Will Housing Repeat Oh-eight?

It's high time
To draw the line
Put an end to this game
Before it's too late

-Foreigner

Some recent housing market indicators seem to point to stability, while others are still pointing downward. Specifically, existing home sales rose 5.1 percent from their trough last month of 4.4 million per annum, while home prices have recently fallen 9 percent in the past four months.

Existing home sales are an important indicator of stability because the turnover of existing homes often leads to other purchases of big ticket items such as washing machines and refrigerators. Although the importance of home prices is self-evident, it is difficult to have much faith in any home price indicator given the infrequency of turnover.

So what is the story with housing?

Diving into the numbers we find the downturn in 2008 was probably not as bad as it seemed at the time. Existing home sales ran around a steady 5 million annual pace, which is exactly where housing bottomed in the 2000/2001 downturn. The difference being, of course, that the mortgage market was functioning well in the prior period - even going strong, you might say, with most indicators pointing toward rising home prices.

So, if we are currently running at the pace of the prior downturn (even though today's is a "housing-led" recession) shouldn't we be happy with the housing market's performance thus far? I for one have been pleasantly surprised.

Unfortunately, a deeper downturn looms in 2009.

Last week's report of 663,000 net job losses in March brings the total to date to 5.1 million. The rate of job losses began to increase only last September. In prior months, job losses had only averaged just 137,000 since the downward trend began in January 2008.

In other words, the foreclosures we saw in 2008 were primarily a result of shifty mortgages and not a result of lost income. Most of the above-mentioned job losses occurred very recently and have not had the chance to filter into the housing sector, much less the remainder of the economy.

The recent Homeowner Stability Initiative housing bailout program introduced by the Obama administration seeks to pump $75 billion into the mortgage market. I submit to you that as a percentage of the mortgage sector this 0.6 percent stimulus will do little to allow the mortgage market to recover.

Instead, we need to encourage new investment in the mortgage sector, which will make home-buying affordable once again. New investment, once on track, would dwarf the effect of the initiative and help drive home prices toward stability.

Because the entire structure of the mortgage market has been decimated, we need to completely build a new pipeline to carry capital from those who have it to those who wish to borrow it (and can reasonably be expected to pay it back!).

Today, Congress controls both Fannie Mae and Freddie Mac who together represent almost one-half of the mortgage market. It's high time to draw the line and put an end to this game before it's too late. Our elected officials need to focus their efforts on pointing these two behemoths in the right direction in order to get capital flowing in this market again.

Unfortunately, it has been over six months since their takeover and Congress, the administration, the Treasury and the Fed seem much more concerned about the ancillary fires as opposed to the massive blaze all around them. Saving individual trees instead of the forest will only allow the flame of destruction to burn brighter and longer.

Key Developments

Consumer confidence rose from a Death Valley level of 25.0 to 26.0. Once statistics get to a certain level, it's difficult for them to fall further and that is what is happening here. Two years ago, this index was at 108.0, so to call last month's move a bounce would be quite generous. Simply put, consumers are worried about losing their jobs and/or their dropping home values. This will keep them on the sidelines for the foreseeable future.

It is estimated that 12 million autos head to the junkyard each year so last week's report that car sales rose from a 9.1 million annual pace to 9.9 million in March needs to be viewed in perspective. This is partly a reflection of the paragraph above, but also partly a reflection of tight credit in the auto sector resulting from a securitization market that is all but dead.

The nonfarm payroll decline for March was north of 600,000 for the fourth straight month as total job losses since December 2007 now total over 5.1 million. Since that date, fully 3.8 percent of workers have lost their jobs with over 53 percent of the losses occurring in the last four months.