A variety of data packages get dropped in my lap from time to time, an excerpt from the latest:

First, we got the existing home sales data for February and they edged down again, by 0.6% MoM, and “no” — it was not due to the blizzards (sales actually rose in the Northeast and Midwest). Also keep in mind that these are closings — so no reason why they should have been impacted by the weather at all.
This is a new downward trend in sales turnover because it was the third decline in a row and we are now all the way back to the depressed levels of June 2009, at just over five million units annualized. Without the tax credits, which expire at the end of April (we shall see about that — Arnold is already moving to extend the goodies in the Golden State) we would have seen an even weaker figure because first-time homebuyers made up 42% of the sales tally last month. Repeat buyers are hibernating, comprising 39% of the sales pace, down from 43% in January.
What was truly disturbing were the inventory data — listings up almost 10% to their highest level since last September — taking the backlog to a six-month high of 8.6 months’ supply (from 7.8 in January), which is materially above the 5-6 months that generally characterizes a balanced market.
We are back to a classic buyers’ market, which means that we are in for another round of residential real estate price deflation. Indeed, average resale prices dropped 0.8% last month and are down in seven of the past eight months — the Case-Shiller home price index is probably not too far behind (recall that the FHFA house price index has declined in each of the past two months).

The bottom line is that the U.S. housing market is still in a mess fully three years after the collapse. If government policies worked, then it is hardly evident — perhaps at best cushioning the blow but not preventing it from happening. Consider the following:
  1. The slide in housing has shaved $7 trillion from national residential real estate wealth since the third quarter of 2006.
  2. There are an estimated 5 million Americans still in the foreclosure process.
  3. There are still 11.3 million homeowners who are “upside down” on their mortgage. The average “under water” mortgage borrower is in the hole to the tune of $70,700 (see front page article of the USA Today) in Q4, up from $69,700 in Q3.
  4. The unsold housing inventory, when accurately measured, is close to 21 months’ supply. There are over 18 million residential housing units sitting empty right now across the country, and the areas under the most severe pressure are Nevada, Arizona, Florida, Michigan and California (“only” 25% of the country).
We are not the only ones who see the prospect of another leg down in home prices. The banks seem to have given up any hope that we would see a rebound at any time on the horizon, which explains for example why it is that BoA is now more fully engaged in principal writedowns and expect to see other lenders follow suit. It is the right thing to do. It will speed up the process of price discovery at the expense of revealing just how much more downward price pressure there is going to be in the market for residential real estate.
Never before have new home sales gone on to make a new cycle low after a recession ends — until now. In fact, in practically every other cycle, housing is the first sector to bottom and lead the economy out of the downturn. This time around, it has been the federal government — bailouts and repeated stimulus — and a production bounce as inventories get realigned with a sales environment that may be weak but never went into the abyss.
That said, without the traditional credit-sensitive sectors leading the economy into the upturn, as has traditionally been the case, then it is hard to believe we are going to see a sustainable recovery. Already we are seeing capital spending slowdown as companies opt for cash and liquidity as opposed to new investments and the export story is going to grow old very soon with Europe moving back into recession and equity markets in Asia pointing to a moderation in growth there as well. Not to mention what the stronger U.S. dollar is going to do in terms of a competitive roadblock for U.S. producers.
The full kit here: March 25 data pack
Like today’s Yahoo story that echoed the same ideas, the view from the ivory tower is ominous – but on the ground the market is hot as a pistol!

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