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Did Housing Run Out Of Fuel With The Ending Of QE Stimulus?

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    March 25, 2015

    The housing industry seems to have slipped under the radar of investor concerns in the fog created by the Fed’s ‘patient’ intentions, the EU’s intentions regarding Greece, the disappearance of inflation, the soaring strength of the dollar, plunging oil, and so on.

    Yet, as I have noted often over the years, the housing and auto industries are the major driving forces of the economy in both directions, leading it into recessions and back out again.

    The reason is obvious. A strong housing market not only creates jobs within its own industry, but has long tentacles reaching out to provide jobs in a huge range of other industries; advertising, realtors, lenders, raw material suppliers, manufacturers of construction equipment, lighting, heating and air-conditioning equipment, appliances, furniture, lawn and garden supplies, trucking companies, and so on.

    Given its importance, and the signs of the economy stalling that are showing up in other areas like retail sales, factory orders, auto sales, etc., let’s hope next week’s reports from the housing industry show a pick up in new and existing home sales.

    Construction and sales of new houses are more important to the economy than the sales of existing homes. New construction provides many more jobs and tentacles into other industries, than the mere passage of an existing home into the hands of a different owner.

    And in spite of coming off the ‘Great Recession’ bottom, new home starts have remained depressed, not far above the lows in the normal recessions since the 1960s (the vertical gray areas in the chart).


    In the short-term, new housing starts have been stalled and flat since October, and plunged 17% in February, albeit due to weather. But weather cannot be blamed for the stall since October, which like a lot of the economic reports since October, just happened to coincide with the end of the Fed’s $85 billion a month of QE stimulus.

    Meanwhile, although not as important to the economy as new homes, existing home sales are of importance. They free households up to make moves, for better jobs, into larger homes for growing families, or smaller homes to downsize costs for retirement. And of course, as far as creating jobs, even if those moves are not into new homes, they often entail considerable re-modeling and upgrading by the new owners.

    Unfortunately, existing home sales have also not been looking well since October.

    Historical Data Chart

    That’s in spite of the Fed keeping interest rates at record lows. As a result, mortgage rates are still at historic lows, and even lower than they were in October.


    It does beg the question of whether the Fed was correct in believing it could end QE stimulus in October as long as it kept interest rates low “for an extended period of time”.

    9.7 million households still underwater on mortgages.

    The whitehouse.gov website reported in January that “from the crisis low, 10 million fewer borrowers are underwater, and new foreclosures are at a 9-year low”.

    However, that only emphasizes just how serious the 2006-2009 meltdown was, since the quarterly report from real estate tracker Zillow Inc. released yesterday, shows that 9.7 million households are still underwater on their mortgages.

    Those home owners are stuck in their homes, not only because of weak sales, but because they are unwilling or unable to take the large losses of selling at appraised prices considerably lower than their mortgage balances. Home prices nationally are still an average of 23% lower than at the housing bubble peak.

    Further, according to Zillow there are another 9 million households ‘effectively underwater’ as, although the appraisal price of the home is at or above the mortgage owed, there is not enough equity to cover the real estate commissions and other transaction costs of selling, and the down payment needed to buy another home.

    In a press release, Zillow Chief Economist Dr. Stan Humphries said, ““It’s a sobering appreciation that negative equity is going to be with us for a while to come . . . Negative equity is central to understanding a lot of the distortions in the marketplace right now.”

    And then there is the return of foreclosures.

    According to Black Knight Financial, both new and repeat foreclosures hit a 12-month high in January. Repeat foreclosures, where borrowers were rescued by the bailout programs during the recession but have failed again to keep up with payments, and fallen into the foreclosure process again, now make up 51% of new foreclosures. Did those programs just kick the problems down the road?

    We really need next week’s reports to show that housing is powering back up again, because for the last few months it’s been looking like it is running out of fuel.

    To read my latest newspaper column click here: Why Market’s Seasonality May Be Critical in 2015

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    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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