US Housing Market – False Dawn?

Is the U.S. housing market truly at a turning point, as investors seem to increasingly believe? Or is this actually a false dawn, meaning that there are problems and pain ahead for those who turned bullish too soon?

At one hand, new home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected. Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years.

We also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae and Freddie Mac have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.
And that’s not all.

The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.
Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.

From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.