Before the financial crisis hit in 2008, Spain enjoyed a property boom similar to what we experienced in the U.S., pre-2008.

In 2009, home prices fell 7.7% in Spain and are currently 20% off their 2008 peak (source: Wall Street Journal, Mar. 15, 2012). The problem is that, in 2012, the housing market and home prices in Spain are collapsing at an accelerated rate. In the fourth quarter of 2011, home prices were off 11.2% from 2010’s fourth quarter.

In January of 2012, home prices in Spain were off 26% year-over-year! As with the U.S. housing market collapse, prices have further to fall in Spain.

How bad is the housing market crisis in Spain? In the U.S., our population is roughly 313 million and we had approximately 1.4 million homes in the foreclosure process. In a country of 44 million people, Spain has approximately 1.4 million homes empty in its housing market with foreclosures rising rapidly (source: Bloomberg, April 1, 2012).

There are those who remain optimistic and believe that the Spanish housing market will not fall that dramatically in 2012, but they are not basing their assumptions on facts. Where is the demand going to come for homes when the unemployment rate in Spain is 23.6% as of January, the latest data available (source: The Telegraph, April 2, 2012)?

Spain youth unemployment in January was 50.5%! The poverty rate is 21.8%, the third worst in the Europe after Romania and Latvia (source: Telegraph, Feb. 26, 2012)!

Spain is officially in a recession. Gross domestic product (GDP) contracted 0.3% in the fourth quarter of 2011 and 0.4% in the first quarter of 2012. The Spanish government expects GDP to contract by 1.7% this year!

Spanish banks hold €400 billion in mortgage-backed securities in the housing market. Right now, the Bank of Spain is saying that the Spanish banks need to take a loss of €88.0 billion, but that is based on the housing market stabilizing. Just the opposite is occurring, which means that mortgage-backed securities will continue to lose value.

S&P has conducted a study that says if the housing market in Spain falls another 20%, which is very likely in their analysis and mine, one in four homes will have mortgages that will exceed the value of the home! This will mean that the Spanish banks will take more losses on their mortgage-backed securities, as people walk away from their homes and mortgages, like they did here in the U.S.

With skyrocketing unemployment, a contracting GDP, and a housing market that is falling at an accelerated rate, the Spanish government still has to implement European austerity measures. They cut spending in health services and education by €10.0 billion just last week, on top of the €40.0 billion cut in January of 2012. Unions have announced protests against the measures, to take place next week.

Spain has officially joined Greece in going into a death spiral. As the housing market continues to collapse in Spain, along with the value of mortgage-backed securities, the only way to save both Spain and Greece is if the European Central Bank steps in and prints money again.

Michaels’ Personal Notes:

In response to Spain, which I’ve detailed above, Greece, and other problem spots in Europe, the International Monetary Fund (IMF) has asked the world to provide more funds to help Europe out of its financial crisis.

Many parts of the world have expressed concern over Europe and have demanded the European Union do what is necessary to stem the financial crisis. Despite nations of the world feeling that Europe should handle its own financial crisis, the world has come together to provide the IMF with an additional $430 billion.

Japan is contributing $60.0 billion and the BRICS countries—Brazil, Russia, India, China, and South Africa—are providing $68.0 billion, although they won’t say how the money is split amongst their group. China has bought European debt in the billions of dollars to help support its largest customer during their financial crisis; China’s biggest export market is Europe.

The question I have, dear reader, is with China dealing with its slowing economy and Japan faced with its own financial crisis, and with their contributions to help Europe with its financial crisis, who is going to buy U.S. Treasuries?

In the first six months of the U.S. government’s fiscal year 2012, the budget deficit has reached $779 billion, which is better than the $829 billion in the first six months of 2011 (source: Congressional Budget Office). The U.S. Treasury is saying that, despite this better performance, the budget deficit for the full year 2012 will still come in at $1.3 trillion.

What is somewhat troubling—talk about a financial crisis of our own—is that, for February 2012, we recorded the worst monthly deficit in our history at $229 billion. The previous record was a year before in February of 2011: $223 billion. In February, the government spent $229 billion more than it took in!

In March, it was expected that the budget deficit would come in at $196 billion, but it came in worse than expected at $198 billion. However, this is much worse than March 2011, when the budget deficit came in at $188 billion.

I have written in these pages recently about the Federal Reserve buying 61% of net debt issued by the U.S. Treasuries. I have also written about the decrease in demand of U.S. Treasuries by our previous biggest buyers: China and Japan.

