Friday, October 17, 2008

Housing: Good News! The Cliff-Diving Continues!

The latest housing data was released today, and not surprisingly, the big bad wolf once again blew over our pile of straw. The Census Bureau reported that housing starts fell to a seasonally adjusted annual pace of 817,000, which is 6% lower than last month and 31% lower than last September.

Building permit data was equally impressive with total permits falling 8% from the prior month and 38% from the prior year. Both are at near 50-year lows and are certain to break that record in the months ahead.

Plenty of the reports out today on this news are decrying the horrific state of housing, and plenty of pundits are further lengthening their estimate of how long and severe the housing downturn will last. I think we may have finally reached the point where even the hardiest housing bull has had to admit defeat, give up his Realtor license, hand the keys to his Miami condo back to the bank, and start planning his run for Congress.

I have to admit that I don't know how long the downturn will last. There are so many variables at play with housing, the economy, and the financial markets that any guess would be simply that -- a guess. What I can say is that I smile every time another "bad" housing report is issued.

The fact is that this is the type of data we will need to see for some time before housing bottoms. A massive amount of housing was built during the bubble, and that surplus needs to be eliminated before prices level off. We need to see fewer housing units built and increased absorption/destruction of the existing supply. It's really that simple. We should welcome this type of data.

What we should not welcome is any effort on the part of our legislators to interfere with the market adjustment currently underway. Any effort to support housing prices will only serve to muddy price transparency and prolong the length of the downturn. One key factor needed to help absorb the excess supply is demand from new first-time buyers. These folks are already "disadvantaged" by the tighter lending standards of the banks and grimmer job prospects. Any program/bailout/Ponzi scheme that keeps home prices above their natural market-clearing level will only further disadvantage and discourage these individuals and families from buying a home. Lower home prices are actually a good thing for a while.

I've remained out of housing stocks during this down cycle, and I still see no reason to jump in. Just as with the financials, there will be impressive short-term pops, but trying to time these is just gambling. The fundamentals of the homebuilders still look lousy, and I expect to see more failures before all is said and done. Even then, I don't expect home building to come roaring back. After bottoming, these shares are likely to remain rather unexciting as home prices once again tether themselves to incomes (unexciting) and rents (also unexciting). At least we'll all be a little less piggish, and we'll be rebuilding with "brick", rather than "straw."

Disclosure: This little Rubbernecker went to the market, and this little Rubbernecker had none.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.