The mainstream press would have us to believe a real estate market rebound is imminent. They keep glomming onto any data that shows the slightest sign of stability.

• For instance, Bloomberg jumped all over the July 1 report from the National Association of Realtors that showed pending sales for previously owned homes rose for the fourth consecutive month.
• Other outlets had a field day with the news out of the Mortgage Bankers Association that refinancings hit a three-month high in early July.
• And ditto for the news that foreclosures dropped 11% in the second quarter.

But these “signs of stabilization” are bogus. Or to beg, borrow and steal from value-investing legend, Whitney Tilson, they are the “mother of all head fakes.”

Fact is, these short-term improvements were fabricated. They materialized because of temporary factors like the $8,000 first time homebuyer tax credit (set to expire November 30), artificially low interest rates (remember the Fed’s been buying Treasuries, en masse, since March to suppress rates) and government and bank moratoriums on foreclosures.

In the end, all this massive intervention is doing is propping up short-term results and prolonging the inevitable. Furthermore, to turn a blind eye to all this government meddling and pretend it’s not artificially influencing demand and prolonging foreclosures, would be irresponsible.

Don’t get me wrong. I’m happy to see an improvement in the market from bad to less bad. But overall, the numbers are still crap.

Three Obstacles to a Housing Market Rebound

Over half of the homeowners who took advantage of loan modification programs, are delinquent again. They weren’t paying before they got interest rate and/or principal reductions. And go figure? They’re not paying now. Great idea Washington!

On top of that, housing prices are still too high to attract buyers yet too low for sellers who are underwater on their mortgages. Such out-of-whack supply/demand dynamics will only foster more uncertainty.

In my opinion, before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…

• Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months. If we factor in the “shadow inventory” – the roughly 600,000 homes that banks are withholding from the market – the problem worsens. Excess supply always erodes prices.
• Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence.More than 20% of Alt-A loans are already 60-plus days late, up from an average of about 3% for the last decade. If interest rates creep up even modestly in the next two years – a near cinch given the likelihood of inflation – payments will increase notably. In turn, so too will default rates.Bottom line, another wave of massive writedowns looms on the horizon.
• Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “…It is unlikely we will see much of an improvement [in foreclosure rates] until after that.”The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower.

The Housing Market’s Reality Bites… But We Can Still Profit

As I’ve said, a simple supply and demand equation underpins the housing market. Right now, there’s way too much supply. Thus, prices can only go lower. And in my opinion, they’ll go significantly lower.

Since the peak, home prices have dropped 34%, based on the Case Shiller Index. However, prices still rest roughly 10% above the long-term trend line.

But given the supply imbalance is so dramatic, and the fact that markets consistently overshoot resistance and support levels, I’m convinced that prices will crash right through the trend line, falling another 20% to 30% before we see a legitimate turnaround in 2011.

I’m not alone, either. Mortgage insurer PMI Group estimates that a 75% chance exists that the majority of our metropolitan areas will experience price declines through the first quarter of 2011. And if we experience a double-dip recession, all bets are off on how low prices will go.

The brave at heart can look to profit from the decline by shorting any of the major homebuilders like:

• Pulte Homes (NYSE: PHM)
• KB Home (NYSE: KBH)
• DR Horton (NYSE: DHI)
• Toll Brothers (NYSE: TOL)
• Or Lennar (NYSE: LEN)

Be warned, though. The ride will be volatile.

Otherwise, the newly launched MacroShares Major Metro Down ETF (NYSE: DMM) is an option. The exchange traded fund is benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index and features three times (300%) leverage. For every 1% decline in the index (i.e. real estate prices), the ETF should increase in value by 3%.

For the truly conservative investor, I recommend the “nothing ventured, nothing lost” approach. In other words, wait to go long when buying real estate because we’re nowhere close to a bottom. At the very least, wait for the prevailing shrink-wrap frenzy to end.

Good investing,

Louis Basenese

Source: Three (More) Reasons Real Estate Isn’t Rebounding

Here are just a few statistics in the news lately from respected market mavens like the S&P/Case-Shiller Indices and the National Association of Realtors:

• The “average” price of homes in the U.S. is down almost 35% from the record highs of 2006.

• “Median” housing prices are down 19% in 90% of the major markets in the United States.

• Building permits were up 4% in April from last year, and homebuilder confidence increased from 16 to 18.

So what do these numbers mean to you?

Probably nothing.

