Real Estate Depression Continues

The real estate market holds the key to an economic recovery. More people invest more of their life’s earnings in real estate than in other asset class. Stocks can rise 100% in a year and people are still justified in questioning the economic recovery. If home prices rose 100% in a year, economic activity would reach a feverish pitch. Housing should be your focus because it is the government’s focus as well. As long as housing is under tremendous pressure, Bernanke will not pull the plug on quantitative easing.

The Census Bureau reported this morning that new home sales fell to a record low in February. Months of inventory rose from 7.4 to 8.9. The depression in housing is still an ongoing story. This does not bode well for our economy moving forward in no small part because the Fed will react by inflating away. Food and energy prices have already risen considerably- how much more can consumers take?

Make no mistake about it, the outlook for housing is bleak. However, weak new home sales do allow prices to come down so existing inventory gets unwound. Homebuilders have also been pessimistic so not a lot of new supply, other than the supply in foreclosures,  is hitting the market. The rebalancing of supply and demand will take some time, but that process is underway. If the government, in concert with the Fed, attempts to jumpstart housing via accommodative policies, then we may see an inflationary rally even in housing.

Most of the major markets are still overvalued and a lot of people are losing hope in housing. However, some markets are at such depressed levels that investors are starting to step in. It is usually when people stop looking for a reversal that a reversal comes. I still think that a bounce in housing will come late 2011 or early 2012. Just as people are misreading higher retail sales and higher GDP figures as a sign of an economic recovery, people will misread the temporary recovery in housing. Unless the government comes out with a 50-year mortgage, this market is in trouble longer term.

What we face is a demographic crisis and a crisis in confidence. The Wall Street Journal ran a story today about the population crash in Detroit. Detroit is a classic example of what happens when taxes rise, industries flee, and confidence collapses.

Our government must be very careful no to make the same mistakes on a national level. Industries will always go where they can find the right balance of skilled labor, reasonable taxation, and a consistent application of the rule of law. People will go where the jobs are and where taxes don’t change from year to year. With tax rates set to rise due to collapsing property tax revenues and constrained budgets, this crisis can get ugly fast. What will happen to public confidence? Volatility will be given a new name if our unresolved issues continue to be ignored.

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