Because when it comes to housing, there are plenty of ‘em. With each passing month, more data confirms what I’ve been telling you — that the U.S. housing market remains stuck in the mud.
Let me give you an example: I was recently on CNBC and they asked me to comment on the March existing home sales data. You know what I had to tell them?
No Amount of Lipstick Can Make This
Pig of a Home Sales Report Look Pretty
Across the board, the report was glum …
First, total sales fell a sharp 8.4% to a seasonally-adjusted annual pace of 6.12 million. That was the single-biggest monthly decline in 18 years, and it left sales at their lowest level since June 2003.
Second, prices fell again. While the year-over-year decline was just 0.3%, it was the eighth such drop in a row … the longest losing streak on record.
Third, supply remains a major problem. The total number of homes for sale was just shy of 3.75 million units — 17% higher than a year ago.
Looking at it another way, it would take 7.3 months to exhaust all the used homes on the market right now, assuming the sales pace stays constant. That’s just shy of the highest reading for this down cycle — 7.4 in October 2006.
Now, existing home sales are based on contracts that were closed a few weeks earlier. So some people tried to blame February’s crummy weather for the poor March sales.
But sales dropped in EVERY region of the country. They were down 6.2% in the South … down 9.1% in the West … down 8.2% in the Northeast … and down 10.9% in the Midwest.
So I’m not buying the “weather ate my homework” excuse. Instead, I think something more is at play here — namely, that affordability remains poor, that speculators have left the building, and that tighter mortgage standards are starting to knock marginal buyers out of the market.
Want more proof?
Not Much to Write Home About
When It Comes to New Housing
The market for newly built housing isn’t looking that good, either. Sure, overall sales rose … but by a smaller margin than expected. The seasonally-adjusted annual sales rate climbed 2.6% to 858,000 in March vs. February. Economists were expecting a gain almost twice as large!
Compared to a year earlier, sales took a nosedive. They were off a hefty 23.5%. And as you can see in my chart, they’re hovering right around their worst level in seven years. That hardly sounds like a recovery to me.
Some people took solace in the fact that median home prices reportedly climbed from a year earlier, too. But actual on-the-ground observations continue to show that builders are using lots of incentives and base price cuts to move inventory. [Editor's note: For more on this, read "What I'm Seeing in Housing Now".]
It’s tough to say whether the government’s figures are truly capturing the impact of all those upgrades, freebies, closing cost giveaways, and subsidized mortgage rates. My educated guess is they’re not.
On the inventory front, a hefty 545,000 new homes were up for sale in March. That’s close to the all-time high of 573,000 set last summer, and way above the typical range we saw in the 1980s and 1990s (260,000 to 380,000). It also amounts to 7.8 months of supply at the current sales pace, just shy of the 16-year high set in February.
Three Forces Will Continue
To Punish Housing. What to Do …
Of all the issues out there facing the housing market, supply is still the biggest one in my book. In fact, I think three distinct forces are keeping inventory levels high, and I don’t expect them to go away anytime soon …
1. The “March of the re-listers” has begun. These people tried to sell last year and couldn’t. They pulled their homes from the market over the holidays, but now they’re putting them back on the market again to try to capitalize on the seasonal upswing in activity we see every spring.
2. Lots of homes are in weak hands. Some 40% of the homes bought at the tail end of the boom were purchased as investments or second homes, not primary residences. Those owners are more likely to cut and run when the market turns south.
3. Forced foreclosure sales. California-based RealtyTrac said nationwide foreclosure filings surged 47% in March to 149,000, the highest reading the company has reported since it started publishing its data in January 2005. As mortgage defaults and foreclosures rise, more mortgage lenders and banks will dump the homes they’ve repossessed on the market, keeping supplies elevated.
So be realistic about real estate:
If you’re trying to sell, price your home right — meaning, low.
If you’re looking to buy, drive a tough bargain.
And if you’re looking for a place to invest, look elsewhere!
I just don’t see the attractiveness of home building shares … or shares of other companies whose fortunes are tied to housing. So many other stocks and sectors are surging that I think it makes sense to go where the action is … and where the fundamentals actually look good!
Look, when it’s time to bargain shop in housing stocks … or when it’s time to look for more real estate investments … I’ll be happy to spread the news. Unfortunately, we’re just not there yet.
Until next time,
Mike
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