Many economic indicators are looking up lately. As we put more daylight between the present day and the Great Recession, there are a host of reasons to be optimistic.
S&P 500 corporations, collectively, are delivering blowout first-quarter earnings that are up an average of nearly 20% over Q1 2010 numbers. The Dow and S&P are up about 90% from March 2009 lows, and up about 23% in the last 12 months. Though the headline unemployment rate is still pretty high, the job market improved in 39 of 50 states last month.
To be sure, there are also reasons to be glum. Inflation continues to eat into family budgets and businesses, federal spending is spiraling out of control – and of course, the housing market remains as bleak as ever.
I have recently written on inflation (read my column on 9 signs inflation is crushing America) and on U.S. budget woes (read my column on 3 budget problems that dwarf the debt ceiling). You can get details on those economic problems in my previous writings – but today, I’d like to point out just how bad it is in the housing market.
Here are 7 signs that, despite some stabilization, housing is headed for a double-dip in 2011:
Millions More Foreclosures Forthcoming. Over the last five years, about 6.5 million homes were lost due to foreclosure. No surprise that figure severely affected the market, right? Well consider this: The Mortgage Bankers Association indicates another 4.3 million more homeowners are seriously delinquent on their mortgages – in short, ripe for foreclosure. We just haven’t gotten to them yet.
Negative Equity Abounds. CoreLogic estimated that as of the end of 2010 more than 11 million homes – over 23% of residential properties with mortgages nationwide – had negative equity. When 1 in 4 homeowners own a house worth less than they paid, the housing market simply can’t function properly. Many people are opting for so-called “strategic defaults” because they are so far underwater the costs appear to be less than the benefits of foreclosure. Others hear of their neighbor’s plight and simply can’t stomach the idea of buying a house now. Such negative perceptions can’t be discounted.
New Home Sales Slump. There were 278,000 new houses sold in February, a paltry number that is near a record low set last August, and one of the lowest figures ever recorded in the data set since it was first recorded back in 1963. Since then sales have “improved” marginally and touched a 323,000 in Commerce Department figures for April. In case you’re curious, three years ago in April 2008 new single-family homes sold at a seasonally adjusted rate of 526,000.
Construction Crashes to a Halt. Commerce Department numbers indicate new home construction continues to be anemic. Housing starts fell 23.9% in April compared with a year earlier, and fell well short of forecasts for 569,000. Permits also fell 4.0%, further indicating developers and builders aren’t too eager to get back into the market.
Builders Burdened by Inflation. As if builders needed another deterrent, commodity prices are making construction much more expensive. Take copper, which is widely used for electrical wiring and plumbing in residential construction. Though the metal has rolled back from a new record set in February, copper prices have more than doubled since early 2009 levels. Paul Dales of Capital Economics recently told the Wall Street Journal that “in the year to April the cost of residential buildings materials rose by 7.2%. That’s the sharpest increase since October 2008.”
Existing Home Sales Slide. According to HUD and the Census Bureau, existing home sales fell about 1% in April to 5.05 million units (seasonally adjusted and annualized). In the latest month, existing sales were nearly 13% below last April. It’s worth noting that last April there was the soon-to-expire tax credit spurring some buying, but it’s naive to say that’s the sole driver of the dip. The inventory of existing homes rose again to 9.2 months worth of sales, up from 8.3 months of inventory in March.
Interest Rates Must Rise. The precarious position of the Federal Reserve warrants an entire article, not just a paragraph. Maybe I’ll write that article soon — but suffice to say that the Fed funds rate has been effectively zero since the end of 2008 and cannot stay that low forever. And when it does increase, mortgage rates will rise in kind and make the cost of homeownership even less attractive. Consider that the difference (very roughly) between a 5% interest rate and a 6% rate on a $200,000 home sale adds over $100 for each monthly payment and about $44,000 in extra interest across the life of a 30-year mortgage. The difference between 5% and 7% is about $250 a month and almost $90,000 in extra interest over 30 years. That’s not chump change.
For the record, I do not think that homeownership is a purely financial equation. As I wrote in a recent column, there are many regular Americans who bought a house because of the school district or proximity to their family or job. Greed and speculators got us into this mess – but if you are basing a decision to buy solely on the “investment potential” of buying a home right now, your state of mind may not be all that different from the irresponsible borrowers and lenders that caused the sub-prime crash. (Read my full opinion on the true value of homeownership here.)
That said, it’s impossible to ignore the potential downside to home prices right now. Admittedly, the prospect of decreasing home values should not be the only factor in your decision to buy a house – but you darn well better take it into consideration.