Monday, January 12, 2009

We're Nowhere Near a Bottom in Housing

From this week's Barron's:

I agree with a lot of what Bill says. The economy is experiencing a rain delay. Nothing is going to happen for a while. Although the government's spending efforts will help, they won't be enough to cure the two biggest problems. The first is housing. Unsold inventory of houses is more than a year's worth, and prices could go down another 10%-plus. Mortgages have been reduced and prices are down, but 68% of the public still owns a home, versus 64%, the historical trend. The mortgage-equity withdrawals of recent years are over. Consumers spend 14% of their after-tax income on housing, more than they pay for food. No matter what the government does, it may not help housing, and in turn, the consumer.

Oscar Schafer provides some good context for what the central issues are:

1.) Massive supply:

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There are a ton of houses on the market both in an absolute number and in the months of available inventory at the current sales pace. In addition

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Sales are dropping because

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Job losses are increasing leading to

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Lower consumer confidence

Additionally -- do people really need all of these houses on the market?

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Homeownership is declining

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And the number of home vacancies is at multi-decade highs.

On top of that total household debt is $13.9 trillion (which is about the same size as total US GDP) and

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Households are heavily in debt (although they are decreasing that level lately).

Therefore, we have established that

1.) Inventory is incredibly high
2.) Sales are dropping
3.) Overall home ownership is now decreasing
4.) The US consumer is heavily in debt and is paying off his debt right now
5.) There is little reason to buy a home when consumer confidence is this low.

As always, thanks to Calculated Risk for the great graphs.