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Housing Optimism Is a House of Cards


Foreclosures, deflation putting pressure on industry's balance sheet.

Editor's Note: Jack Lavery, former Chief Economist for Merrill Lynch, is now offering up his expert analysis in a newsletter on Minyanville. Learn more or sign up for a FREE 14 day trial of The Lavery Insight

Some of the headlines sound promising, as does a 4-week advance in the Dow Jones Industrial Average (DJIA) to 8,017.59. On March 17, housing starts for February rose 22.2% from the prior month, following 7 straight declines. Multi-family starts surged 82.3% in February (due heavily to unusually warm and dry weather for the month), while single-family edged 1.1% higher.

Housing starts were well above consensus and my own expectations, surging to an annualized pace of 583,000 units in February. Permits rose as well.

On March 23, existing home sales grew 5.1% from January, to an annualized pace of 4.72 million units, per the National Association of Realtors.

The reality is that foreclosures and short-selling activity accounted for roundly 45% of aggregate sales of existing homes. Declining prices on existing homes puts downward pressure on new-home prices, and constrains new construction.

Inventories of existing homes were still at an engorged 9.7 month supply at February's selling rate. Yes - lending rates have eased, but bank lending is tight and the labor markets hardly inspire confidence.

On March 25, February new-home sales were released, and rose 4.7% from January to a 337,000 annualized pace, well above consensus expectations.

The bad news is, nearly half of new-home inventory is fully completed, well above normal. Builders will be placing downward pressure on housing valuations, so as to try and move the merchandise.

Remember that housing starts are still 47.3% below year-earlier levels. And last Tuesday's Case-Shiller data on home prices in January deflated at an accelerating rate, off 2.8% from December, down 19% year over year (YoY), and declined 26.5% at an annualized rate over the last 3 months through January.

The latest data (February) on Federal Housing Administration (FHA) insured home mortgages had escalating defaults. Fully 7.5% of FHA loans were "seriously delinquent" at the end of February. This is a worsening from 6.2% a year earlier.The FHA defines seriously delinquent mortgages as more than 90 days past due, in the process of foreclosure, or in bankruptcy.
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