Housing Market Recovery: On the Same Schedule as Godot

Not much action in the markets yesterday. The Dow lost 5. Gold gained 4.

So far the markets have not seemed to notice, but there are not one…but two bulls in this china shop.

First, the US government is going broke.

Second, we’re at the beginning of a Great Correction.

As to the second item, here’s this update from Bloomberg:

Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.

Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6% this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.

“It’s going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,” Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. “New home sales probably have until the fourth quarter until they start recovering.”

What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment?

We don’t think there will be a recovery…not in the 4th quarter…not this year…not next year…not for 10 years.

Instead, housing prices are probably going to sink. Why? Because they’re a consumer item, not an investment. For 100 years, a house was a place to live in…and housing prices more or less kept pace with inflation. Then, beginning in the mid-’90s people came to see a house as “the best investment you can make.” They began buying houses as a way to make money…and as a way to save for retirement. It made sense. What would you rather have, a mutual fund growing at 10% per year…or a house that goes up by 10% per year? The house! Because you can live in it…and show it off. So you leverage up…you buy twice the house you can afford. You live better. And you make more money.

Those days are over. But, not everyone realizes it. Some wait for the housing market to ‘recover.’ Some may imagine that they will once again see profits from their houses. Others just hold on…waiting for an up-tick so they can get out.

There are still millions of people living in houses they can’t really afford…and millions of others who are “underwater” and running out of air. That’s why the number of houses facing foreclosure rose in the last quarter of last year. And it’s why the inventory of unsold houses continues to rise.

Gradually, people are coming to see houses in a new light. Soon, they’ll see them as money-pits…as expensive follies…and as a pain in the neck. Instead of being proud to have a McMansion…they’ll be embarrassed…like having a car with tail fins in 1985…or wearing a mullet in 2010.

Not only that, it will also be seen as a big waste of money. As the Great Correction continues, unemployment will remain at high levels…savings will increase…and people will want to cut expenses. Among other things, they’ll want smaller, cheaper houses. They’ll want to dump their suburban castles and walk away from their country palaces.

Houses will be losers.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning