If the Housing Market Is Turning Around, Why Has Home Builder Confidence Dropped for Three Months in a Row?

According to data released by CoreLogic, at the end of 2012, 21.5% of all the homes with a mortgage in the U.S. had negative equity. This means that 10.4 million homes in the U.S. housing market are still underwater; their home prices are lower than the mortgages on them. (Source: Wall Street Journal, March 18, 2013.)

Those who are close to the U.S. housing market—home builders—are turning pessimistic. Home builders’ confidence has been declining for three consecutive months. In March, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) dropped two points from February—reduced to 44. Any reading below 50 indicates home builders are viewing the condition as poor, rather than good. (Source: National Association of Home Builders, March 18, 2013.)

With all this said, there is still optimism among the mainstream that the increase in home prices means that a housing market recovery is underway. It is true that home prices in the U.S. housing market have increased marginally; but let the truth be known: they are still down nearly 30% since the housing slump began in 2007.

For the 10.4 million homeowners living in their homes with negative equity, their home prices will have to go up, on average, by more than 40% for them to just break even.

As I have repeatedly been saying in these pages, an essential ingredient of a real housing market recovery is missing from the action: first-time home buyers.

Dear reader, we all know the reason behind why home prices are increasing in the U.S. housing market; it’s the institutional investors who are driving demand. They are buying homes and renting them out, because the returns from doing so are better than the returns big investors can get from the bond market or the risky stock market.

I’m still not convinced that there is any recovery in the U.S. housing market. I will consider the U.S. housing market to be in a rebound when I see first-time home buyers pouring in—and right now, that’s not the case. At the same time, I would consider it a recovery when we see a decline in the number of homes with negative equity.

Where the Market Stands; Where It’s Headed:

As I started writing in these pages back in 2009, the primary purpose of a Phase II secular bear market (what we are in now) is to lure investors back into stocks under the premise that the economy is improving and stocks are a safe bet again. That’s exactly where we are now. Caution is warranted.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumers spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in Profit Confidential, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 to November 2008.

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