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Monday, 07 February 2011 11:59

The Latest Case Shiller Index - Housing Continues Freefall In Aggressive Search For Equilibrium

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Summary: Except for a few metric blips borne from .gov bubble blowing, the housing market has been on a continuous nosedive since 2nd half of 2006. Anyone unfortunate enough to buy into the nonsense mis/dis/information styled propaganda of "This is the best time to buy" or the government's incentives to catch a falling knife with your bare hands (ex. tax incentives) have already been cut...

The residential real estate situation is still looking quite bleak. The downturn (actually, the continuation of the earlier downturn - they were not two separate events) that I forecast last year has come, and come with a vengeance. If we may reminisce, the mainstream media was overrun with optimistic housing forecasts, primarily as a result of some minor metric upticks born from incessant .gov bubble blowing. From my post of June 22nd last year - As I Made Very Clear In March, US Housing Has a Way to Fall

From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit

Sales of U.S. previously owned homes rose in May to the highest level in six months as buyers rushed to beat a June tax-credit deadline, economists said before a report today.

Purchases of existing houses, which are tabulated when a contract closes, increased 6 percent to a 6.12 million annual rate, according to the median of 73 forecasts in a Bloomberg News survey. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

Credit-induced gyrations will make the underlying health of the market difficult to determine over the next couple of months. A slump in builder shares since early May signals investors are concerned the damage caused by the end of government stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.

Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May

June 22 (Bloomberg) — Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.

Now, this is the BoomBustBlog version from March of this year where I made it crystal clear that housing will fall further and significantly. The government incentives are just market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest

Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”...

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Come 2011, the effects of the government's attempt to usurp market forces have nearly completely worn off and housing stock is in free fall - exactly as I proclaimed in 2009 and 2010 - free fall in an incessant search for equilibrium. Said equilibrium is nowhere near where we are now.

My very first post, the one that created BoomBustBlog, back in 2007 warned that the residential and commercial real estate bust was not only just getting started, but would continue for quite some time. I was dramatically more bearish than the Street and the mainstream in general. Reference The Real Trend in US Housing Prices… Sunday, September 2nd, 2007. In that post I made clear that although the Case Shiller index looked bearish, it failed to capture the worst parts of the residential bust. Well, fast forward 3.5 years later and the story still stands, even more exaggerated.

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Looking at the basic precepts of residential real estate valuation, there is no real reason why prices should not continue falling. As indicated in the Bloomberg video below, nearly every factor that you can plug into the valuation equation is negative. In addition, the recent fraudclosure issues significantly exacerbate the problem.

[youtube iLKYxfxHpuY&hl]

Here, you have the most recent snapshot of the Case Shiller index. As you can see, it is the quintessential picture of a bubble gone bust. Notice the upticks throughout 2009 and 2010, the results of incessant .gov bubble blowing. Many truly believed that was the marked turnaround in the real estate market. Those who believed so did not study their history nor their spreadsheets. Plug in the numbers, and you will see that there is no empirical reason for housing prices to go up when they are still too richly priced to begin with.

This is an interactive version of the chart above. Use the slider at the bottom of the chart to alter the time frame graphed...

[iframe https://spreadsheets.google.com/pub?key=0Ai5WJsM3KjltdFlpZ1JUZXJIMWxfWHNHZWxrMDl2MXc&hl=en&single=true&gid=1&output=html&widget=true 500 450]

Please take into consideration that I believe things are actually going to get worse, for the shadow inventory buildup has been exacerbated by the foreclosure issues. All paying subscribers should review Foreclosures & Shadow Inventory. Shadow inventory not only hides the true condition of the housing market, it allows banks to hide the true nature of profits from said housing stock. More on that in our next post which will contain a current update of the shadow inventory and foreclosure backlog numbers.