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August 17, 2009
Issue 58  -  Is it Safe to Buy a House?
 
I am currently seeing a lot of news items mentioning the "green shoots" in the housing industry and that it may, indeed, be a good time to buy a house.  Is that so?  Are things ready to take off to the upside?  Sadly, I just don't see it.  This is from the statistics and facts, not from the optimism train I see on CNBC.  In real numbers, this is the reality:
 
 
FILE - In this Wednesday, Aug. 29, 2007 file photo, a foreclosure sign tops aAP – FILE - In this Wednesday, Aug. 29, 2007 f
By ALAN ZIBEL, AP Real Estate Writer Alan Zibel, Ap Real Estate WriterThu Aug 13, 7:26 am ET

WASHINGTON – The number of U.S. households on the verge of losing their homes rose 7 percent from June to July, as the escalating foreclosure crisis continued to outpace government efforts to limit the damage.

Foreclosure filings were up 32 percent from the same month last year, RealtyTrac Inc. said Thursday. More than 360,000 households, or one in every 355 homes, received a foreclosure-related notice, such as a notice of default or trustee's sale. That's the highest monthly level since the foreclosure-listing firm began publishing the data more than four years ago.

Banks repossessed more than 87,000 homes in July, up from about 79,000 homes a month earlier.

Nevada had the nation's highest foreclosure rate for the 31st-straight month, followed by California, Arizona, Florida and Utah. Rounding out the top 10 were Idaho, Georgia, Illinois, Colorado and Oregon. Among cities, Las Vegas had the highest rate, followed by the California cities of Stockton and Modesto.

While there have been numerous recent signs that the ailing U.S. housing market is finally stabilizing after three years of plunging prices, foreclosures remain a big concern. Foreclosures are typically sold at a deep discount, hurting neighbors' home values.

The mortgage industry has been slow to adapt to the surge in foreclosures. Many lenders have needed government prodding to get up to speed with the Obama administration's plan to stem foreclosures.

The Treasury Department said last week that banks have extended only 400,000 offers to 2.7 million eligible borrowers who are more than two months behind on their payments. More than 235,000, or 9 percent, those borrowers have enrolled in three-month trials in which their monthly payments are reduced.

"The volume of loans that are in distress simply overwhelms" those efforts, said Rick Sharga, RealtyTrac's senior vice president for marketing.
 
So the volume of loans is overwhelming?  Can you imagine what would be happening if the government wasn't redoing loans?  What if all the banks started to sell their "stock" of houses?  Prices are not going to go up anytime soon without massive hyperinflation.  Money supply data is still rather subdued so that isn't happening before the end of the year.   Here is a chart: (from www.fieldcheckgroup.com/blog)
 
 
 
 
 
A couple things to focus on here.  First notice that all the lines are still trending UP!!!!  How in the world are things going to get better before foreclosures start easing?  It just can't happen.  Next look at the up tick in Jumbo loans.  These are those loans over $700K.  If they are having difficulties, things are really tough.  Lastly, remember that the option arms resets aren't going to hit full force until the fall.  Do you really think that the foreclosures will start coming down then?  Look for more government "help" to be legislated next year.  Another indicator of housing market health is apartment vacancies:
 
Apartment vacancies spiked in Q2 in U.S.
Apartment vacancies in the United States hit their highest level in 22 years in the second quarter of 2009. Job losses are to blame, according to Bloomberg, as tenant demand falls when people don't have any income. Vacancies rose to 7.5% from 6.1% year-over-year, according to Reis Inc. But this still doesn't reach the 1987 level of 7.6%. In June, the U.S. unemployment rate hit a 26-year high, with payrolls dropping faster than expectations.

Conventional wisdom has it that potential homebuyers turn into renters when the job market softens. The rental pool is shrinking, however, leading to the high rate of apartment vacancies as landlords struggle to fill units. Asking rents for apartments fell 0.6% last quarter (for the second in a row), according to Reis, the largest fall since the company started to track this measure in 1999. Overall, asking rents (including other types of residences) were off 0.7% year-over-year, down to an average of $1,040 a month.

Rents paid by tenants, on the other hand, fell 0.9% from the previous quarter, reaching $975. Effective rents were off 1.9% from the previous year.
 
