New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. (NYSE: PHM) has more than doubled from its low. Toll Brothers Inc. (NYSE: TOL) is up around 70% from its bottom. D.R. Horton Enterprises (NYSE: DHI) is up almost four times from its bottom. Lennar Corp. (NYSE: LEN) is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. (NYSE: HOV) is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recently released earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years. Yet January 2000 was not the bottom of a housing depression – far from it, in fact. That was actually close to the top of the dot-com bubble, when valuations of all assets were at all-time highs. So an average price over the whole country that – even now – remains 42% above the average price recorded at the very top of a huge economic boom does not seem like a market bottom to me.

You also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.

And that’s not all.

The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.

In individual cities, the picture is somewhat brighter. Phoenix and Las Vegas prices are less than 10% above their 2000 levels, having been halved from their respective peaks. In those markets, house prices may truly be reaching a bottom, although the overhang of foreclosures after such a huge drop may make recovery slow. At the other extreme, Detroit housing is 30% cheaper than in 2000, a testimony to the awful economic environment there, with the bankruptcies of General Motors Corp. (NYSE:GRM) and Chrysler Group LLC.

Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.

Probably the best prospects, however, are in Denver and Dallas, where prices are about 20% above their 2000 level, roughly in line with the increase in consumer prices during that same period. However, the local economies are strongly based on natural resources, particularly oil, whose price is triple its 2000 level. With prices in Dallas and Denver down only about 10% from their 2000 peaks, a true recovery in those cities may be near.

At the opposite extreme are the metropolitan “Big Three” of Los Angeles, New York and Washington, where prices are 61%, 71% and 74% above their 2000 levels, respectively.

Washington will be fine, of course: The Obama administration’s spending-and-legislation plans have attracted yet another huge influx of bureaucrats, lobbyists and lawyers, all of which will boost the housing market to new highs. With New York you have to worry about all the financial-services jobs being lost as a result of the worst financial crisis since the Great Depression.

From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. Housing is likely destined to once again become a highly regional market, as it always was prior to the 2001-2006 market boom, with the cycles in each market being very different.

As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.

Source: The U.S. Housing Market’s False Dawn

Existing home sales rose 7.2% to a 5.24 million annual rate in July, the most since August 2007 and the fourth straight month the figure increased, the National Association of Realtors (NAR) said Friday. Year-over-year sales grew 5%, the increase since September 2007, just before the markets came crashing down the following month.

“The housing market has decisively turned for the better,” said NAR chief economist Lawrence Yun. “A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales.”

Rising sales numbers in the past few months may have triggered previously discouraged sellers to re-list their homes, according to Yun.

Total housing inventory at the end of July grew 7.3% to 4.09 million existing homes available for sale, representing a 9.4-month supply at the current sales pace. However, the raw inventory totals are 10.6% lower than they were last year.

Sellers are responding to rising inventories accordingly: The national median existing home price was $178,400 in July, 15.1% lower than a year ago. But the fact that buyers are dipping their toes back into the murky depths of the housing market doesn’t necessarily mean the sector is trending toward a full-blown recovery.

Turn of the Year Makes for Uncertain Future

One in three homes sales last month came from first-time buyers who benefited from the Obama administration’s $8,000 tax credit, which ends after November. First-timers accounted for almost the same amount in June with 29%. That means there could be a significant drop in purchases when that program expires.

The real estate industry is lobbying Congress to extend the first-time buyer tax credit, and Nevada Democratic Senate Majority Leader Harry Reid told reporters earlier this month an extension is “something we can get done.”

With or without a tax break, consumers in this economy are looking for a bargain much like they are with retail sales and auto sales. The bulk of the first-time tax credit sales have come from lower-priced homes, and NAR data supports that. Sales of homes that cost less than $250,000 were up almost 17.8% year-over-year through June. Meanwhile, sales decreased 13.3% in the $250,000-$500,000 bracket, 18.6% in the $500,000-$1 million range, and 32.7% in the $1 million – $4 million range.

Lost pricing power in the more expensive homes wasn’t lost on Pulte Homes Inc. (NYSE: PHM), which last Tuesday finished its acquisition of value-priced homebuilder Centex Corp.(NYSE: CTX), making Pulte the largest homebuilder in the United States.

“I’m not seeing a tremendous amount of good news on the job or economic front, so I do think it’s important that the [tax] credit get extended,” Pulte Chief Executive Officer Richard Dugas told The Associated Press.

The turn of the year isn’t likely to yield much good news on the job front. Most economists are expecting the unemployment rate to top out around 10%, and although July’s rate dipped one-tenth of a percentage point, the latest weekly initial unemployment insurance claims were discouraging, rising 15,000 to 576,000 for the week ended August 15.

