The Real Goods on the Direction of the Housing Market

Here’s a headline from a major news wire yesterday: “U.S. new home sales rise.” Another service headlined an article: “New Home Sales Unexpectedly Increase.” You’d think investors need not read any further with headlines like these portraying a healthy housing market.

But nothing could be further from the truth.

Yesterday, the U.S. Commerce Department reported new single- family home sales increased by about 5% in April. Digging deeper into the report, here’s what really matters to investors and home owners:

— The median price of a new home in the U.S. fell by 7.3% in April from March.

— U.S. new homes prices are up less than 1% from a year ago.

— There’s an inventory of 565,000 unsold new homes in the U.S. At present, the level of unsold new homes in the U.S. is at its highest level on record.

With the standard 30-year U.S. mortgage now at 6.6%, mortgage rates are at their highest level in four years. Last week, both former Fed Chairman Greenspan and current Chairman Bernanke came out and said the boom in the housing market was essentially gone. Greenspan said it best when speaking at the Bond Market Association’s 30th anniversary function: “The boom (in the housing market) is over, and you can say that with a fairly strong degree of confidence.”

What matters now is where the housing market will take the U.S. economy. Depending on which report you believe, the housing and construction market in the U.S. accounts for about one-fifth to one-quarter of all U.S. economic activity. While Fed Chief Bernanke has commented that we are in for a soft landing in the housing market, other market watchers have more dire predictions.

While we all wish for a soft landing, we must realize the fact that over the past couple of years so many Americans signed up for creative mortgages with either no principal payments or no down payments. How will these consumers fair with a softening housing market? My guess would be not well. If the Fed decides to raise interest rates at its next couple of meetings, the proverbial nail on the coffin will be placed on the U.S. housing market.