“It’s like a weatherman who combines conditions in Nome, Alaska and Clearwater, Florida and issues an “average” national forecast of 45 degrees,” according to Andrew Waite, a former institutional investor who is now the publisher of a magazine focusing on real estate investing. “Real estate markets are by their very nature ‘hyperlocal. Averages simply don’t apply.”

Waite is the publisher of thePersonal Real Estate Investor, a glossy magazine that focuses on investors who buy houses or condos to manage for income or to fix up and sell for a profit, and he wastes no time in dismissing most of the “indicators” in use as useless and irrelevant.

As a onetime Wall Street venture-capitalist who subsequently joined Silicon Valley’s Sand Hill Road private equity crowd, Waite also understands how the Wall Street investment game is played – and, in the case of the U.S. housing market, the missteps many overly-anxious analysts make as they attempt to create a “one-size-fits-all” picture of the nation’s housing market.

And he would like you to know that all those gloom-and-doomers are overshadowing a real estate rebound that is already underway.

The Fractionalized Housing Market

The housing market is too fractionalized to put a finger on an “average” price, Waite says.  Real estate is segmented by individual neighborhoods, and is further subdivided by price points and such price-influencing factors as condition, cash flows – and even cap rates on rental properties.

To find the facts about housing prices for his investors, Waite compiles and verifies data directly from records kept by local Multiple Listing Services.  From sales records, Waite determines the inventory supply in months for major markets. That gives him the “hyperlocal” data that reveals an accurate picture of individual markets.

“The formula’s pretty simple,” he says. “As housing inventories shrink in real estate markets around the country, demand and prices go up.”

After examining the statistics for March, Waite thinks he sees a clear bottoming pattern, at least in some markets. If he’s right, the Western United States is already making a comeback and the ripples of resurgence will soon make their way to the Midwest and then to the East Coast markets.

What’s more, the improvement from year to year indicates the bottoming sequence will soon have prices on the rise.

Housing Markets in Western U.S. Have Already Bottomed

Remarkably, Waite’s research reveals the downtrodden Las Vegas housing market has already bottomed and is currently “balanced” between buyers and sellers.  Housing markets in Seattle, Los Angeles, Phoenix and Denver are on the move too:

• Phoenix’s MLS housing inventory is 7.33 months, down from 19.1 months last year.
• Denver’s current inventory is 5.59 months, down 35% from a year ago.
• San Diego’s inventory stands at a paltry 4.19 months, down 58% from a year ago.
• And Las Vegas’ inventory stands at just 6.25 months, down a whopping 64% from an inventory of 17.5 months in 2008.

In fact, Waite sees the trend on the West Coast as a leading indicator that the worst is behind us. In short, if you’re in one of those depressed markets where prices are still dropping, relief may well be on the way.

Here’s the “market-bottoming” sequence as he sees it:

The chart depicts the market for houses in the Western United States.  It follows the natural sequence of a housing market recovery through its progressive phases:  As the supply of homes drop, demand picks up. And as that demand picks up, prices first stabilize and then begin to rise.

Based on this research the housing cycle on the West Coast has already bottomed and prices will start to swing upward in the fall.  Eventually the trend will move from West to East and prices will move up broadly.

But the recovery will be painfully slow getting to certain markets where cities are still being hit with swelling inventories, which is likely to continue to put downward pressure on prices.

Housing supplies in Baltimore, for example, have increased 11% from March 2008, to 15.9 months this year.  Similarly, listings grew from eight months to about nine and a half  months in Houston, and from eight and a half months to 10 months in Charlotte.

But some of the hardest hit markets are clearly on the upswing.  Miami has slashed inventories from a staggering 52 months to 31 months, a decrease of 40%.  Rochester, New York and Boston have each dropped housing supplies by about 13% in the last 12 months.

Some realtors in Boston are even reporting that sellers are receiving multiple competing offers to buy homes for more than their asking price and buyers are entering counteroffers.

Fewer New Homes Stoke Demand

And it’s not just pre-existing home sales driving a rebound in the sector.  In October 2007, new home permit applications stood at roughly 800,000 nationwide.  A year later, in October of 2008, that number had dropped to about 480,000.

Since it takes about 12 months for buildout to progress from permit to finish — and with many builders halting construction altogether — Waite estimates only about 450,000 of those permits will actually translate into new homes that will hit the market in 2009.  And with new home inventories drying up, demand will start climbing as well.

