FOOD FOR THOUGHT: Home Sweet Home (part 1)

Tuesday, February 16th, 2010

We keep hearing about the recovery in the economy and the recovery in the housing market, but for the life of me the only place I see it is on T.V. What I see is a decrease in production, continued low housing numbers, higher lumber prices and a downturn in commercial real estate.

With lending as tight as it’s been in lending history, and unemployment at 10% (so they say, probably more like 15%), where are the prospective buyers supposed to come from? If you throw the proposed HUD legislation to prevent owner financed deals unless the owner lives in the property, the picture gets even bleaker. Then there are those pesky ARM resets coming up this year, bleaker yet.

Research shows where roughly five million homeowners- houses and condos- are delinquent and headed for foreclosure. If we don’t recover quickly and interest rates rise, prices would fall even further and drive more owners in default to foreclosure. In fact, Standard & Poor’s sees the “overhang” of foreclosed homes leading to as many as 70% of owners in default to foreclosure. Not a pretty picture.

As if these troubles aren’t enough, we are also dealing with escalating lumber prices. Lumber, strangely enough, is outperforming the S&P, Gold, Copper, Grains and Oil this year. In fact it’s outperforming most things. This is great if you own lumber futures, but not so great if you’re looking for help with the housing market.

Lumber is up over 25% this year despite the home construction business – its main use – at record lows.

According to Jon Markman at Money Morning, “This is a rather stunning development. But there’s a solid explanation: Production has dropped in the face of weak demand – and dropped so much that prices have moved much higher. In other words, because there has been so little demand for lumber to build houses, timber companies have cut back on their harvesting and cutting. So now that home production is picking up a little – as was suggested in some earnings and economic reports last week – marginal new demand is pushing up the price of this surprisingly scarce commodity. “Now, in the face of all these obstacles how in the world did the homebuilder and real estate stocks soar? What do they know that we don’t know, or is this just a great opportunity to short them? To shed some perspective on the advance the SPDR S&P Homebuilders (NYSE: XHB), which replicates as closely as possible the performance of the S&P Homebuilders Select Industry Index, has doubled from its March 2009 low.

Is this really sustainable?

Michael Schulman of Seeking Alpha has been warning us since 2007. He says way too many houses were built and that “40% of the jobs created between 2000 and 2008 were in home construction.” Also, as we know, houses were sold to people that could not afford to own a house, but were enticed by the creative mortgages, which led to the housing crash and the current recession.

Recently Schulman said “One quarter of the people in the US with a mortgage now has a mortgage greater than the value of their home. And for this reason, for the first time ever, the people in default on their homes are paying credit card bills before paying mortgages. Mortgage lending standards are tighter than anyone can remember. There is no secondary mortgage market and only Fannie Mae and Freddie Mac are buying mortgages. But they are capped at how much they buy, could hit the cap next year, and between this cap and the Fed withdrawing from buying mortgages, rates will have to rise to bring other buyers of RMBS into the market. Put this together with the continuing slide in home prices, and you have another seven million foreclosures coming in the next 30 months and reduced demand for new and existing homes.”

The only bright spot is that evidence shows that a low in lumber prices coincides with relative lows in the construction of new single-family homes, 12 months out. Fortunately, we did see a low in lumber prices set a year ago in January 2009, which would suggest that single-family home construction is right now at a relative low. Other than that, and the T.V. saying we have bottomed, I don’t see much of anything that would turn this battleship around.

Stay tuned for part two tomorrow.

NEW – Weekly Blast from the Past!!