“The improvement in the labor market has stalled,” Scotia Capital Inc. economist Derek Holt told Bloomberg News following the latest jobless claim figures. “Consumer spending will be pushed back on its heels for a longer time than markets are expecting.”

When the bleeding of jobs does peak, an upturn in employment could take some time as the United States experiences a jobless recovery. With an unemployment rate at or around 10%, home inventory levels could creep back in to 2008 territory.

“[The unemployment rate projection] indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate,” Fed economists wrote.  “This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing work forces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.”

Source: Home Sales Will Struggle to Rebound Without Tax Credit Extension

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

However, a new blizzard of government money may be coming to your neighborhood, and it promises to be a true bailout for the masses, not just for those in foreclosure or real financial difficulty.

Tight credit and lending markets, rising foreclosures, and surging unemployment figures have homebuyers on the sidelines, pummeling the fortunes of homebuilders such as D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM) and Centex Corp. (CTX)

“It is going to be a very cold winter indeed for homebuilders,” Joshua Shapiro, chief U.S. economist for forecasting firm MFR Inc., wrote in a note to clients Monday, MSNBC reported.

And the numbers are grim.

The U.S. Commerce Department yesterday (Tuesday) reported that housing starts, where construction has actually begun, fell 18.9% to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October, much less than the 740,000 starts Wall Street analysts expected.

New building permits, predictive of future home construction, plummeted 15.6% to 616,000 units from 730,000 units in October. That was also way below analyst estimates of 700,000.

Housing starts were down 47% in November from the rate in November 2007 and permits were down 48.1%, the largest year-to-year drops since January 1991.

But on the bright side, any slump in new home construction could help U.S. housing market prices recover.

“The more we have less housing starts, the more we can shrink existing inventory,” Steven Goldman, market strategist at Weeden & Co. LP, told Reuters.

The news comes on the heels of a phalanx of trillion-dollar-government efforts and bailouts to banking and government agencies designed to shore up the housing industry. The economy has a variety of problems, but the housing industry is at the crux of any plan to return the U.S. economy to a healthy state.

Obama’s Housing Plan

Some economists are forecasting gross domestic product (GDP) to fall 8% for the current quarter, making the most drastic policy proposals increasingly palatable.

And the latest plan to emerge from the inner workings of President-elect Barack Obama’s recovery team is a stunner, sporting an astounding price tag of $3 trillion.

According to Bloomberg News, the so-called Hubbard-Mayer plan is being studied by Lawrence Summers, chairman-designate of the National Economic Council, and is already “on a fast track at the Treasury.”

The plan calls for reviving the faltering housing market by providing just about everybody access to a 30-year fixed-rate mortgage with a 4.5% interest rate. That’s almost a full percentage point below the current national average rate of 5.47%. The plan might even be available to existing homeowners who want to refinance their mortgages.

The bottom line: If you have a mortgage, this plan would put extra money in your pocket.

Assume a homeowner currently has a $500,000, 30-year fixed rate mortgage at 6.1%, the average rate issued this year, lowering the interest rate to 4.5% would lower the monthly payment by about $500.

The thinking of the Obama team is that this plan might just be the magic bullet needed to turn the economy around.  After all, if Joe Taxpayer’s monthly housing payment drops by $500, he might not be afraid to go out and purchase that new car he’s been eying.

The effects from millions of subsidized mortgages like these could dramatically increase the number of home buyers and help stabilize or even push property values back up.

But the plan could be so expensive that the Treasury may try to limit it to new home buyers, preventing homeowners who want to refinance from participating.

That, however, might be impossible to enforce.  According to one scenario sketched out by experts, creative homeowners could simply draft a friend into an deal under which each would agree to buy the other’s house, grabbing the new 4.5% loan to do so. Then they could quit, claim the deed back, or rent them to each other for the same price.

This mortgage plan is radical, and might just be powerful enough to help turn this troubled economy around. And a $3 trillion bailout would have something for almost everyone.

Source: With New Home Construction Down, Obama Team Plans ‘Bailout for the Masses’

This from Money Morning:

The U.S. housing market is already being pounded by the “perfect storm.” And the outlook for the New Year is for the stormy weather to continue – and probably to get worse.

As if a locked-up credit market and tidal waves of foreclosures weren’t already enough, we’re now watching unemployment climb and consumer confidence plunge.

But even when the housing market is taking on water, there are ways to stay afloat. Indeed, investors nimble enough to maneuver can even make money.

The watchword on this market, though, is caution.  If an investor decides to test the waters, beware of the extraordinary financial undertow.

Here’s a look at what’s happening now, and what the implications there are for investors in the New Year.

Rising Unemployment Feeds into Sinking Demand

The grim reality is that skyrocketing unemployment is a major threat to the recovery of the U.S. housing market.  And consumers shackled with record levels of debt are unlikely to ride to the rescue this time.

