Double Dip To Be Lead By Housing?

Hey, what could go wrong with Hydrogen?

Lots of doom and gloom yesterday and today.  Let’s dive right in.  First from Bloomberg’s John Gittelsohn and Bob Willis.

“Housing led the U.S. out of seven of the last eight recessions.  This time, it may kill the recovery.  Home sales collapsed after a federal tax credit for buyers expired in April.  Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling”.

The economy is in a very precarious situation right now.  We are closing in on more than a year’s worth of home supply (a normal market has under six months).  Foreclosures are mounting, especially at government lenders Fannie Mae and Freddie Mac.  Demand for homes has dissipated since the expiration of the first time home buyer tax credit.  You do not have to be a Fulbright Scholar in economics to realize that a little demand and a lot of supply equals declining prices.  One of the most recent estimates says that it may be 2.5 to 3 years before the excess supply is absorbed.  I’ve seen estimates that say home prices will fall anywhere from 5-20 percent over the next year.

The fear that everyone has is that another round of price declines will pull even more borrowers underwater, wiping out even more equity and causing a spiral of declining home values and foreclosures.  Right now as many as 15 million Americans owe more on their mortgage than their home is worth.  Those who are underwater on their homes are far more likely to default on their mortgages.  These borrowers are also frequently unable to refinance their homes because their loan to value ratios do not meet the minimum requirements.  They are unable to take advantage of low mortgage rates to refinance their homes and save money in monthly payments.

For more bad news on housing, take a look at an article from Housingwire’s Paul Jackson “Housing’s Second Leg Down“:

“Home prices could continue to float along sideways for years from this point, as some of my colleagues have suggested earlier. But I tend to think we have another 8-10% to fall. Here’s why.

Across the entire S&P/Case-Shiller dataset, more than 23 years worth of data, average home price appreciation is 4.5% per year–and that average includes the gonzo 1997-2006 years, which effectively skew the long-term trend upward.

Nonetheless, if you apply the generous 4.5% trend across the data you find that home prices still sit well above what the trend would project. For example, applying 4.5% trend growth starting in 1999 (when the growth rate began to transition towards parabolic) suggests that current home price levels through May 2010 are still 8.5% above where they would otherwise be expected to be. Apply it all the way back to 1997, and home prices are still 4.3% too rich versus the trend”.

The picture that is painted is not a pretty one.  From a historical perspective, housing still looks overvalued in many markets in the country.  The housing market simply will not recover until the labor market improves.  The labor market will not improve until employers start hiring, and many employers are reticent to hire until they have confidence that shell-shocked American consumers will start spending again.  American consumers likely will not start spending again until the labor market improves.  You can see why this will be a tough problem to solve.

This is not new stuff.  Barry Ritholtz has been talking about this for several months (and likely longer, I didn’t wade through all his old stuff to find out), as have many other commentators.  What do you think we are in store for?  Let me know in the comments section below.