Housing's Greatest Suckers Rally

Today’s new home sales results offers even more confirmation that the government sponsored housing bounce of 2009 was essentially a massive tax payer funded suckers rally.

Induced by a relatively large tax gimmick, artificially (quantitatively eased) low interest rates and a climate of foreclosure mitigation, endless unemployment insurance extensions and other “stimulative” measures, many naive market participants likely concluded that 2009 marked the bottom of the great housing decline.

Yet, the real “organic” market forces are not tricked by such tomfoolery.

New home sales have now broken well below the supposed housing “bottom” of early 2009 and likely lead other important measures such as existing home sales, home prices and the new residential construction measures.

So, while popular media and other interested parties continue to spin a tale of a “stabilizing” housing market their story is beginning to look both inaccurate and self serving.

As we move into the spring market don’t be surprised if the second (and final) expiration of the housing tax credit drives another significant spike in home sales but as we see now the effects are likely to be only temporary.

Malinvestment in a market as large as the residential housing market of the United States likely cannot be fundamentally cleared through government subsidy.

The following chart plotting new home sales against the median months for sale demonstrates very clearly that 2009 was NOT the bottom for new home sales.

New Home Sales: February 2010

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for January showing significant declines on a month-to-moth and year-over-year basis resulting in a new home sales level that is far lower than the supposed "bottom" seen last year.

In fact, the latest data indicates that at 308K annualized units, new home sales is now at the lowest level seen in seen since records have been kept (47 years) and 8.88% lower than the previous lowest low seen in September of 1981.

New single family home sales dropped 2.2% since January and 13% since February 2009 while median prices have increased 5.15% since February 2009.

Additionally, the monthly supply increased to 9.2 months while the median months for sale jumped to 14.4 months.

So much for the “end of the housing decline”…

Although many in the traditional media and elsewhere have been treating the government sponsored bounce seen since March 2009 as if it were a solid indication that the bottom was in, those who have followed this dataset for years know that one needs to rely on a mix of multiple metrics along with healthy dashes of skepticism and hunch in order to glean out the true trend.

Needless to say, these must be awfully disappointing numbers for many.

The bounce in new home sales seen throughout 2009 was an authentic increase in overall activity but not in “organic” activity… How would new home sales have trended without the government propping?

In any event, the “real” bottom was NOT IN during 2009, as I had correctly predicted in prior posts, and the level of new home sales is now at a low for this cycle.

The following charts show the extent of sales decline (click for full-larger version)