Since this recession is expected to be long and deep, economists are projecting high rates of unemployment. And the latest statistics released by the U.S. Labor Department show the crucial jobs market deteriorating at an alarmingly rapid pace.

The U.S. unemployment rate jumped to a 14-year high of 6.5% in October as another 240,000 jobs were cut – an uptick from 6.1% in September and the 10th month in a row the jobless rate has risen. Most forecasts are calling for unemployment to spike as high as 8.5%, which would be the worst showing since 1980.

So far this year, a staggering 1.2 million jobs have disappeared. More than half the decrease occurred in the past three months alone, Money Morning reported in its “Outlook 2009” series economic forecast story. Even worse: A year ago, job cuts were concentrated in the financial-services and homebuilding sectors. Now they’re rising across the board; virtually every part of the economy is feeling the squeeze.

For instance:

• U.S. automaker Chrysler Corp., one of Detroit’s wheezing “Big Three,” is laying off 25% of its white-collar work force of 18,500.
• Appliance maker Whirlpool Corp. (WHR) recently announced it would cut 5,000 jobs to cope with declining sales.
• Worldwide shipping giant DHL, a subsidiary of Deutsche Post AG, is laying off 9,500 people, and threatening to close its U.S. distribution center.
• Onetime Internet search giant Yahoo! Inc. (YHOO) plans to let 1,100 workers go – on top of the 1,000 already jettisoned in January – the result of several botched merger attempts.
• Ailing banking giant Citigroup Inc. (C) heaped more bad news on the financial sector, announcing whopping 50,000 layoffs in the next 12 months.

Layoffs of this magnitude are more than a mere shot across the bow of the housing market – they’re actually a direct hit amid ship. People who are unemployed cannot buy homes. Period. But 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.

Foreclosures Still Rising

As unemployment climbs, foreclosures will continue to multiply. That only exacerbates an already unappealing combination – more houses being dumped onto the market even as the pool of potential buyers grows increasingly smaller.

RealtyTrac Inc. reported that more than 81,000 homes were foreclosed on in September – 71% increase from the same period just a year ago. For 2008, foreclosures rose to a record 765,558.

“I wouldn’t be surprised to see foreclosures increase as the economy slows down,” said Rick Sharga, RealtyTrac’s vice president of marketing. “The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes.”

And while foreclosure volumes are outpacing projections, the cumulative losses by banks on bad mortgages may have yet to hit their books.  Since loan losses don’t get recorded until the property is sold, it’s likely there’s a lot of bank-owned inventory that hasn’t been unloaded – meaning there may be more foreclosures out there investors don’t yet know about.

“We are in uncharted waters,” said Brian Bethune, an economist at research firm Global Insight (IHS).

Making the waters even rougher was the decision by Standard & Poor’s Inc. (MHP) to cut the ratings on $34.1 billion of “Alt-A” residential loan packages that had been issued in 2006 and 2007.  Alt-A mortgages are those written with little or no documentation, i.e., without proof of income or assets. Even worse, S&P put an additional $351.7 billion of Alt-A securities up for possible review reflecting the rating company’s “belief that further declines in home sales will depress prices further and push loss severities higher than we had previously assumed.”

On top of all that, record numbers of borrowers are already “underwater,” or “upside down” on their mortgages, making it more attractive for them to default by simply walking away, than to hang around and drown.

About 18% of homes nationwide are now “upside down,” according to a report from First American CoreLogic.  Almost two-thirds of those homes are in just seven states: Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio. In Mountain House, Calif., an unincorporated planned housing community located in the foothills of the Diablo mountain range, the housing crisis right now has nearly 90% of the homeowners owing more on their houses than they are worth – the highest percentage in the country, The New York Times reported on Nov. 10. The average homeowner is underwater by $122,000, the newspaper said.

Other areas are suffering almost as much: In Nevada, alone, borrowers owed a whopping 89% of the value of their homes.

Despite such dramatic anecdotes, this housing slump is nationwide in nature. It’s more severe than any other such downturn since World War II, mostly because of the risky lending practices that inflated the real-estate bubble in the first place.

The Downdraft in Housing Prices

Meanwhile, while unemployment rises, the downward spiral in housing prices is gaining momentum.

“The No.1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.”

The S&P/Case-Shiller Index of home prices plunged 16.6% in August from the year before, following a 16.3% drop in July. The index has fallen every month since January 2007 (See accompanying chart, “Plummeting Prices.”).

Prices were lower in all 20 of the major cities the index covers, with Phoenix and Las Vegas down nearly 31% from last year.

Nationwide home prices have fallen 20.3% since peaking in June 2006.

And the skid isn’t over.

