The Frighteningly Obvious Truth That Most Deny – US Housing Continues Freefall & Is Nowhere Near The Bottom

Reggie Middleton's picture

The residential real estate situation is still looking quite bleak.
The downturn (actually, the continuation of the earlier downturn – they
were not two separate events) that I forecast last year has come, and
come with a vengeance. If we may reminisce, the mainstream media was
overrun with optimistic housing forecasts, primarily as a result of some
minor metric upticks born from incessant .gov bubble blowing. From my
post of June 22nd last year - As I Made Very Clear In March, US Housing Has a Way to Fall

From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit

Sales of U.S. previously owned homes
rose in May to the highest level in six months as buyers rushed to beat a
June tax-credit deadline, economists said before a report today.

Purchases
of existing houses, which are tabulated when a contract closes,
increased 6 percent to a 6.12 million annual rate, according to the
median of 73 forecasts in a Bloomberg News survey. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.

Credit-induced gyrations will make
the underlying health of the market difficult to determine over the next
couple of months. A slump in builder shares since early May signals
investors are concerned the damage caused by the end of government
stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.

Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May

June 22 (Bloomberg) — Sales of U.S.
previously owned homes unexpectedly fell in May, a sign demand was
probably pulled into prior months before a June tax-credit deadline.

Purchases
of existing houses, which are tabulated when a contract closes,
decreased 2.2 percent to a 5.66 million annual rate, figures from the
National Association of Realtors showed today in Washington. To receive a
government incentive worth as much as $8,000, buyers must have signed
contracts by the end of April and need to complete deals by the end of
this month.

The decline raises the risk the
retrenchment following the expiration of the tax credit will be deeper
than anticipated. A slump in builder shares since late April has
exceeded the retreat in the broader market on concern the damage from
the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.

Now, this is the BoomBustBlog version
from March of this year where I made it crystal clear that housing will
fall further and significantly. The government incentives are just
market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest

Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”

Click to enlarge - NOTE: videos and interactive graphics are available in the original version of this article at

image202.png

Come 2011, the effects of the government’s attempt to usurp market
forces have nearly completely worn off and housing stock is in free fall
– exactly as I proclaimed in 2009 and 2010 – free fall in an incessant
search for equilibrium. Said equilibrium is nowhere near where we are
now.

My very first post, the one that
created BoomBustBlog, back in 2007 warned that the residential and
commercial real estate bust was not only just getting started, but would
continue for quite some time. I was dramatically more bearish than the
Street and the mainstream in general. Reference The Real Trend in US Housing Prices… Sunday,
September 2nd, 2007. In that post I made clear that although the Case
Shiller index looked bearish, it failed to capture the worst parts of
the residential bust. Well, fast forward 3.5 years later and the story
still stands, even more exaggerated.

Looking at the basic precepts of residential real estate
valuation, there is no real reason why prices should not continue
falling. As indicated in the Bloomberg video below, nearly every factor
that you can plug into the valuation equation is negative. In addition,
the recent fraudclosure issues significantly exacerbate the problem.
Here, you have the most recent snapshot of the Case Shiller index. As
you can see, it is the quintessential picture of a bubble gone bust.
Notice the upticks throughout 2009 and 2010, the results of incessant
.gov bubble blowing. Many truly believed that was the marked turnaround
in the real estate market. Those who believed so did not study their
history nor their spreadsheets. Plug in the numbers, and you will see
that there is no empirical reason for housing prices to go up when they
are still too richly priced to begin with.

Please take into consideration that I believe things are actually
going to get worse, for the shadow inventory buildup has been
exacerbated by the foreclosure issues. All paying subscribers should
review Foreclosures & Shadow Inventory.
Shadow inventory not only hides the true condition of the housing
market, it allows banks to hide the true nature of profits from said
housing stock. More on that in our next post which will contain a
current update of the shadow inventory and foreclosure backlog numbers.

Teaser to our upcoming foreclosure research

Related links:

Interested readers can follow me on twitter, peruse my Residential Real Estate postings and/or my Commercial Real Estate opinion and research. I
will be lecturing on this “realistic” viewpoint of real asset valuation
and the outlook for 2011 as the keynote speaker in both New Amsterdam
(Harlem, NY) and Amsterdam (the Netherlands).


See www.seminar.ingref.com.