Recovery in the housing market is on the verge of stalling (is a double-dip near?)

A summary from various news sources:
· With the expiry of an $8,000 tax credit for first-time homebuyers on April 30, new single-family home sales in the U.S. crashed in May.
· Commerce department figures showed on Wednesday that new home sales dropped by 32.7 per cent from April to May to an annual rate of 300,000.
· The monthly fall was also a record, and was nearly twice as severe as Wall Street analysts had predicted.
· Compared with the same month a year ago, new home sales are off by 18.3 per cent.
· Additionally, home prices have now fallen for the past six months, according to the Case-Shiller home-price index.
· Foreclosures have been running at a rate of over 300,000 filings a month for the past 15 months.
· By some estimates, it will take more than eight years of normal sales to clear the stock of houses now held by banks.
· Bloomberg reported that mortgage securities with U.S.-backed guarantees traded at record high prices on speculation homeowner refinancing will fail to accelerate and as supply of the bonds remains limited.

Thoughts:
With the government stimulus drawing down, we now have a reminder of what the housing situation is really like. Other than low interest rates, there are few factors that will provide a boost to the housing market at the moment. This is why the fed has opted to keep interest rates low and will continue to do so (probably at least until early 2011).

Housing will continue to be one of the most important indicators for our economy. Many economists argue that the housing market never really recovered in the first place. The rebound that we saw was largely due to artificial support from the government and low interest rates from the fed. Therefore, the best investors and buyers can hope for is a slow and steady improvement in the coming months. The stock market and the entire economy are likely to follow the same slow and steady growth if they are to improve.

Being that housing and labor markets go hand in hand. An improvement in employment and incomes is needed to raise home demand and lift house prices. Poor jobs data in the past month is another sign that the recovery in the housing market is stalling.

Conclusion:
The drop in homes sales is likely a correction, due to the expiring tax credits. I do not expect a double dip in the housing market. However, I do see a long and drawn out recovery that will take years to play out. What will it take in order to see improvements in employment (which will aid housing)? Businesses will need easier access to credit and stronger confidence from consumers.

Daniel A.
Summer Analyst
Analyze Capital LLC