This Housing Recovery Is One Built On Sand

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I'M ALWAYS SURPRISED that anyone is surprised by certain phenomena.

The National Association of Home Builders reported Monday that its measure of its members' confidence fell to 14 in June, the lowest level since April 2009 and well below forecasters' guesses. Why the latter was so was mystifying.

The conventional, ex-post explanation was that homebuilders were bummed by the end of the federal government's tax subsidy for certain first-time and other home buyers at the end of April. As if nobody knew that would happen. Builders would have to reduce building houses and condominiums after they wrung all the business they could from those receiving the largesse of up to $8,000 from the taxpayers—that is, you. Surprise?

Even the slow learners in Congress realize that this give-away did nothing to stimulate demand—and by extension, boost supply—of newly built structures. The subsidy only affected the timing of purchases, not their total.

And preliminary indications are the subsidies mainly went into the pockets of sellers of houses as buyers paid up to beat the April 30 deadline. That's also what apparently happened with the "Cash for Clunkers" dough, which mainly fattened auto dealers' profit margin.

But more than the end of the homebuyers' tax credit is depressing builders' confidence. Indeed, their fortunes have been on the decline for months. Unlike previous housing cycles, they are up against a huge competitor, once that will stop at nothing to sell houses. They are the banks.

According to Housing Intelligence (, at the height of the housing boom in late 2006, sales of new homes comprised a peak 20% share of all new homes sold. You remember those halcyon days of folks queuing up to buy at new developments, often with no intent ever to live in those houses and condos. And mortgage brokers were falling all over themselves to provide loans to anyone who would say anything about their current income or net worth, just to qualify for a loan.

These days, banks sell more than 20% of the homes that Americans are buying, or half again as many as builders. That hasn't changed much because of the tax credits. And why should it?

Even though qualified home buyers can avail themselves of 30-year, fixed-rate mortgages under 4.75%, it's made little difference. Such mortgages now are reserved for those who can actually pay the loans off, a quaint notion that was jettisoned in the go-go years.

The post-bubble decline in home prices has put them at roughly fair value, according to Yale's Robert Shiller, half of the team that created the Case-Shiller indexes of home prices. But, Shiller emphasizes, prices can overshoot to the downside, just as they did on the upside.

That's what it will take to clear the market of excess supply created in the housing bubble. Vulture investors have to step forward to buy houses and condos at bargain-basement prices to rent to those shut out of the market—perhaps the very same folks inhabiting the structures.

But that means foreclosures, exactly the thing that government policies are trying to avoid. So far, foreclosures have meant abandonment of properties left to deteriorate. Or worse, as when foreclosed properties are trashed by bitter former owners who emulate the Vandals, the tribe that gave its name to such behavior.

For all those forecasters who overestimated the NAHB index, here's a clue. There is a reason that homebuilders' stocks have significantly underperformed the overall market. Over the past three months, the SPDR S&P Homebuilders exchange-traded fund (ticker: XHB) is down more than 20%, or roughly twice the decline in the Standard & Poor's 500 SPDRs ETF (SPY.)

Tuesday, the Commerce Department releases its housing-starts data for June. A number around showing foundations being put down on 550,000 units on an annual basis is the consensus forecast. That's down from annual rates of 590,000 and 660,000 in the two preceding months. A relatively small decline is expected even with building permits dropping in the past two months.

For stock-market investors, the importance of the report should be trivial. The equity capitalization of home-building stocks has shriveled to a small percentage of the major market indexes, such as the S&P 500. Technology stocks such as Apple (AAPL), Microsoft (MSFT), Intel (INTC) and Google (GOOG), which are dependent on the world economy rather than parochial concerns such homebuilders, dominate the U.S. stock market.

But for the U.S., the building, buying and selling of houses account for an inordinate share of the economy. Unlike technology, however, housing doesn't create real wealth.

The imbalance created by the dependence of the U.S, economy on building, buying, selling and financing residential real estate has not been corrected. That anyone doesn't recognize this is surprising.


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