Huffed and puffed and blew the housing market down

The Big Bad Wolf got a lot of bad press in fairy tales — just look at the story of the Three Little Pigs. This guy has some lung capacity to go around blowing houses down. Nothing could stop him, until he came to the brick house built on a solid foundation. Based on what’s happening in the U.S. housing market over the last year, maybe we have our own big bad wolf at work.

In our July issue (being published on June 27), we spend some time looking at the housing market in our mid-year economic outlook. Let me sum it up: It’s not good. Housing prices are falling and those lower prices are not spurring increased buying. Nationally, house prices fell in April to their 2002 levels and earlier today we saw existing home sales fall in May 3.8% to only 4.81 million, a six-month low.

Analysts declared the housing market was in a “double dip” last month after the S&P Case-Shiller Home Price Index showed prices dropping below the bottom put in place last year. Pretty much every analyst has equated last year’s uptick in housing sales to the short-term first-time homebuyer tax credit. As soon as that expired, home sales and prices started working their way back down again. So much for that quick straw house.

While taken as a whole, the U.S. housing market still is in for a rough rest of 2011 and probably 2012, there are some patches that are beginning to turn around. According to a Wall Street Journal article, some areas are beginning to recover from the five-year-and-counting housing recession. The article points to three things that are indicators that housing may be turning around in any particular area: Jobs, rent prices and foreclosures.

None of those are that great of a surprise. If people can’t get jobs, then they can’t borrow money for a house, and job creation has been dismal with June non-farm payroll showing only 54,000 jobs created in May. Considering the millions of people that lost jobs, that number doesn’t even put a dent in the unemployment figure, which rose to 9.2%.

Still, one of the greatest drags on housing prices is the glut of foreclosures still flooding the market that are forcing traditional sellers to lower their asking price just to compete. Those foreclosures need to be purged from the system before a recovery can take place. Further, there is a huge shadow market of homebuyers waiting to sell their homes as soon as there is any uptick in the market.

It is ironic to think the very things that spurred the housing bubble are the things depressing a recovery. The buying frenzy created the huge glut of inventory and that buying was fueled by low lending standards, something that has tightened as the pool of buyers has shrunk.

Depending on where you fall, there are two ways of looking at recent housing data. If you are a homeowner hoping to sell, it has to be discouraging. If you are a homeowner that plans to stay put for a while, it is neutral with a potential upside that now is a great time to get your home reassessed to lower your tax bill. For homebuyers, it’s hard to imagine much better news than prices falling and mortgage available around the 4.25% mark.

The U.S. housing market is looking for that solid foundation to begin a recovery upon. While things still look to be on the downside nationally, there are patches beginning to climb out. That is the important thing to focus on, recovery is happening, it’s just taking a little longer in some areas than others. The housing market is not just a factor in the Great Recession, the Great Recession is tied to the housing market. A number of analysts have said there can be no recovery in the economy at large until the housing market turns around.

Be sure to read our mid-year economic outlook in our July issue to see what analysts are expecting, it will be published on June 27.

What do you think? What needs to happen to see a recovery in housing? Would another homebuyer tax credit help to stimulate buying?

About the Author
Michael McFarlin

Michael McFarlin joined Futures in 2010 after graduating summa cum laude from Trinity International University, where he majored in English/Communication. With the launch of the new web platform, Michael serves as web editor for the site and will continue to work on the magazine, where he focuses on the Markets and Trading 101 features. He also served as a member of the Wisconsin National Guard from 2007 to 2010.

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