Rossputin.com Rational Thinking About Our World

Just below, you'll find Brian Wesbury's optimistic take on the likely effect (or lack thereof) of housing on the economy. While I hope Brian is, right, I still find myself discerning the dark could around housing's recent silver lining.

see "Existing Home Sales Surge in February" (Bloomberg News, 3/23/07)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_VipJ8nWUgQ&

Even the reporter for the Bloomberg News story above sounds optimistic: "Sales of previously owned homes in the U.S. unexpectedly surged last month by the most in three years, a sign that the housing market is probably past the worst of its slump."

It's true: The National Association of Realtors reported that sales increased 3.9% versus a Bloomberg survey forecast of a drop of 2.9%.

But as Bastiat warned us, we should be aware of what is unseen as well as what is seen.

And in this case, what is unseen are a few major points:

1) The high number to some degree reflected unseasonably warm weather in December, since existing home sales are recorded at the time the contract closes, not when it was signed.

2) Inventories increased substantially, going up 5.9% to 3.75 million homes for sale, or a 6.7 month supply.

3) The sub-prime contagion is, in my view, closer to its beginning than its end. Yes, it's been very ugly already for the stocks of sub-prime lenders but the borrowers themselves are mostly yet to have their interest rates reset to new higher levels that many of the borrowers will not be able to afford. As Bloomberg notes, "Countrywide Financial Corp., the largest U.S. mortgage lender, said this week that delinquencies on some subprime home loans may climb to 9.89 percent, exceeding a company record set in 2000."

4) Lending standards are increasing which will decrease the pool of buyers available for these coming foreclosures.

5) The median price of an existing home fell 1.3% versus a year ago to $212,800. It was the seventh monthly decline in a row and the eighth month in a row with a negative year-over-year comparison.

So, more houses sold that were forecast, but at lower prices and while inventories went up substantially. Of course, lower prices are what will be necessary to clear out the inventory, just as in any business. But given that inventories went up so much despite high sales and lower prices, I believe the situation is very likely to get worse before it gets better.

I repeat what I have been saying on these pages for more than a year: I predict that the housing market is in for a much longer period of weakness than most people expect, just as the bubble took longer and went further than anyone I read predicted. I do not think it will be the equivalent of a crash, but rather of a long grinding bear market. The best time to buy a house (of course this is a big generalization because markets are very local in nature) will not be for at least 2 or 3 years, and will not be until you see Lou Dobbs or some equally prominent but poorly informed talking head of the financial media do a special on "Why Buying Your Own Home Will Never Again Be A Good Idea".