Housing Sales: Forget It
Courtesy of The Market Ticker
As I pointed out on March 17th, the housing "tax credit" has run out of gas – and today’s existing home sales numbers prove it:
Sales of existing homes have thus fallen three consecutive months, a reversal after having risen steadily through the fall in response to a federal subsidy for first-time home buyers. The tax credit has been restored and expanded to repeat buyers, but there has been no increase in sales yet.
Notice the "yet" – despite the fact that you must have a signed contract by April 30th to get the credit.
Let’s cut the crap – the debt channel is stuffed for consumers. Without the ability to take on more debt the American Consumer cannot continue to buy houses, cars, or anything else that they cannot pay for with current income.
"We need to have a second surge," said Lawrence Yun, chief economist for the real estate lobbying group. However, the jury’s still out, he said.
You’re not going to get one.
There is only one way to clear the housing market – prices must decline dramatically so that Americans can buy homes at a reasonable multiple of their incomes.
Historical "fair values" have been at 3x incomes, but that’s assuming 20% down payments and all 30 year fixed mortgages. The difficulty of saving up a 20% down payment when one is burdened with insane amounts of credit card, automobile and student loan debt is obvious.
There is no solution to the problem that does not clear, not simply defer, this excessive debt.
Yes, I know this means that all the major banks have to be "resolved." Yes, I know this means that those who bought houses (myself included) during the last 10 years are going to take losses if we thought we were "preserving" or "building" wealth (I didn’t – I consider my house to be a place to hang my hat, but I’m in the minority.) Yes, I know that ultimately this may well mean that home prices contract to 2x or even one times incomes on average in a given area.
I have been talking about "pulled forward demand" for quite some time – pretty much since The Ticker began publication. That has been the official policy of government every time there has been a recession for the last 30 years. But when the ability to take on more debt is exhausted you can no longer pull forward demand and you get to deal with the vacuum you left behind!
What I or anyone else (including The Fed and Government) may want doesn’t matter.
Tax credit or no tax credit, Federal Reserve interference in "buying down" interest rates by intentionally overpaying for mortgage securities and Fannie/Freddie paper or not, if the consumer is stuffed full of debt and cannot afford to take on and service more, nothing you do other than clearing that excessive debt can make a difference to the outcome.
It really is that simple, whether we want it to be or not.
