Housing Still Awaits Its Happy Ending



Original Post Date: November 30, 2010

By: David Reilly

The economy and consumers are looking a bit perkier these days. Housing, not so much.

Last week, the government revised upward its estimate of third-quarter gross domestic product growth, weekly jobless claims fell to their lowest level in two years and personal incomes posted a strong gain in October. Consumer-confidence data due Tuesday are expected to rise, while Friday’s November employment report could show the addition of another 150,000 or so jobs.

Housing is a different story. October new-home sales sank 8.1% to a seasonally adjusted annual pace of only 283,000, just off record lows, while existing-home sales slid 2.2% in October to a 4.43 million annual rate. On Tuesday, S&P/Case-Shiller home-price index data through September is expected to show a 0.5% month-on-month fall, while pending home sales figures Thursday are also expected to remain weak.

Granted, housing has shaken off the worst of the hangover that followed April’s expiration of the federal government’s home-buyer tax credit. Housing inventory, for example, fell from 12 months of supply for single-family homes and condos this summer, to about 10.5 months in October, according to the National Association of Realtors.

But the market is merely bouncing along a bottom, and demand is tepid, even with mortgage rates below 4.5%. Even excluding the summer surge, the number of months of housing inventory for sale is still at its highest level since November 2008. Plus, the figures don’t include 2.1 million units of “shadow” inventory not yet on the market, according to Corelogic, largely foreclosures in process.

The danger is that today’s renewed housing slowdown leads to a further leg down for home prices. Janney Capital Markets, at the bearish end of the spectrum, expects prices could fall another 10% to 15% by year-end 2012. That would clearly pose risks to the economy and banks. While most bigger banks would probably weather additional price falls of as much as 5%, a double-digit decline could force many to again build loan-loss reserves, denting profit.

Further price falls will eventually get sales moving again. For now though, it is likely declines will breed even more uncertainty, keeping home buyers on the sidelines and the housing market on its back.