South Shore: 781 929 3683 or Boston/Metrowest: 781 549 9562

Housing Market Could Fail Again

There has been no shortage of encouraging numbers in recent housing data. New home sales rose 14.8% in April. Existing home sales were up 7.6%. And pending home sales? They were up 6%. Meanwhile housing starts gained 5.8%. And that’s enough of the good news.

The tax credit has expired, so we’re back to reality. And the reality is that the government can’t use tax credits to buy prosperity in the housing market. Not when a record number of foreclosures are waiting around the corner. The little glimmer of hope we saw is about to be overtaken by the grim fact that the housing market is too fundamentally weak to stand on its own.

And homebuilders see the writing on the wall. Yes, housing starts were up 5.8%. But at the same time, housing permits fell 11.5%. And yes, pending home sales rose 6%… but mortgage applications fell 4.1% last week alone. And the unintended consequence of the tax credit: it brought more home sellers to the market… the inventory of unsold homes rose 11.4% in April. Springtime is officially over in the housing market.

And looking ahead, foreclosures will climb. The National Association of Realtors estimates a record 1.1 million foreclosures this year.

Now we have to give credit where credit is due. The tax credit brought an estimated 1 million buyers to the housing market…which no doubt stemmed a lot of foreclosures. So the future could have looked a lot cloudier.

But at the end of the day, sentiment about the housing market is bleak. Strategic defaults continue to climb. Homeowners have reached a point of indifference…that is even worse than anxiety. And there is such a backlog of properties in default that those homeowners will sit expense free in their homes for easily a year before foreclosure proceedings are completed.

Now, don’t be surprised if we see sustained strength in some of the housing data for the next couple of months. It’s no reason for confidence, though. The government’s tax credit required a contract by April 30, and a closing by June 30. Because existing home sales are counted at the time of closing, this data will have a steady run through the June reading. But after that, expect a precipitous drop.

The bottom line: the tax credit may have only succeeded in affecting “the timing, not the total, of home purchases”, according to Barron’s.

And in the midst of all this misfortune, some are still surprisingly upbeat. Toll Brothers (the largest luxury home builder in the country) increased their land holdings for the first time in four years, according to Bloomberg. And Chairman Robert Toll is optimistic, “The past few months’ activity has been driven by an increase in confidence among our buyers”. That may be the case, but, none the less, the company is not immune to the perils of the housing market. They are sitting on $3 billion in inventory, and that inventory will pose a challenge, particularly since volume this year is expected to be just 30% of that of 2005, according to Morningstar analyst Eric Landry.

But it’s not just Toll Brothers. Now is not the time to buy into any housing stocks. As the lingering effects of the stimulus fades, and the glut of foreclosures rises to the surface, we will find another housing low soon enough. Just wait.

Disclosure: No positions

Article written by Brian Rezny

Ciara Brennan
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