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Fatal Collapse: Charting The Housing Market

  • Written by Syndicated Publisher 249 Comments249 Comments Comments
    April 14, 2012

    By a number of measures the housing market has not recovered.

    I asked frequent contributor Chartist Friend from Pittsburgh to apply his technical insights to the housing market. His charts and observations are illuminating:

    I’ve looked at the charts a little further, and the pattern that emerges is this: fatal collapse – attempt at resuscitation – imminent reading of the last rites.In technical terms that would translate to “a” wave breakdown (in most cases to new lows), “b” wave correction/pullback to previous support neckline, then “c” wave to lower lows.

    It saddens me to have to report that, even with mortgage rates at historic lows, the American housing market is dead.

    Let’s start with the backbone of affordability, the mortgage rate. The Federal Reserve has pursued two strategies of resuscitation: lower interest rates so mortgage rates have fallen to historic lows, and purchase impaired mortgages to clear the system.

    In this chart depicting the mortgage debt change from the previous year, we see that the year-over-year change in mortgage debt skyrocketed in the bubble and plummeted in the post-bubble collapse. Despite the Fed’s $1 trillion purchase of mortgages and super-low mortgage rates, mortgage debt has barely budged.

    In terms of housing prices, year-over-year price change in the 10-city Case-Shiller Index recovered sharply from the bottom but has once again turned down.

    The Consumer Price Index (CPI) measure of housing costs (once again, year-over-year change) has traced out a similar pattern of sharp recovery and renewed decline. Recall that the CPI uses “owners equivalent rent” as the basis for calculating housing costs.

    Housing starts–the key metric of building activity and employment in residential construction– bounced from the post-bubble lows but remain at historically depressed levels.

    Single-family home sales sharply rose as prices fell and “short sales” (in which the bank sells the home for a price which is less than the outstanding mortgage) paid with cash (reflecting investor activity) rose to 25% to 30% of many markets.

    Lennar Corporation, a large home builder, can be viewed as a proxy for the home building sector. The stock has recovered but has traced out a bearish flag pattern and appears to be close to rolling over. This may reflect the realization the housing recovery has stalled.

    Add all these charts up and we get a snapshot of a housing recovery that seems to have stalled or rolled over. The reasons why are apparent: mortgage debt remains elevated, a vast “shadow inventory” of underwater or foreclosed homes remains off the market and household income has stagnated or declined, as reported in What If Housing Is Done for a Generation?.

    Thank you, Chartist Friend from Pittsburgh for your assistance and insights.

    Images: Flickr (licence attribution)

    About The Author

    Charles Hugh Smith writes the Of Two Minds blog (www.oftwominds.com/blog.html) which covers an eclectic range of timely topics: finance, housing, Asia, energy, longterm trends, social issues, health/diet/fitness and sustainability. From its humble beginnings in May 2005, Of Two Minds now attracts some 200,000 visits a month. Charles also contributes to AOL’s Daily Finance site (www.dailyfinance.com) and has written eight books, most recently “Survival+: Structuring Prosperity for Yourself and the Nation” (2009) which is available in a free version on his blog.