Home Sweet Home? Not for the U.S. Housing Market

If you have been waiting for a resurgence in home prices, don’t hold your breath. George Leong takes a look at the Case-Shiller 20-city Index results and what the near future holds for the real estate market. If you live in Atlanta, San Francisco, or Tampa, the recent news was clearly not what you wanted to hear, but then you probably already know the dire situation in your housing market.

The key Case-Shiller 20-city Index showed these three metropolitan areas experienced the largest decline in home prices in September. Also consider that 17 of the 20 cities in the index witnessed price erosion in the housing market. The index fell 3.6%. The housing markets in Atlanta, Las Vegas, and Phoenix are sitting at their lowest levels since the beginning of the subprime mortgage mess four years ago.

If you have been waiting for a resurgence in home prices, don’t hold your breath. I have long been negative on the housing market despite some intermittent improvements. Yes, some will point out that the index had reported a slight increase in home prices in at least half of the cities for five straight months to September. That’s great, but prices continued to be under pressure and the increases will be tiny and not deserving of any screaming optimism.

The weak September reading supports my view that the feeble housing market will continue to be a drag on economic renewal.

A strong housing market is critical for the retail sector, as home buyers will tend to get new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales, where homes are dumped below the mortgage value. The S&P report showed that homes sold under these distressed circumstances are selling at 20% below the actual value of the mortgage.

The reality is that foreclosures continue to drive the buying in the housing market and this does not reflect well for housing price appreciation. It may not be until 2013 that home prices will steadily rise.

Just go back to the August FOMC meeting in which the Federal Reserve said, “…household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.” The subprime mortgage and credit crisis killed the housing market and it could be several years before we see any sustained recovery.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

With the unemployment rate expected to hold at nine percent in November and 15 million Americans still looking for work, don’t expect a rush to buy homes.

On the plus side, Consumer Confidence in November saw a surprise jump to 56.0, above the estimate of 42.5 and the revised 39.8 in October. The strong reading suggests that consumers may be feeling better or maybe they are happy that the year’s coming to an end. But again, it’s only one month, given that the reading fell for six straight months prior to November.

Let me put it another way. While 56.0 appears impressive, the feeling amongst economists is that a reading of 90.0 is needed to indicate a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession reading of 90.0.

In the meantime, there’s no home sweet home for the housing market and I would not be buying homebuilder stocks just yet.