Tuesday, March 23, 2010

Housing Hype Fades with Sales Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

During last summer and fall, the mainstream media was filled with glowing reports of recovery in the U.S. housing market. Government programs were juicing the numbers, which doesn't represent recovery of anything, but that wasn't the spin the media put on increased home sales. Special tax credits, which are still in place, were behind the better numbers. They are losing their affect though and the housing market is already beginning to turn down again.

According to the NAR (National Association of Realtors), existing home sales fell 0.6% in February to a seasonally adjusted 5.02 million units. This is the third monthly drop in a row. The impact of the 'seasonal adjustments' seems to have caused sales in the snow-buried Northeast and Midwest to rise significantly during the month. The overall number would have been much worse without the supposed strong sales in those geographic areas. Inventories of homes on the market, which are not seasonally adjusted, jumped 312,000 to 3.59 million. This represents an 8.2 month supply based on current sales rates. The median sales price was $165,100, down 1.8% year over year.

While the federal government has a number of programs to prop up the housing market, including funneling questionable mortgages through the FHA (Federal Housing Administration) and its blank-check support of nationalized and money-bleeding Fannie Mae and Freddie Mac, the first-time home buyers credit was the most immediate impetus for increased sales during the second half of 2009. The credit was originally slated to expire on November 30th, but at the last minute was extended to this April 30th and expanded to include non first-time buyers. Nevertheless, sales started to dip after November. It is now clear that the credit merely sped up purchases that were already going to take place and higher sales last fall mean lower sales early this year.

Existing home sales peaked in 2005 at 7,075,000. The latest number at 5,020,000 represents and almost 30% drop - and we are now entering the fifth year since the top. The pattern of sales from the homebuyer's tax credit indicates that it was too little to fix what is a massive systemic problem. House prices went too high during the bubble, actually doubling or more in a four-year period in some cities, and they need to come down to market clearing prices. Until this happens, the market cannot recover and grow again, nor can the overall U.S. economy.

Disclosure: None

NEXT: Will Expanding Euro Crisis Continue to Benefit U.S. Stocks

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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