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With the latest data pointing to a double-dip in home prices, it has become increasingly clear that the wobbly economic recovery won't be getting any help from the housing sector.
Existing home sales sank 9.6% from the previous month, while prices fell 5.2% to a median of $156,000, the lowest since April 2002. And since existing homes comprise 90% of the housing market right now, that's a heavy weight on the overall housing market.
Meanwhile, new home sales last quarter plummeted to an annual rate of 250,000 – far below the norm of 700,000 and a level half that of 1963, when the U.S. only had 120 million fewer people. The median sales price for new homes plunged 8.9% in the last year.
But the worst news recently came with the release of Standard and Poor's Case-Shiller Home Price Index. The index average of 20 major housing markets in the United States fell 3.1% in early 2011, putting it within 1.1% of its April 2009 low. Falling below that level would establish a new post-peak low – and the dreaded "double-dip."
At best this means housing is "bouncing along its trough". At worst, the double dip is already here.
A Long Way Down
Don't be surprised if it takes another year or longer for housing to hit bottom. The more extreme any investment bubble, the longer and more painful the recovery after it bursts.
At the peak in 2005, home prices were 65%-70% higher than historic norms. And the current 31% decline from that peak has not been enough to return housing to these decades-long trend lines. That means prices are likely to fall even more before reversing.
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Despite what may look like stabilizing, the large number of homes on the market is still pushing prices lower. Home inventories are averaging more than eight times demand for sales. And if current sales number turn out to be lower than expected, there could be up to a 17-month housing backlog on the market, which will drive prices much lower.
Some of this excess inventory is an aftereffect of the overbuilding that took place during the boom, but much of it has resulted from the endless stream of foreclosures.
Short sales and foreclosures made up 39% of last month's transactions, up from 35% a year ago.
These "distressed" properties sell at an average of 28% below market value. And when foreclosed properties making up more than one third of sales occurring everyday, overall housing prices must be affected.
Then there's the so-called "shadow inventory". These properties – ones that are either 90 days past due on their loans or already in foreclosure but not yet on the market – numbered 1.8 million, as of 2011.
And that figure doesn't include the two million homes that are more than 50% underwater – worth less than half of what is owed on the mortgage. According to statistics compiled by CoreLogic, most underwater properties will end up in the foreclosure pipeline as well.
But even that total of nearly 4 million homes waiting to hit the market doesn't represent the full extent of the problem. Inventory is moving on and off the housing market depending in the time of year and the situation of the current owner – making it almost impossible to get a "real" inventory count on U.S. homes for sale.
It's the Economy
Of course, lingering issues with the U.S. economy, particularly the stubbornly high unemployment rate and tighter credit, have reduced the number of eligible buyers.
The high percentage of Americans without jobs is possibly the largest factor preventing a rebound in housing from gaining any traction. It's one of the major factors driving foreclosure statistics to dizzying heights. And, in conjunction with tight credit, it's kept new buyers out of the market.
The national unemployment rate will remain near or above 10% for the rest of 2011, with next year beginning to look just as bad.
And it works both ways. Just as economic growth feeds a booming housing market, the struggling housing market continues to inhibit the recovery.
Construction of one new home creates three jobs for a year and generates $90,000 in taxes, according to the National Association of Home Builders. And people who buy existing homes usually spend money on furnishings, appliances and home improvements, which benefits thousands of businesses.
The steep decline in values – homeowners in the U.S. have lost $8.3 trillion in property value in the last four years – has subtracted money that could have stimulated the economy.
Residential investment has dropped from 6% of the gross domestic product (GDP) in 2005 to 2.2%. In the U.S., housing historically averages about 5% of the GDP.
Construction employment on residential projects has dropped to 1.6% of all jobs from 2.5%.
The silver lining, if there is one, is that the housing market can't get much worse – even with the dreaded double dip on the horizon.
Action To Take
The best approach in 2001 is to wait until you see some steady improvement in new-job creation and a decrease in inventory before considering buying into the housing sector (or before considering buying a house, for that matter – even if you don't get in on the "bottom", you're risk of losing more value once you own the property is greatly diminished.).
When it becomes clear that more people are going back to work – and keeping their jobs – start checking out the major housing stocks. Lots of folks will want or need new homes to go along with their new jobs.
If you want to get an early jump on the rest of the crowd, look first the stocks of firms that supply homebuilders.
Weyerhaeuser Co. (NYSE: WY) is one of the best choices among suppliers. It has remained profitable throughout the housing mess and saw increased year-over-year revenue and earnings for three of the last four quarters. But the overall market has still forced down the company's share price.
When good news starts coming in, WY – with its excellent track record and "early bird" status as a supplier – will be one of the first stocks to rebound.
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