The Real Estate Market: Don't Celebrate Housing's Recent Uptick Yet

by Martin Denholm

The Real Estate Market: Don't Celebrate Housing's Recent Uptick Yet

by Martin Denholm, Contributing Editor

Monday, August 3, 2009: Issue #1057

Recently, my colleague Marc Lichtenfeld and I took a collective pop at some lazy journalists and other media cheerleaders. Their crime? Whipping the investment community into false optimism through misleading headlines regarding earnings announcements.

They're at it again.

This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.

And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes - 9% higher than estimates.

Collectively, new and existing home sales hit the highest level in eight months in June.

Sweet! Hand me some champagne - let's celebrate. Or maybe we should hang on a sec... there's a problem with these headlines. Here's what you need to know about the real estate market, and what we really should be looking for.

The "Real" Story Behind The Real Estate Sales Numbers

While an 11% rise in new home sales within the real estate market certainly makes for good reading, it doesn't mean much when it's not put into perspective.

And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy incentives and tax credits when buying real estate.

But perhaps the most notable reason for the sales rises is the home defaults...

  • Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.

  • And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it's still a hefty amount.

To understand how real people are being affected by the nascent housing recovery, look no further than the troubles Treasury Secretary Tim Geithner has had in trying to sell his house.

Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the "For Sale" sign. And that's after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they're now apparently renting the home at a loss.

Doesn't Tim read the papers?

He didn't seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It's tough out there, mate. First, you have to persuade buyers that it's worth shelling out $1 million-plus for a house.

Then you need to convince them that the plans you have for the recovery will help the U.S. economy. But I digress. Haven't we just seen some positive data for the real estate market?

Putting Perspective On The Price Figures

Last week also saw the release of the latest S&P/Case-Shiller Home Price Index - a closely watched gauge that monitors home prices in 20 major U.S. metropolitan area housing markets.

  • Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April - its first monthly increase since July 2006.

  • In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.

Good news, for sure. But let's put it in context. The market hasn't magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May's year-over-year figure rolled in with a 17.1% drop.

So while prices did rise month-to-month, the truth is that the real estate market isn't exactly growing, nor are prices appreciating. It's just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.

As S&P index chairman David Blitzer says: "On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation."

And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.

You might say I sound more bearish than a Rocky Mountain grizzly, but it's important to inject some perspective into the story, rather than just blindly absorbing the media reports.

What Will It Really Take For The Housing Market To Grow?

As I've said before, for the housing market to truly start growing again, it's going to require a few key things.

  • First, we need to see a reduction in the bloated number of available homes on the market. In that respect, it's good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you're talking about a meaningful upswing, that brings me to another crucial requirement...

  • As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of "distressed" sales - i.e. short sales or foreclosures).

Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both.

For example, home prices declines were partially responsible for a $13.9 trillion drop in household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.

There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time.

Meantime, if you're looking for a bargain in the New York area, give Tim Geithner a call.

Good investing,

Martin Denholm

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