Housing Market Double Dip

House prices dropped to levels below the 2009 housing bust bottom in the first quarter confirming fears of a housing market double dip, dropping 4.2 percent from the previous three months, according to an industry report released Tuesday.

Prices have not been this low in the S&P Case-Shiller national home price index since the middle of 2002.

It was the third straight quarterly drop for the index, which was down 5.1% from a year earlier. National prices are now down 32.7% from their peak set five years ago.The S&P and Case-Shiller national home price index covers 80% of the housing market.

“This month’s report is marked by the confirmation of a housing market double dip in home prices across much of the nation,” said David Blitzer, spokesman for Standard and Poor’s.

Housing Market Double Dip-Brief Recovery

The housing market went through a brief recovery period starting in mid-2009. Home prices recovered nearly 5% of their earlier losses. After home-buyer tax credits, which were in effect during the rebound, expired last April, the slump resumed leading to the recently released reports of a housing market double dip.

“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit,” said Blitzer. “Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession.”

A separate S&P/Case-Shiller index covering twenty major urban areas also fell in March, this being a straight eight monthly decline.

This is the second month of the post-recession housing market double dip for the twenty city index. Home prices reached their highest levels in July 2006,but then started a declined that lasted till June of 2010, adjusted for seasonal differences, have plunged every month since.

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