Japan has its own financial crisis to deal with, while China must contend with its slowing economy. Couple this with the fact that both Japan and China are pouring billions into the IMF and into Europe to help with the financial crisis, who then is going to buy U.S. Treasuries?

The only answer that makes sense is what worked in 2011 and that is the Federal Reserve. If that is the case, there will have to be a QE3. Gold bullion and those gold stocks are looking awfully cheap when QE3 is right around the corner.

Where the Market Stands; Where it’s Headed:

Yesterday, the tech-heavy NASDAQ had its biggest single daily advance in 2012, compliments of the better-than-expected quarterly earnings of Apple Inc. (NASDAQ/AAPL). It is quite interesting: The NASDAQ closed at 3,029 yesterday, still down 40% from its peak of over 5,000 in January 2000—12 years ago.

The Dow Jones Industrial Average and the S&P 500 continue to trade in a bear market rally that started in March of 2009. The rally is getting long and tired. I do not believe the potential upside reward is worth the risk for the majority of my readers.

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate, because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Get ready; the housing market may be primed for an upward move. At least I’m hoping it is.

The housing market may be on its way up, but prices also need to follow home sales higher. The problem has been the massive inventory of home foreclosures selling at dirt-cheap prices across the nation, especially in the rust belt states and areas such as Nevada, Florida and Arizona that witnessed pricing booms years back and are now struggling to hold on. A quick look at homes in Arizona and Florida shows how far prices have come down.

We are seeing some heavy buying action in the foreclosure housing market that may drive prices higher. There is currently a strategy from investors and institutions who are buying foreclosed homes in order to rent them out in what is a growing rental market.

The U.S. government is looking at a trial project that would see Fannie Mae sell large pools of single-family homes in the distressed housing markets to investors. Fannie and Freddie Mac combined own around 200,000 foreclosed homes and, according to RealtyTrac, about 600,000 foreclosed single-family homes are held by the banks, so there’s quite a lot of inventory to get through. However, once the levels fall, we could see an upward move in prices.

The buying of foreclosed homes will eliminate some of the inventory build-up of the cheap homes and inevitably allow prices to move higher. At least that’s what I hope will happen.

The reality is that the activity in the housing market continues to show improvements, despite ongoing pressures with home prices. The ongoing strength with jobs growth and a downward moving unemployment rate is helping to attract more buyers to the housing market and the hope is that prices will advance higher. For now, home prices continue to struggle and this means reduced wealth for consumers to spend on non-essential goods and services. The Case-Shiller 20-city Index showed an average 4.0% price decline across the top 20 U.S. cities in December after a 3.8% decline in November. The problem has been the high foreclosures and short sales driving sales and placing a downward pressure on home prices, but, perhaps with the inventory declining, prices will stabilize.

Housing starts came in at 698,000 in February, just below the estimate of 705,000 and the revised 706,000 in January. This reading means that builders are seeing higher demand down the road in the housing market and this is positive. Moreover, the key Building Permits reading, which shows how well the building pipeline is doing, is also improving, with 717,000 permits in February, above the 695,000 estimate and the revised 682,000 in January.

The NAHB/Wells Fargo Housing Market index, an indication of homebuilder sentiment, is at its highest level since May 2010, coming in at 28 in March, but still well below 50. This means there are more builders that see the housing market as poor than as positive. The last time the index was above 50 was way back in April 2006 before the subprime fiasco.

The evidence is that the housing market has bottomed out. We are seeing an influx of foreign buyers from Brazil and Canada buying real estate in Florida and other depressed regions. So, while home prices continue to languish, we are seeing a pickup in activity that will inevitably drive up home prices sometime in the future, but this may not be until 2013.

As I said, a strengthening jobs market will help the housing market. I feel the jobs area is improving, which I discussed in Jobs: Are They Headed Down the Right Path?

When looking at homebuilder stocks, you can look at two basic segments to gauge the housing market: the companies that build the homes directly, such as Toll Brothers Inc. (NYSE/TOL), and those firms that sell the supplies, such as The Home Depot Inc. (NYSE/HD) and Lowe’s Companies, Inc. (NYSE/LOW).

Home Depot just came out with earnings that beat the estimates of Wall Street handily and pushed the shares up even higher. Sales were up 5.9% for the fourth quarter in 2011 compared to the same period 2010. Net earnings were $774 million in the fourth quarter 2011 versus $587 million in the same period 2010. For the entire year 2011, sales were at $70.4 billion, up 3.5% from 2010.