According to Fitch Ratings Inc., U.S. home prices will fall another 8% to 10% before they show signs of stabilizing.  According to a Fitch forecast, the peak-to-trough price decline will be 30%.
And still one other reliable indicator of housing prices seems to confirm that, in many cities, home prices still have further to fall.

According to analysis by Moody’s Investors Service (MCO), Miami houses are right now priced at about 22 times annual rental income – versus an average of just 15 over the past two decades. This suggests that a home currently priced at $350,000 is actually worth only $238,600 – meaning the price would have to drop 32% to reach the fair-value point.

Congressional Missteps

In an effort to help more than 400,000 homeowners avoid foreclosure, Congress came up with the “Hope for Homeowners” program.  Unfortunately, in their infinite wisdom, federal lawmakers designed a program that is almost certain to fail.

The program supposedly makes as much as $300 billion available to at-risk borrowers, enabling them to refinance into a 30-year, fixed-rate loan insured by the Federal Housing Administration (FHA).

The biggest mistake Congress made was to make this program strictly voluntary for participating banks, experts say.

Just as bad: In an effort to make the program more affordable for beleaguered homeowners, it also requires the lenders to write the value of the home down to 90% of its current market value. So in a downtrodden market like Phoenix, if a lender holds a $400,000 mortgage on a home currently appraised at $300,000, the bank would have to settle for a new mortgage worth only $270,000.

Needless to say, the response has been underwhelming.  After four weeks, a whopping 79 people had applied for the program.

Not to be deterred, the Federal Deposit Insurance Corp. (FDIC) is proposing another package, which would extend the terms of at-risk loans from 30 years to 40 years, with interest rates as low as 3.0%.  Housing payments for delinquent borrowers could not exceed 38% of gross monthly income.

In order to sweeten the pot for lenders, the government would share as much as 50% of the losses if a borrower ended up in default anyway.  In addition, the FDIC would pay servicers who process these new mortgages a fee of $1,000 for each re-worked loan.

FDIC officials estimate that this anti-foreclosure program would cost $24.4 billion, and would prevent 1.5 million of the 2.2 million at-risk homes from falling into foreclosure.

But that also means the taxpayer will be on the hook for half the value of 700,000 mortgages that do fail.

Can you say “fuzzy math?”

Homebuilders on the Ropes

You can probably guess where this leaves the nation’s homebuilders – gasping for air.

D.R. Horton Inc. (DHI), one of the nation’s biggest homebuilders, just wrote down $1.1 billion in land, deposits and inventory in the third quarter, as sales fell by half. The Ft. Worth, Tex.-based company expects to post a fourth-quarter net loss of between $800 million and $900 million, 18 times more than it lost in the fourth quarter a year ago.

Other builders are in similar shape. Pulte Homes Inc. (PHM) and The Ryland Group Inc. (RYL) just reported quarterly losses of $280.4 million and $65.7 million, respectively.

Even Toll Bros. Inc. (TOL), which caters to the high-end buyer, said fourth-quarter revenue fell 41% from the same period last year.

The Forecast for 2009: More Pain Before Any Gain

No matter what happens in the U.S. housing market, until a large inventory reduction takes place, housing prices will not stabilize.

In a recent Forbes magazine column, A. Gary Shilling, president of an economic consulting firm of the same name, said the worst is yet to come. Says Schilling: “Excess inventory, the mortal enemy of prices, now amounts to 1.8 million homes, which is a huge number relative to the net demand (new families minus departures due to deaths and moves to nursing homes) which is only 1.5 million a year.”

And one of the architects of the U.S. housing debacle – former U.S. Federal Reserve Chairman Alan Greenspan – is also downbeat: “At a minimum, stabilization of home prices is still many months in the future,” Greenspan said in an October speech.

The question that needs to be answered, then, is this: In the current atmosphere, does anyone believe we actually need homebuilders to add even one new home to the market?

Some pundits claim this may be a golden opportunity to short U.S. homebuilders. Even though they’re already down 80% from their highs, the deadly combination of skyrocketing unemployment, deflating prices and tight credit continue to spell further pain for the industry.

Short sellers would obviously look at any of the companies mentioned above. They might also consider iShares US Home Construction (ITB), the prominent exchange traded fund (ETF) for the group. However, any such move would have to be made with extreme caution.

The reason: All bets are off if the new Barack Obama Administration implements a moratorium on mortgage foreclosures. There’s also the possibility that Obama will be able to shepherd through any one or more of the proposed mortgage guarantee programs now on the table.

Those kinds of moves could provide a boost to homebuilders and leave short sellers in the grips of an uncomfortable squeeze – just like the millions of homeowners saddled with mortgages they can no longer pay.

Source: New Year U.S. Housing Market Forecast: No Gain, More Pain