The US Department of Housing and Urban Affairs certainly peed on the parade of those blowing horns and banging drums because they thought the real estate market was recovering. Seasonally adjusted new home sales for January came in at a paltry 309,000, the lowest figure on record, and a gut wrenching decline of 11.2% from the previous month, versus an expected gain of 3.8%. It just doesn’t get any worse than this.
Sure, the horrendous weather in the Northeast was a factor. But the harsh reality is that, with enormous federal and state tax incentives soon to expire, the life support that kept this industry alive is about to see the plug kicked out. Once the Fed ends the TALF, mortgage rates are going up, even if overnight rates remain rock bottom, putting another stake through the heart of this market. Unemployment is going to stay pitilessly high, sending consumer confidence into another death spiral.
For what it’s worth, I never bought the whole green shoots thing, viewing the enormous gains seen in stocks over the last year as nothing more than one giant tradable dead cat bounce. The XHB, the homebuilders ETF, held up remarkably well today. But let’s face it, the life has already been squeezed out of this sector. There is nothing left to short.
As much as I would love to tell my friends to rush out and buy a house because prices have fallen so much here in California, I just can’t bring myself to do it. I have to admit that even I have been guilty of occasionally stopping by at open houses for some local mansions on Sunday afternoons, but always find it a bit of a downer when I come across the listing agent hanging from the bathroom shower head. Take a look at the chart of US house prices relative to incomes showing that homes are still expensive, and that prices continue to fall. On this basis, Los Angeles, San Francisco, and New York are the most costly markets in the country and are falling the fastest. Bank analysts and lenders take note.
At least 25% of homeowners are underwater on their mortgages now, and a new wave of foreclosures is imminently going to slam the market. Not only has the negative equity city (Miami, Las Vegas, Stockton) become a feature of the landscape, we have graduated to the negative equity state (Nevada).
There is also the mother of all demographic problems overhanging real estate, which no one seems to see but me. Remember the baby boomers? You know, the ones with all the money? As they downsize from McMansions to condos to assisted living facilities, their net shrinkage in demand for housing is going to be in the tens of millions of square feet per year.
If you absolutely have to buy a home, make sure that you pick up one of those once-in-a-lifetime deals where you are taking it off a bank, or out of foreclosure, at 30% below the appraised value. I know these deals are happening. Buy it because you need a place to live, not an investment, and don’t count on selling it for a decent profit this decade. And also don’t expect to get the first born child you are putting up for collateral back until they are a teenager. There are going to be so many great trading opportunities in the markets this year that you shouldn’t even think about tying your capital up in a house. Rent, don’t buy.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .