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April 9, 2011
Issue 142  -  Housing, on a Cliff?
 
 
The latest Fortune magazine has a feature story on how the housing market is all up from here and that NOW is the time to jump back in.  I respectfully disagree.  The main thrust of the article is the lack of new homes being built.  While on its face that would seem to suggest that eventually this will push prices higher as supply drops.  Unfortunately, there is a huge shadow inventory on the banks balance sheets.  There are also many "homeowners" just waiting to sell to rid themselves of their albatross.  This huge inventory is the reason there are fewer houses being built.  Here is the latest Case/Shiller graph:
 
 
As you can see after a modest upturn, prices have started back down.  I expect this to continue.  I don't think buying a house will make any sense at all until after 2013.  Here is more evidence:
 
 

CNNMoney.com

Housing market: 13% of all U.S. homes are vacant

Les Christie, staff writer, On Monday March 28, 2011, 8:28 am EDT.

High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it's only getting worse: The national vacancy rate crept up to just over 13% according to last week's decennial census report. That's up from 12.1% in 2007.

"More vacant homes equal more downward pressure on home prices," said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

 
This is a TREMENDOUS quantity of homes.  While some of them are 2nd homes, a lot of them aren't.  There are tons of empty homes that aren't even listed as for sale.  Another large negative ignored by the Fortune magazine article is underwater owners:
 
 

Underwater mortgages rise as home prices fall

Published: Tuesday, March 08, 2011, 11:05 AM     Updated: Tuesday, March 08, 2011, 1:46 PM
 By Associated Press business staff The Plain Dealer
The number of Americans who owe more on their mortgages than their homes are worth rose at the end of last year, preventing many people from selling their homes in an already weak housing market.)

WASHINGTON -- The number of Americans who owe more on their mortgages than their homes are worth rose at the end of last year, preventing many people from selling their homes in an already weak housing market.

About 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater in the October-December quarter, according to report released Tuesday by housing data firm CoreLogic. That's up from 22.5 percent, or 10.8 million households, in the July-September quarter.

The number of underwater mortgages had fallen in the previous three quarters. But that was mostly because more homes had fallen into foreclosure.

 
So think about that for a moment.  23% of ALL homeowners are underwater.  Not only is that a bad thing for your net worth, but it makes things very difficult when selling.  An underwater seller will not receive enough in a sale to pay off the loan, let alone profit.  This is a huge yoke around the housing market. 
 
Mish Shedlock reports about his reading of the latest mortgage report and the news gets worse:

March LPS Mortgage Monitor Report: 30% of Loans in Foreclosure have not made a Payment in Over 2 Years

Inquiring minds are reading the March 2011 LPS Mortgage Monitor.

There is a bit of good news in the report. Delinquent and Non-Current Rates are improving. However, the rates are still exceptionally high historically. Also, some of the foreclosure data is skewed by moratoriums and reworked loans.

On the other hand, option ARM foreclosures have increased dramatically over the last six months and 30% of loans in foreclosure have not made a payment for at least two years. 47% of those in foreclosure have not made a payment for at least 18 months.
WHAT!!!!  30% of foreclosures haven't made a payment in 2 years?  No need to wonder anymore of how the retail industry hasn't collapsed.  If I don't have to pay rent, I've got a lot more disposable income.  This money has been a support to the economy which just shouldn't be there.  Here's a chart from the report:
 
 
Looking at this chart there is good news, but actually, the drops in the top two lines is due to reworking/refinancing of mortgages.  These people will probably end up in trouble a couple years down the line.  Notice that foreclosures are still rising even though we know for certain that the banks have put the brakes on them.  This also bodes poorly for future price appreciation.
 
A little more evidence of a troubled housing market:
 
FDIC "Cash for Keys" Proposal Would Pay Underwater Homeowners $21,000 to Walk Away
Submitted by bobbyw24on Sat, 03/26/2011  

The five biggest US mortgage servicers were told this week at a private meeting with regulators to consider paying delinquent borrowers up to $21,000 each as part of a broader settlement of the foreclosure crisis.

People who attended the meeting, chaired by the Federal Deposit Insurance Corporation on Monday, said the industry-wide “cash for keys” program would involve the biggest servicers, led by Bank of America paying borrowers as an incentive to leave their homes.

 
If the housing market was ready to "take off" as the Fortune magazine article maintains, would this type of discussion be happening?  I highly doubt it.  Why would you need to pay people to leave their house if the market is healing?  You wouldn't.
 
The housing market is totally reliant on one thing...job growth.  Without jobs, people can't make house payments and they won't buy houses.  Job growth is still anemic, check out this chart from the FED:
 
 
 
What you see here is the job growth of the last three large recessions.  Notice that each successive recession has produced weaker and weaker job growth.  In fact, this recession recovery finds our job growth FAR behind where it needs to be.  There is no housing recovery in the offing without more robust job growth.  It's that simple.  Here's another chart comparing all of the recessions from 1948 until present:
 
 
 
What is striking on this chart is that this is the ONLY recession of the eleven shown where job growth hadn't rebounded to prior levels.  In fact, not only are we not back to our old levels, we are still 5% below.  That is just not the necessary springboard for a strong recovery in the economy or housing.
 
Positions
 
GORO  (closed $29.00, up $2.38, average price paid $6)
 
Well, if we get a couple closes over $30, the basing will be completed and up we'll go.
 
Mexus Gold  (closed $.25, up $0.01, average price paid, $.22) 
 
 
Stocks    (Current status, out, sold on March 18)
 
Physical Gold  (Closed $1,475,  up $44,  average price paid $395)
 
In case you are falling for the "gold is in a bubble" story, here is a chart from Casey Research:
 
 
As you can clearly see, the amount of assets in gold is still far below 1%!  Until this breaks through at least 2 or 3%, I wouldn't even consider selling my gold.
 
Physical Silver  (Closed $40.93,  up $3.10,  average price paid $5.31)
 
This week's video is a presentation made at a venture capital conference.  These are millionaires listening to pitches from aspiring entrepreneurs looking to raise money.  This one is a prank that was taken seriously.  You'll want to watch it twice to look really closely at the things written on the slides as they are a hoot.  Have a great week!