 The homebuilder stocks’ selling supplies have far exceeded the S&P 500 over the last three months. Home Depot is up approximately 24% over that time period, and Lowe’s up 18%, while the S&P 500 is only up 12%.

Does this mean that the housing market is about to boom? Not necessarily. Home Depot cited the extremely warm weather as part of the reason for the increase in sales. This being one of the warmest winters on record has improved traffic and sales of early spring equipment, which offset the decline in snow removal gear. While the warm winter might have helped the sale of plants, this doesn’t mean the housing market is fixed.

What else is helping homebuilder stocks that sell supplies is the increase in foreclosures and conversion to rental properties. The housing market is now becoming more of a rental market. This means buyers of foreclosed properties need to renovate and this benefits homebuilder stocks that sell supplies, such as Home Depot and Lowe’s.

The other portion of the housing market consists of people who are stuck in their homes and can’t sell because the price has fallen too far, but they’re not underwater, so they’re not walking away from their homes. These people are turning to homebuilder stocks that sell supplies like Home Depot to buy upgrades. Since they can’t move, they might as well spruce up their homes with new plants, energy-efficient furnaces and other small-to-medium purchases.

Home Depot’s guidance for 2012 expects an estimated sales growth of four percent, 11 new stores, operating margin expansion of approximately 50 basis points, and share repurchases totaling $3.5 billion.

While these are great earnings numbers, we can’t judge the entire housing market based on the homebuilder stocks that sell supplies. We need to see the level of foreclosed homes come down for the housing market to gain some price improvement. With the housing market still expecting some price declines, it will be difficult for confidence to build up. The housing market needs prices to move up. Once we see prices increasing across the country, we can then say that the housing market is becoming “normal” once again. Until foreclosure levels come down, I’d be wary of the housing market bouncing back anytime soon.

The housing market is continuing to show improvements in spite of ongoing pressures with home prices. The strength with jobs growth and a declining unemployment rate are helping to attract more buyers to the housing market and the hope is that prices will advance higher. For now, home prices continue to struggle and this means less wealth for consumers to spend on non-essential goods and services. The Case-Shiller 20-city Index showed an average 3.7% price decline across the top 20 U.S. cities after a 3.4% decline in October. The problem continues to be high foreclosures and short sales driving sales and placing a downward pressure on home prices.

Housing starts came in at 699,000 in January, above the 671,000 estimate and the revised 689,000 in December. This reading means that builders are seeing higher demand down the road in the housing market and this is positive. Moreover, the key Building Permits reading, which shows how well the building pipeline is doing, is also improving, with 676,000 permits in January, above the 675,000 estimate and the revised 671,000 in December.

The NAHB/Wells Fargo Housing Market index, an indication of homebuilder sentiment, is at its highest level since May 2010, coming in at 29 in February, but still well below 50. This means there are more builders that see the housing market as poor rather than positive. The last time the index was above 50 was way back in April 2006 before the subprime fiasco.

But with the jobs growth looking better, we could see a corresponding improvement in the housing market. In January, 243,000 jobs were created, with the unemployment rate declining to 8.3%, much better than what the Federal Reserve was expecting this early in 2012.

 The low interest rate environment will continue to support the housing market. The average rate for the 30-year fixed mortgage is at a record low of around 3.91%. This will continue to translate into an incentive to buy homes going forward.

 One thing for sure, the housing market has bottomed out. We are seeing an influx of foreign buyers from Brazil and Canada buying real estate in Florida and other depressed regions.

We are also seeing improved business in home renovation companies.

 The Home Depot Inc. (NYSE/HD), the world’s largest home improvement retailer, reported $16.0 billion in fourth-quarter sales on Monday, up 5.9% year-over-year. And the key comparable same-store sales reading rose a healthy 5.7% in the fourth quarter. The reading for U.S. stores was better at 6.1%. Home Depot also made $0.50 per diluted share, up 38.9% versus the $0.36 per diluted share in the year-earlier fourth quarter. The outlook is muted, however, with the company predicting sales growth of around four percent in 2012.

So, while home prices continue to languish, we are clearly seeing a pickup in activity that will inevitably drive up home prices sometime in the future, but this may not be until 2013.

As I said, a strengthening jobs market will help the housing market. I feel the jobs area is improving, which I discussed in Jobs: Are They Headed Down the Right Path?