New Home Sales are Strong! At the Right Price

Before I get started I thoughy everyone could use a laugh. Check out the new stimulus T-shirt:



Classic isn't it? I laughed my butt off when I saw this one.

Ok, back to the markets.

Today was another "borefest" on Wall St as the bears and the bulls continue to tango around the 1000-1050 area on the S&P.

We got some more bullish housing data on new and existing home sales. I have to admit, that tax credit seems to really be working. A few mortgage brokers have told me things(especially on the low end) that things have picked up as a result of the government stimulus.

What's interesting here is when you dig into the hew housing data, the real demand is coming from houses that haven't been built yet versus the spec "McMansions" that are already up.

According to the most recent report, new home sales are up 33% for houses that haven't been built yet while the new home sales for homes that are already up were down 6%. The reason for this is builders have adjusted to build what the buyer is looking for: Smaller and cheaper homes!

As I have said before, the 1-3's or 100-300k end of the market has been doing extremely well as a result of the first time home buyer tax credit. Homes in this price area are affordable which is critical in an environment that's dominated by tight lending. Buyers today must have the income needed to afford the mortgageor the deal isn't going to happen.

The answer to the problem with housing is simple folks. The price to income ratio must drop to where buyers can actually afford to buy them which is historically 3 times income. For example if you make $70k then you can comfortably afford something in the $210k range.

This means one of two things has to happen:

A) Incomes have to rise sustantially.

Or:

B) Housing prices must drop to fall in line with incomes.

Since we are in the midst of an economic collapse with soaring unemployment, I think we all know that option B is the only choice that realistically works.

The only way we got to this point was because Wall St created Ponzi lending products that enabled us to buy homes that we had no business buying. In the bubbly areas the price/income soared to 10-1 as buyers used no doc and subprime loans to buy up everything in sight.

What we have now learned is these homes were simply unaffordable which is why we now see a 13% delinquency rate on all mortgages right now!

What we are now learning as prime defaults soar is it didn't matter what your income bracket was: EVERYONE MADE THE SAME MISTAKE OF BUYING HOMES THEY COULDN'T AFFORD.

This is why the high end of the home market is totally screwed: The lending products are no longer available to buy these homes.

Banks would laugh at you today if you came to them with a loan application had a price to income ratio of 10-1. They would deny your application before you got two feet inside the bank. You would walk out of there with the word "DENIED" stamped right across your forehead.

Economic Disconnect found a great chart from Bubble-meter decribing the huge disparities in demand at the different home sale price levels:

The Bottom Line:

The numbers don't lie folks. The cause of this crisis is simple: Housing prices historically got way out of whack with incomes. The answer is also simple: All homes must fall back to levels where people are able to qualify.

The problem we have here is this adjustment will destroy the balance sheets of the banks on Wall St. The government has been desperately trying to prop up housing prices by lowering interest rates in an attempt to reflate the bubble and keep prices elevated.

Washington needs to realize that this WILL NOT WORK! Any economist with half a brain can figure out the problem here. Middle class Americans had no business buying homes for 500-600k just like upper middle class Americans had no business buying $2 million homes.

I also want to point out that this insanity was basically seen in certian "bubble areas" of the country. 600k homes in areas where housing is affordable will hold more of their value because there is less supply of them.

The fallout of this stupidity at the mid to high end will result in an upper end collapse in home prices because there simply aren't enough buyers to soak up the inventory.

This will put many prime loans at serious risk and will trigger another string of losses for the banks.

If you are in a home under $250k you have probably taken the largest part of your hit from the housing bust unless lending rates rise in the bond market as a result of our unfathomable deficit's.

If you are in the market for something above the low end in a bubble area, be patient, those $600,000 homes in suburbia will be $300,000 within a year or two.

As for the stock market: It's barely worth mentioning right now because the volumes are so low. When insolvent government owned stocks like AIG, C, BAC, and F are responsible for 40% of the trading volume on the exchange please accept this advice: Run away as fast as you can unless your an obsessed day trader or addicted to gambling!

These stocks are being gamed daily via HFT's so I would avoid this charade because you might be the one that gets stuck holding the ball when they decide to move onto something else.

The price action overall has been insane on Wall St recently. There is no rational way to accurately analyze it. Hopefully when the summer ends and the big players on the street get back to work, the market might start making sense again.