THE HOUSING MISFORTUNE

Can lawmakers in Washington justify extending the homebuyer tax credits with such obvious abuse from consumers?

 

While Keith covered the short on the XHB today, we continue to expect that the recent enthusiasm around the housing recovery and the homebuilders will continue to wane.  As such, we will look to an up day to re-short the XHB. 

 

The trend toward a stabilization of home prices and the improvement in new and existing home sales is self evident, and the consensus belief is that the bottom is in the rear view mirror.  The question at this point is the trajectory of the recovery in the housing market and what happens on the margin.  While there is significant reason to be optimistic about the recovery, the data flow over the next six months is likely to show a slowdown in the magnitude of improvement relative to what we have seen recently.   

 

The decline in mortgage rates and lower home prices has made housing more affordable than at any point over the past 2 decades. Additionally, the tax credit for first time home buyers has helped create significant incentive to jump start purchase activity.  

 

Today, it was reported that the National Association of Homebuilders housing market index dipped to 18 from 19 in September, falling below market expectations for a reading of 20.  Home builder sentiment is waning, as the November 30 expiration of the government's $8,000 tax credit for first-time buyer's approaches and there is no resolution for its future. 

 

The WSJ also notes today that the IRS is examining more than 100,000 suspicious claims for the first-time home-buyer tax break.  This is not a good sign and makes it less likely that the program will be extended. 

 

Also, construction of new homes rose 0.5% in September to a seasonally adjusted annual rate of 590,000 units; weaker than the 610,000 economists had thought.  The all important applications for building permits fell by the largest amount in five months. 

 

As an industry, the homebuilders are in the business of building new homes, which helps to support the nation’s economy.  Unfortunately, the bottom line is that we don’t need any more new homes.  Using data from the Mortgage Bankers Association, there are more than 7 million homes that are in some state of distress.  Given the pace of new homes being built, the current inventory of unsold homes and the potential number of homes that are in distress is likely to increase. Put simply: the housing overhang is here to stay. 

 

With the market now up 62% from the March 9 low, consumers may feel better, but it does not completely offset the fact that unemployment is approaching 10%+ and job security remains  an issue.  Today, most consumers need a substantial discount to motivate them to spend their hard earned paychecks.  Without government tax incentives, the housing market is on shaky ground.  Even if the government comes to the rescue with more aid, it does not fix the heart of the problem – most consumers are having a hard time making ends meet.

 

Howard Penney

Managing Director

 

THE HOUSING MISFORTUNE - HPHH

 


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