U.S. Housing Market Far From a Bottom

Some are arguing that the U.S. housing market has bottomed.

U.S. homeownership fell to 65.4% in the first quarter of 2012 (source: Bloomberg, April 30, 2012). Homeownership of 65.4% means that of all the occupied housing units in the U.S. housing market, 65.4% were occupied by the actual owner. This is down from the record 69.2%, which was set at the height of the housing market bubble in 2004.

The 65.4% U.S. homeownership level is also the lowest seen in 15 years!

I believe the homeownership rate will continue to drop in the coming years. As I’ve written in these pages, more people are deciding to rent instead of buy in the U.S. housing market.


The main reasons for renting are that banks are not lending out to people. Mortgages are hard to get. Secondly, real disposable incomes are not rising at all for people to justify entering the housing market—the average American is not feeling wealthy; they feel they are just getting by. A third reason is that the record $1.0-trillion in student loans will restrict many first-time home buyers from getting a mortgage, because they already have too much debt.

Another good reason people are deciding to rent: like the stock market, after people have been burned or have family members and friends that have been burned by stocks, one tends to stay away from the stock market in general. The housing market is no different, especially after the horrible collapse of 2007 and the lingering pain many are still feeling today.

The Mortgage Bankers Association (MBA) released its latest housing market report for the fourth quarter of 2011. Its survey covers almost 44 million homes in the U.S. housing market (33% of all homes in the U.S., which is why I believe it is a dependable survey).

The MBA rated all mortgages in the U.S. for delinquency, which means that payments from homeowners are at least 30 days past due. The delinquency rate in the housing market fell to 7.6%, well below the highest level reached in 2010, 10.2%. But these numbers are still dangerously high. After recessions and in an economic recovery, this figure should be half that.

The foreclosures rate in the U.S. still remains very high, as confirmed by RealtyTrac, which estimates the numbers of homes in foreclosure at 5.6 million. As I’ve been writing in these pages, home foreclosures should continue to rise in 2012.

This means that more empty homes will enter the housing market, further putting pressure on home prices. CoreLogic released its “Real House Price” Index for February 2012, which adjusts for inflation. Home prices in February of 2012 are now back to levels last seen in the housing market in May 1999. Case-Shiller’s “Real House Price” Index adjusted for inflation in March of 2012—for its 20-city composite—and is back to levels not seen in the housing market since the fourth quarter of 1998.

The ideas that the housing market has bottomed and foreclosures are a thing of the past are simple fallacies.

Where the Market Stands; Where it’s Headed:

Let’s face the facts: there is a lot of money in the financial system (thank you, Federal Reserve); 10-year U.S. Treasuries continue to yield less than two percent; and the stock market is one of the most attractive places for an investor to park his/her money.

But we must not forget that the stock market trades at a multiple of company earnings. My argument is that the economy will not get better and that it will weaken. As the economy weakens, corporate profits will fall. A policy of keeping interest rates so low for so long, coupled with $2.0 trillion in money printing, make for very inflationary factors. Inflation goes up, interest rates rise, the stock market plummets. That’s how it’s always worked. (See: Getting Ready for the Next Economic War: Interest Rates.)

We are getting close to the top of a bear market rally in stocks that started in March of 2009.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 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.