Six Reasons Why I Remain Skeptical About the Housing Recovery

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

A healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.

To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.

We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.

The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.

Chart courtesy of www.StockCharts.com

Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.

Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 21, 2013.) Construction spending is not only a measurement of activity in the housing market; it directly affects gross domestic product (GDP).

Finally, those closest to the housing market are showing concerns again—they’re turning outright pessimistic on the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) registered at 44 in April. (Source: National Association of Home Builders, May 15, 2013.)

Any number below 50 indicates that homebuilders view market conditions to be more poor than good. Remember: homebuilders see the changes in the housing market much quicker than other market participants. If they are worried, it’s certainly not good news for the U.S. housing market.

As I continue to preach in these pages, rising home prices don’t mean that the housing market—a critical component of economic growth in the U.S. economy—has recovered.

And as I have written before, first-time home buyers are missing from the U.S. housing market recovery, because they continue to be worried about their jobs, falling real income, and rising expenses.

The bottom line is: the recent rise in home prices that we’ve witnessed over the past year is a reflection of financial institutions rushing to buy homes for rental income—and this is exactly why I remain skeptical of the housing recovery.

Michael’s Personal Notes:

As companies in the key stock indices, like the S&P 500, reported their first-quarter corporate earnings, some of the most notable names showed concerns about the eurozone.

Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)

McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)

When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)

GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from troubles in the eurozone. Big-cap companies like International Business Machines Corporation (NYSE/IBM), United Technologies Corporation (NYSE/UTX), and Xerox Corporation (NYSE/XRX) have also shown concerns in their first-quarter corporate earnings due to bleak demand in the eurozone.

What’s ahead for the eurozone? The strongest nations in the region, such as Germany and France, are struggling to keep up. France is in a recession, while the German economy showed very little change in the first quarter. Similarly, the situation in the debt-infested nations of Greece, Spain, Portugal, and Italy hasn’t changed.

Dear reader, pieces of the puzzle are coming together now. American companies are becoming concerned about their corporate earnings due to an economic slowdown in the eurozone. Readers ofProfit Confidential shouldn’t be surprised by this; I have been warning about it in these pages for some time now.

Looking forward, it wouldn’t be a surprise to me to see more companies in the key stock indices that have exposure to the eurozone show poor corporate earnings. The stock market is running on hope, and that hope can only go for so long.

Where the Market Stands; Where It’s Headed:

I’m telling you; the higher this stock market goes, the harder it’s going to fall flat on its face! Within the next week, I will be releasing a video I’m just finishing called a Dire Warning for Stock Market Investors. Watch for it.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S. economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.