U.S. Housing Market Bottom or Heading for Another Collapse?

By: Money_Morning

Jason Simpkins writes: A rash of positive housing data has given some analysts hope that the housing market has bottomed and an economic recovery is underway. But the soaring unemployment and rising mortgage rates could lead to a double-dip plunge for the housing market.

Home prices rose on a monthly basis in May for the first time in nearly three years, according to the Standard & Poor's Case-Shiller Home Price Index. The index of 20 metropolitan areas showed a month-over-month increase of 0.5% in May - the first increase in the monthly index since July 2006.

And while housing prices in the 20 cities fell 17.1% year-over-year in May, that's still an improvement over April's 18.1% drop. Year-over-year declines in home prices have now lessened for four straight months.

The improvement in the Case-Shiller index followed the release of several equally optimistic government reports that showed increases in home sales and housing starts, and a decline in inventories.

The Commerce Department said Monday that June sales of both new and previously owned homes increased from the previous month. Sales of single-family homes increased by 11% from May to a seasonally adjusted annual rate of 384,000. That made for the fourth increase in six months.

Home construction unexpectedly rose in June as well. Housing starts increased 3.6% from May to a seasonally adjusted 582,000 annual rate. And even while more houses were built in June, the number of available homes on the market went down.

There were an estimated 281,000 homes for sale at the end of June, less than the 293,000 available at the end of May. Additionally, the ratio of houses for sale to houses sold was 8.8 in June, versus 10.2 in May.

Taken together, this data was very encouraging to analysts.

"Recession is over, economy is recovering - let's look forward and stop the backward-looking focus," Wells Fargo Corp. (NYSE: WFC) chief analyst John E. Silvia wrote in a research note.

Of course, Silvia may be going a bit too far. The fact that the housing market is "less-bad" doesn't necessarily mean that the recession is over or that a recovery is underway.

"This is really a lousy market," Patrick Newport, an economist with IHS Global Insight told the Washington Post. "The sales are growing in part because prices are dropping, but the sales are still near all-time lows."

The recent pickup in home prices also calls for skepticism.

"I think it's a temporary respite," Mark Zandi, chief economist at Moody's Economy.com told CNNMoney. "It reflects the recent decline in foreclosure sales, and prices will continue to fall over the next several months."

What's more is that, going forward, resurgence in the housing market could whither in the face of a jobless recovery and higher interest rates.

Why the Housing Market Rally Has a Shaky Foundation

The federal government's effort to lower borrowing cost has been a big reason why the housing market has been able to stabilize over the past few months.

Mortgage rates fell to a record low 4.78% twice in April after the U.S. Federal Reserve announced its plan to scoff up mortgage backed securities. That led to surge in mortgage and refinancing applications. But now it appears the Fed's effort to reduce borrowing costs is losing momentum.

Mortgage rates have increased in each of the past two weeks and demand for mortgage applications is beginning to wane. The Mortgage Banker's Association said average rates for a 30-year mortgage climbed 0.05 percentage points to 5.36% in the week ended July 24. That followed the previous week's increase to 5.31% from 5.05%.

The Market Composite Index, which tracks the volume of mortgage applications - fell 6.3% on a seasonally adjusted basis last week, after edging up 2.8% the week prior. The Refinance Index fell 10.9% to 1862.1 from 2089.7.

"Refinancing activity was somewhat elevated early in the year, probably due to low mortgage interest rates and the waiver of many fees and easing of many underwriting terms by the [government sponsored enterprises]," U.S. Federal Reserve Chairman Ben S. Bernanke said in the central bank's Semiannual Monetary Policy Report to Congresss. "However, such activity moderated considerably when interest rates rose during the past few months."

Some experts say that mortgage rates at or below 5.0% are needed to make a significant impact on home loan demand, Reuters reported.

Higher mortgage rates aren't the only thing daunting potential homebuyers either. Soaring unemployment also poses a threat to the housing market by eroding disposable income and consumer confidence.

"People that are afraid for their jobs are not going to make those purchases and people that are losing their jobs can't get the loans," Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, Calif., told Reuters.

Some 467,000 jobs were lost in June alone, and about 6.5 million jobs have been lost since the recession began in December 2007, according to the Labor Department. Furthermore, with the recession in its 20th month and long-term unemployment at its highest level since data collection began in 1948, more than 1.5 million workers are expected to exhaust their unemployment benefits by year's end.

The unemployment rate leapt to 9.5% in June from 7.6% in January, and most analysts believe it will end the year in double-digits. In 15 states, in fact, the jobless rate already exceeds 10%, including Michigan, where it's 15% (22.5% if you include laid-off workers who have given up looking for jobs, or who have settled for part-time work).

The rising tally of unemployed workers is taking a toll on consumer confidence, which fell for the second consecutive month in July. The Conference Board's monthly consumer confidence index dropped to 46.6 in July from 49.3 in June. 

"Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months," Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement.

Analysts also worry that the country will see another round of foreclosures as unemployment rises. That would lead to another large build up in inventories and erase any gains made in home prices.

According to RealtyTrac Inc., 860,000+ properties were repossessed by lenders last year, up a whopping 64% from 2007.
But that may pale in comparison to 2009.  Lawrence Yun, chief economist of the National Association of Realtors told Bloomberg News that the number of foreclosures this year might rise to a record 2.5 million.

The government attempting to help homeowners modify or refinance their mortgages to avoid foreclosure, but that effort is completely lost on people who are unemployed and lack the income to pay even modified loan payments.

The gains made in the housing market have been encouraging to many analysts and investors. But with Americans facing heavy job losses and higher mortgage rates, it's hard to imagine how they will be sustained.

The reality of the housing market is that while we may have seen the worst, a sustainable recovery probably won't begin until at least next year.

"We have a lousy job market and an excess of around 1 million extra homes that has to be worked off," Andres Carbacho-Burgos, an economist with Moody's Economy.com (NYSE: MCO) in West Chester, Pa., told Bloomberg. "The housing market is not going to hit bottom before mid-2010."

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