In fact, declining new home inventories are already beginning to stabilize prices in hard-hit southern California, an area where prices were hammered by waves of foreclosures.

KB Home (NYSE: KBH) Chief Executive Officer Jeffrey Mezger said on May 4 home prices in Southern California have begun to stabilize, making his company’s new houses competitive with existing homes, including foreclosures.

“If you go to Southern Cal, as an example, we’re seeing a floor on pricing,” Mezger said recently in a conference call with analysts organized by J.P. Morgan Securities Inc., Bloomberg News reported. “We don’t see prices going down right now, which is a good thing, because then you can set a baseline.”

In March, Los Angeles-based KB Home, reported a narrower first-quarter loss as orders increased for the first time in three years.

And there are other positive signals.

• The median price paid for a home in six Southern California counties was $250,000 in March, the same amount as in January and February, according to San Diego-based research company MDA DataQuick.

• The National Association of Realtors says a total of 3.7 million homes were listed for sale nationwide at the end of March, down 10% from a year earlier.

• The supply of homes for sale in 29 major metropolitan areas at the end of April was down 3.6% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.

That last figure defies normal trends — listings typically increase in April as for-sale signs bloom heralding the spring home-shopping season.  Since 1982, the average increase in April from the prior month has been 4.8%, according to Zelman & Associates, a research firm.

Tom Lawler, a housing economist based in Leesburg, Va., says the decline in listings “suggests that the bottom in home prices is much closer than many pundits believe.”

Still Looming: Foreclosures, Credit Crisis, And Unemployment

But Lawler says the future remains unclear because no one really knows how many homes in the foreclosure process will eventually land on the open market.  Estimates are that some of the nation’s largest banks currently are listing only about 60% of foreclosed homes.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), are the biggest owners of foreclosed homes, but they have only about 35% to 50% of those homes listed for sale at any given time, according to industry estimates.

And some foreclosed homes aren’t listed because they’re on the rental market, are undergoing repairs or are subject to legal action or other delays.

Barclays Capital PLC (NYSE: BCS) estimates that banks and investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. Barclays forecasts that this inventory will peak at around 1.3 million homes in mid- to late-2010, The Wall Street Journal reported.

The credit markets pose another obstacle to recovery.

There’s no doubt that banks have made it more difficult to borrow money.  And mortgages are far more expensive than they appear, especially for people borrowing large amounts or trying to refinance.

As previously reported in Money Morning, buyers can only get those rock bottom 4.75% interest rates you’ve been hearing about if they put 20% down, borrow $417,000 or less, and boast a high credit score (730 to 750).

And the days of “stated income” loans where you don’t have to document your earnings, and option adjustable-rate mortgages, where you could choose to pay less than the interest due, are long gone.

But while that’s true, it’s also true that mortgage lending is still one of the banks most important sources of revenue.

“Tight lending standards and the credit lockup is absolutely the limiting factor on how soon prices will recover nationwide,” Waite says. “But eventually, banks will loosen their purse strings if for no other reason than it’s their most efficient way to earn profits.”

But the cold reality is that skyrocketing unemployment remains a major threat to the recovery of the U.S. housing market.  The unemployment rate soared to 8.9% in April, leaving more than 5 million workers without jobs. Economists predict the national jobless rate will probably hit 10% by year-end even if an economic recovery kicks off before then.

Consumers who are unemployed cannot buy homes, much less pay for the homes they’re already living in. And even consumers who are afraid that they might be joining the jobless ranks are loath to take on the added risk – making them unlikely candidates to buy a new home either.

Bottom Line: Prices Don’t Matter if You’re Not Selling

But while the current news is full of talking heads espousing the latest “average” numbers about the downward spiral in housing prices, the basic truth is the vast majority of homeowners won’t be selling this year or next.

The typical house is owned for five to seven years, and only about 5% of U.S. housing stock turns over in a single year, meaning only 1 in 20 homeowners plan to sell this year.

And, as Waite points out, houses aren’t a tradeable commodity so there’s no reason why you should consider marking your home “to market” as the Wall Street bankers are being forced to do with  those derivatives they’ve been trying to dump.

In fact, if you’re not in a hurry to sell, chances are good your home will recover at least most of its pricing power in the next few years.

“Unless you have to sell now, you’re pretty much insulated.  If you sell in five years, chances are what’s happening now won’t have any effect on your selling price at all,” Waite said.

Source: “Hyper-local” Stats Show Housing Market Has Bottomed