Two Major Dow Jones Segments Still Flashing Warning Signs Over U.S. Housing Market

Did you hear this one?

Next week, the National Association of Realtors (NAR) will revise down its previously reported sales of U.S. homes from the period of January 2007 through to October 2011. The NAR said yesterday that it had made a mistake in past calculations on home sales and was double counting.

So, in reality, sales of existing homes in the U.S. have been weaker than what we have been told. Surprise, surprise, surprise. No wonder the U.S. economy can’t get going—the U.S. housing market, the backbone of the economy, is not responding to life support. Each month, as the Labor Department releases its job report, the biggest sources of job losses continue to be construction jobs.

When I want to know how the U.S. housing market is doing, I don’t look at the NAR statistics, I don’t look at new housing sales, and I don’t look at the S&P/Case-Shiller Index. These are lagging indicators. The leading indicator I follow for the direction of the U.S. housing market is the Dow Jones U.S. Home Construction Index, a weighted average of the stock prices of the 34 largest U.S. home builders.

And what’s this chart saying to me right now about the U.S. housing market? It’s saying that the U.S. housing market continues to be a problem. While most stock sectors have recovered from the 2008 credit crisis, only the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Banks Index, leading indicators of two related industries, are still far below their 2007-2008 highs.

This tells me that the U.S. housing market is still depressed; it tells me that the U.S. banks have plenty more bad home loans to foreclose on. The U.S. economy cannot, and will not, have a meaningful recovery until the U.S. housing market is fixed…something that could take years to happen.

Here’s the long-term problem. When the banks finally get rid of their entire foreclosed home inventory, when everything is washed through the system, two major hurdles remain:

About one in four U.S. homes with mortgages on them are worth less than their mortgages today. How many decades will it take to sort this out? And by the time the bottom in the U.S. housing market is reached, interest rates will be rising to offset the inflation created by all the money printing of the past three years. The remainder of this decade for the U.S. housing market—doomed. (See: Why We Can’t Have a Sustained Economic Recovery.)