 
The pressure on apartment rents downward will draw more potential homeowners toward rentals.  This makes the oversupply of houses last longer which keeps pressure on prices.  A thought about this from GATA:
 
"Here are the factors:

1) unemployment
2) overbuilding
3) growing foreclosures

The Government can throw money at 1 and 3 - we are seeing in the recent non-farm payroll reports that Government hiring has been rapidly increasing and the Government is throwing billions in a failing attempt to restructure mortgages for some homeowners (over 50% of mortgage modifications go back into default within the first year). #2 can not be addressed except with a lot of time and a real growth economic recovery. It will be a long time before the latter occurs.

The solution used to address 1 and 3 - Government spending - will continue to ramp spending deficits higher, devalue the dollar and eventually create rampant price inflation. Remember this: "we will see deflation in everything we own and inflation in everything we use" (ultimate source of quote unknown)....."
 
Taking that into account doesn't make me want to run out and buy rental units (although this is a long term goal for me, just not yet).  Business optimism is down also:
 

US small business spirits downcast in July-survey

WASHINGTON, Aug 11 (Reuters) - Proprietors of small businesses have become more pessimistic as their worries grow about whether business conditions will improve in the next six months, according to a survey released on Tuesday.

The National Federation of Independent Business said the index fell in July for the second straight month, dropping 1.3 points to 86.5.

Small businesses produce half the private GDP, employ the bulk of the private sector work force and generate most of the new jobs created, and now face a plethora of proposed taxes: unemployment, gas, cap and trade, NFIB said.

"Now they are expected to finance the new experiments of Congress and the president such as healthcare reform, auto industry bailouts and union pension fund bailouts," said
William Dunkelberg, the NFIB's chief economist.

"Even with good news on the economy, it's hard to be optimistic -- and commit funds to the future -- with these prospects facing small business owners," said Dunkelberg.

Only 5 percent of small business owners think now is a good time to expand their business, and more firms expect their real sales volumes to decline than grow, the group said.

The percent of owners expecting business conditions to deteriorate lost 10 percentage points from June, 15 points from May, this in spite of increasingly positive signs that the economy is improving, the group said.

Plans to invest in inventory improved, but remained negative, with 5 percent more planning to reduce stocks rather than to increase them, NFIB said.

"The recession is wearing Main Street folks down," said Dunkelberg. "And unfortunately, lawmakers in Washington are doing more to scare small business owners than to reassure them of an economic recovery."

-END-

Small business is where Obama says the job growth will be coming and yet they are very pessimistic.  Who is telling the truth?  I'd go with the business owner.  If large businesses are still doing layoffs and small businesses aren't hiring, who is going to buy houses?  Is this starting to become clear?
 
Another area of concern you may have heard or read about is the commercial real estate market.  This market is literally imploding and things look to get worse.  Have you seen all those half empty strip malls?  They are probably going to get worse and that won't help the economy or housing market:
 
"S&P says commercial loans casts a long shadow over US bnks

Aug 11 - Despite some hopeful signs of relief for U.S. banks in second-quarter 2009, the next several quarters likely will continue to be struggle, especially for small regional institutions, Standard & Poor's Ratings Services analysts said during a quarterly conference call on Aug. 6.

Overall, the industry outlook remains predominantly negative, in part because of banks' lower profit margins related to still-heavy provisioning required for increased reserve building.

Asset-quality deterioration shifted to commercial lending, both commercial and industrial and commercial real estate (CRE), from consumer-related loans.

Most credit losses are also pressing close to Standard & Poor's stress-test expectations and those of the U.S. government. Asset quality declines in the business sector, including construction and CRE, have been slower to materialize than we anticipated, but we still expect losses to start creeping up."
 
 
This just doesn't sound too good, does it.  Here is a chart showing things a little more clearly:  (from theGoldenTruth blog)
 
 
 
 These are rather dramatic jumps in these large cities.  Does that look like things are improving?  Of course it doesn't.  The economy MUST improve before it will be a good time to buy a house and now is not the time.  I'm still looking at 2013 as a good time target.  See you next week.
 
 
Stock Plug:  My largest holding Gold Resources Corp (GORO) had great news this past week as it received it's final mine permit.  They also had delivery of the last substantial piece of mining equipment.  They should be mining within a couple months.