U.S. Real Estate Market Numbers Look Good on the
Surface…Closer Look Screams Caution

The numbers look good until we take a closer look…

The National Association of Realtors reported last week that home resales in February were 7.7% higher than February of last year. The U.S. Commerce Department reports that February new home sales are up 11.4% from last February. Both sets of numbers bode well for the U.S. housing market.

The year-over-year strong jump in U.S. home resales of 7.7% and of new home sales of 11.4% can be explained by the unusual warm weather in the northeast, which caused some buyers to venture out home-shopping earlier this year, as the northeast really experienced no winter.

But the important thing to note in the U.S. housing market data is that resales and new home sales month-over-month are actually trending downwards.

As a matter of fact, the number of new single family homes sold in the U.S. is at an historic low, dating back 50 years. Yes, it is bouncing a bit from 2009 levels, but not nearly enough to move it past historically low levels.

The other issue with the U.S. housing market is the inventory of homes on the market.

The inventory of homes in the U.S. housing market rose to 2.43 million homes in February. Realty Trac is reporting that foreclosures are set to rise at least 15% this year over last year’s levels, as the courts manage to work through the improper paperwork submitted by the banks last year.

In 2012 alone—to the end of February—there were 410,000 homes in the U.S. housing market that received default notices, which is expected to increase as the year progresses. Add these foreclosures to the amount of unsold homes and one can see continued pressure in the U.S. housing market.

However, there is one statistic that economists are clinging to that may indicate that the U.S. housing market is recovering. Permits to build new homes are at a three-and-a-half year high.

While companies like Lennar Corporation (NYSE/LEN) are forecasting an improvingU.S.housing market for 2012, the nation’s fifth-largest homebuilder, KB Home (NYSE/KBH), posted a wider-than-expected quarterly loss and a steep drop in margins last week.

KB Home said that cancellations of new homes rose to 36% from 29% last year, which was the reason for the miss. Those permits for new homes don’t look like they are translating to homes actually being built, which comes as no surprise considering the glut of unsold properties in the U.S. housing market, high foreclosures in the pipeline, and a consumer that is not experiencing real personal disposable income growth.

So, home resales and new home sales have been dropping off recently in the U.S. housing market, while S&P Case-Shiller Home Price Index met analyst expectations by only declining 3.8% in January 2012 from last January.

While recent numbers on the U.S.housing market are being touted as a victory and a sign of “stabilization” in the U.S. housing market, the bottom line is prices continued to drop and home prices are now at 2003 levels. I believe prices for the U.S. housing market will fall again in 2012 and possibly 2013. (Also see: Hope in Housing? Our Indicators Say Prices Still Crashing.)

Where the Market Stands; Where it’s Headed:

We are in a long-term secular bear market. Phase I of the bear market was completed when the Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009.

Phase II of the bear market started in March of 2009 and continues today. The purpose of a Phase II bear market (often referred to as a sucker’s rally) is to lure investors back into the stock market under the false pretense that the economy is improving.

Phase III of the bear market will bring stocks back close to where Phase I of the bear market ended—that’s 6,440 on the Dow Jones Industrial Average.

This is what I believe.

What He Said:

“Any way you look at it, the U.S.housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. A dire prediction that came true.