Yes, housing is broke in the United States. It is not at a bottom; it is not in a depression or at recession levels; it is broken and this reality is having profound impacts on employment, feelings of consumer wealth, consumer spending, and the economy — and will have greater impacts on the banks and corporate profits in the second of this year and in 2011. (See our related article, Bull Market: Year Two).

There are reams of publicly available information – available to one and all including analysts and money managers recommending and buying home building stocks – showing how badly broken the housing market is at this time:

 Home Ownership: Historically, 63% of Americans own their own home. Under Clinton and Bush, that was pushed to 70%. This push was done through changes in credit standards. Those standards have been reversed and are now far tighter than when the push began. We are headed back down to 63% and possibly lower if the real world Great Recession continues longer than most expect.

Unemployment: Historically, home buying has a linear relationship, over time, with national income and employment or unemployment. It is pretty simple — people do not buy as many houses when they are unemployed or fear being unemployed. And real world unemployment of more than 20% – unemployed, the discouraged, the unwilling part-timers and the permanent drop outs – is showing no signs of abating.

Affordability: Analysts keep speaking about affordability – homes are cheap –but this is simply not true. Historically – before the fall in interest rates at the beginning of the millennia – the cost of a house was 3.2 times household income. The range from the sixties to the end of the last century was between 2.7 and 3.5 times typical household income. Last year it was 3.4. That makes the cost of a home high by historical standards.

 Foreclosures: At the same time, we are less than one fourth through the foreclosure ramp created by the Great Recession – 1.5 million homes out of a 6-7 million homes that will be foreclosed in the next 24-30 months. Foreclosures are still at an all time high – and would be higher if not for state initiatives to slow down the process and the willingness of banks to slow the process so they do not have to write down losses. (10 Under-Loved Stocks to Buy Now).

 Housing Surplus: Six to seven million more foreclosures, plus some new homes starts – 350,000-500,00 a million a year plus sales of existing homes not in foreclosures means a gigantic inventory overhang that will suppress prices for several years. The current inventory is eleven months of sales; the historical norm is six months.

 Home Prices: Home prices are set locally – where I live prices are stable and have been for a while. Nationally they have fallen a almost 30% since the beginning of the crash, more than 50% in some localities and according to Meredith Whitney and others prices have at least another 15% to go before we see a national bottom.

The Government: Federal support for housing is pulling back. Fed purchases or RMBS end today; the homebuyer tax credit, never politically popular, ends in a month; statutory caps on Fannie and Freddie’s balance sheet will hit before year-end, probably just before the election, and there is better than a 50/50 chance they will not be raised; the FHA is in the red, is seeing historically high default rates and is going to have to ask Congress for more money, which will require further tightening of standards.

Interest Rates: Interest rates are set to rise, reducing housing affordability. Ten year rates have risen sharply this year and will continue to climb, if not this year, next, through the simple math of bond market gravity and increasing demands by the US Treasury.

Bottom line: Foreclosures peak in 2012, home prices stabilize nationally that year or early in 2013. Maybe – if the mortgage securitization market returns and national income begins to increase in 2011.

What does this mean for stocks?

1.      The Stock Market: Slower economic growth means weaker corporate profits in many segments and pressure on the market itself.

2.      Housing Stocks: A broken housing market means a miserable 2010-2012 for the home builders – all of them. Lennar Corp. (LEN), PulteGroup Inc. (PHM), Beazer Homes USA (BZH), Hovnanian Enterprises (HOV), KB Home (KBH) and D.H. Horton Inc. (DHI) just to mention a few in for more trouble.

3.      Bank Stocks: And the continuing rise in defaults and foreclosures mans nasty surprises at the big banks. The Citicorp (C), Bank of America (BAC), Wells Fargo (WFC), JP Morgan (JPM), and PNC Financial Services (PNC) among are 2010 risks.

4.      Stocks to Buy:  A pretty good business for beneficiaries of home renovation and fix up projects – if you cannot sell it, and you are going to live there for a while, put up some fresh paint, build the porch, or get a flat panel. Home Depot (HD), Lowe’s Companies (LOW), Sherwin-Williams (SHW) and Best Buy (BBY).


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