Why Rising Housing Starts Do Not Signal a Recovery for the Housing Market

No matter where you go, political debates, or mainstream media, everyone seems to be talking about how our economy is doing. Some say the economy is improving. Others, like me say, take artificially low interest rates and money printing out of the equation, and see the economy is doing terribly.

Regardless of where you sit with your opinion, the majority of us do seem to agree that, for the economy to improve, the housing market needs to improve. So the question is: is the housing market really recovering?

As we all know, the housing market was the main culprit of the Great Recession that started in 2008. Here are some important facts about housing today. At the end of the second quarter of 2012, housing market prices were still down more than 30% from 2006. A total of 22.3% of all residential properties with mortgages on them had negative equity at the end of the second quarter—the equivalent of 10.8 million residential properties with negative equity. (Source: Core Logic, September 12, 2012.)

In a recovering housing market, what you want to see is overall market conditions improving. This means existing home sales improving, not just prices going up marginally; but first-time home buyers coming into the housing market, inventory of distressed homes decreasing, and obviously a continued rise in housing starts. You also want to see improve mortgage lending and the willingness of homebuyers to borrow. None of this is happening!

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U.S. housing starts in September increased 15% over August, to an annualized rate of 872,000 units. In September of 2011, housing starts were running at annualized rate of 647,000 units. Hence, housing starts are certainly moving in the right direction. But they don’t draw a clear picture of what’s really happening in the housing market.

Big banks like JPMorgan Chase & Co. (NYSE/JPM) and Wells Fargo & Company (NYSE/WFC) are earning higher profits over last year partly due to more mortgage lending. But the fact is that, in 2011, residential mortgage lending reached the lowest level in 16 years, while mortgage interest rates were historically low.

My point is that, yes, the housing market is witnessing some good things, but from a bigger point of view, it still has long way to go. With one in five homes with mortgages on them underwater, it will be a long, long time before we get back to a normal housing market, and a long time before we see national house prices rising again.

Where the Market Stands; Where it’s Headed:

This has to be the worst earnings season I have seen in years. Just look at some of these names…

Google Inc. (NASDAQ/GOOG) reported its third-quarter earnings yesterday afternoon and missed both analysts’ profit and revenue expectations. The stock fell eight percent to under $700.00 a share.

After the close, Microsoft Corporation (NASDAQ/MSFT) reported that its third-quarter sales and profit were below analyst expectations and its stock dropped almost three percent in after-hours trading.

Philip Morris International Inc. (NYSE/PM) said it made less money than expected in the third quarter, as eurozone smokers cut back on cigarette consumption (sales down 15% for the company in the European Union in the third quarter). This stock fell four percent.

I’ve been warning that it would be a very poor third-quarter earnings season. How much longer before the stock market pays attention to the falling profits of the companies that trade in it?

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in Profit Confidential, July 24, 2006.The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011, producing spectacular profits for investors in the bonds Michael recommended.