House of Cards

The current housing recovery is not a house of brick, but a house of cards.

The cards came tumbling down this week, as the U.S. Commerce Department reported that housing starts in June fell to their lowest level in almost a year.  At June’s pace, new housing starts would total 836,000 for the year, down 9.9% from May’s 928,000 pace.  Multi-family projects plunged 26.2%.

The announcement blunted the stock market rise initiated on Wednesday by Federal Reserve Chairman Ben Bernanke, whose warm-and-fuzzy comments (more fuzzy than warm) can be summarized as “we have no idea when quantitative easing will end and, even if we did, we wouldn’t say.”

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The Second Housing Bubble

“Demand is artificially high … and supply is artificially low.”
                                                                         Fitch Ratings

We’ve written frequently about the disconnect between the real world and the stock and bond markets. Now the housing market has drifted into its own false reality.

While Gluskin Scheff’s David Rosenberg has referred to the stock market’s recent climb as a “Potemkin rally,” what’s happening in housing is Potemkin in reverse.

Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term “Potemkin” to mean an illusion, reality propped up to look bigger and better than it really is.

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Housing Recovery Continues … Sort Of

For the economy to recover, the housing market must recover.  When consumers can barely pay their mortgages, they’re unlikely to spend money on other things – and when consumers don’t spend money, the economy stagnates.

There have been signs of recovery in the housing market in recent months, as we’ve reported, and now there’s more good news:

  •  The Case-Shiller Index, a composite of statistics from 20 cities, showed that housing prices rose 4.3% from October 2011 through October 2012.
  • It appears that housing prices will see their first gain for the year since 2006.
  • The National Association of Realtors’ Pending Home Sales Index is at its highest level in five years and has risen for 18 consecutive months.  At the end of October, it was at 104.8, up 13.2% from a year earlier.

While these are positive trends, statistics can be misleading.  Many current buyers are investors, who are purchasing homes to rent out, not to resell.  If investors believed that housing prices were going to continue rising, they would buy and resell.

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Housing Showing Signs of Recovery

We’re in a business where it’s good to worry; if we didn’t worry, we might take on too much risk, to the detriment of our clients.  But we recognize that not all of the economic news is bad these days.

So we note that housing prices are rising.  At the least, this provides symbolic relief, as it was the bursting of the housing bubble that led to the 2008 financial meltdown.  If housing prices just kept appreciating forever, all of those mortgage-backed securities would have deserved their high ratings and the meltdown could have been avoided. read more

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