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The State of Housing- by Greg Strid

Housing starts clocked in at an annual rate of
1.474 million in May, down from 1.506 million
in April. And, this compares to a rate of 2.292
million at the peak of the construction boom in
January of 2006. That equates to a drop of 36%.

But, many in the investment community still
cling to the belief that the worst news for the
troubled real estate market is about to pass,
and that activity, and depressed prices will
resume their upward paths soon.

This sunny view of the market, unfortunately,
does not mesh with the outlook of those building
America’s cavernous castles. The National
Association of Home Builders is currently
registering the lowest sentiment levels since
1991. (By, the way, that year is notable due to
the fact that it coincides with the sobering stretch
that followed the bursting of the late, great real
estate bubble of the late 1980s.)

Many housing “cheerleaders”, and the always
optimistic investment community would argue
that such a dismal reading can only mean that a
bottom in the real estate market is at hand. But,
if the sunshine set bothered to examine the early
1990’s housing situation, they would discover that
prices stagnated once the bottom had been
established. It was not until much later in the
decade that sentiment and prices turned positive
again.

There are two major problems with the overly
optimistic housing scenario that is being touted by
those with a vested interest in real estate and the
stock market. The first is the recent rise in long
term interest rates, which increase the cost of
purchasing, and in the case of current
homeowners with Adjustable Rate mortgages,
maintaining, a home. This is already causing growth
in foreclosures, affecting those with weak credit
ratings who have used subprime mortgages to
finance their homes the most.

The second is that regulators are starting to
crack down on lenders who have not engaged in
proper credit checks on their customers. In
addition, politicians in Washington have found in
these lenders a very popular scapegoat, and
they are pushing hard to enact stricter credit
standards for regulators to use in the prevention
of further abuses.

This is happening at the worst possible moment.
It is at times of stress in the market that lending
standards need flexibility, this allows support to
prices and deal flow when it is needed the most.

It is evident that Mark Twain was correct. History
does not necessarily repeat itself, but if you listen
closely, it certainly does rhyme. Once again, a
market is allowed to reach full boil due to the lack
of proactive and sensible legislation and regulation.
And, as it implodes, those who have helped to create
the mess don their rose-colored glasses and tell us
that all is well.

Greg Strid

© 2007 Splendid Marbles.