Back to our Regularly Scheduled Housing Crash

It looks like things are starting to wind down for the holiday. 

One more post before I shut it down for turkey day new home sales. 

Housing has been placed on the backburner recently as the European debt crisis and insider trading probe have taken center stage.

We got the October new home sales data this morning and it was flat out dismal:

Here are the numbers from Reuters:

"(Reuters) - New U.S. single-family home sales fell unexpectedly in October and prices dropped to a seven-year low, a government report showed on Wednesday, pointing sustained weakness in the housing market following the end of a home-buyer tax credit.

The Commerce Department said sales dropped 8.1 percent to a 283,000 unit annual rate after an upwardly revised 308,000 unit pace in September.

October's weak sales pace pushed up the supply of new homes on the market to 8.6 months' worth from 7.9 months' worth in September. However, there were 202,000 new homes available for sale in October, the lowest since June 1968.

The median sale price for a new home dropped a record 13.9 percent last month from September to $194,900, the lowest since October 2003. Compared to October last year, the median price fell 9.4 percent, the largest drop since July 2009."

My Take:

The pricing data is even worse than the putrid number of new homes that were sold.   Home prices have now fallen back to where they were selling when the housing bubble really got going back in 2003.

Inventories continued to rise in October as buyers remained on the sidelines despite record low interest rates and a huge correction in prices. 

The housing market was hopeful that the rebound seen in September was the beginning of a recovery.  Today's data blows that theory right out the window.

The Bottom Line 

As I have said all along, housing is not coming back anytime soon and it will likely never get back to selling where it was at the peak.

Housing prices are only heading in one direction and that is down.  The fact that no demand has been created with the combination of record low rates and huge price drops tells you that there is a ways to go as the bubble pops.

I see another 20-40% price correction from today's price levels depending on what market you live in.  I say this because once the mentality of deflation kicks in it's almost impossible to stop.  Just ask Japan.

The psychology of deflation is devastating once it takes hold. 

It works like this:  People stop buying and prices then begin to drop.   As buyers see prices drop they sit on the sidelines thinking that they might drop some more.  Eventually prices drop again due to lack of demand.  Buyers react by holding out some more because they think they can get an even better deal if they wait just a little longer.

Making matters worse:  As prices continue to drop, buyers become afraid of catching a falling knife which just exacerbates the problem. 

This all becomes a viscous cycle where all pricing power is lost. This is how deflationary death spirals are created. Many economists refer to this as a positive feedback loop.

The fallout of the housing crash will fall on the shoulders of the banks because they are the ones who will be saddled with the losses.  Of course, when it's all said and done, we get stuck with the tab because our stupid government decided to backstop the losses which ultimately means the US taxpayer foots the bill.

I expect most of the "mortgage slaves" will continue to default or just walk away from their homes as this death spiral intensifies and they watch their loans fall deeper and deeper underwater. 

The banks will be crippled by this because their balance sheets are filled with bloated McMansions loans that will never be paid back.

The trading algo's of course ignored this news today and focused on the weekly jobless claims data which was better than expected.  The bond market remained weak but steadied after the 7 year bond auction got done. 

If you are in the market to buy a home do yourself a favor and wait.  Prices will only continue to drop as the economy remains weak.

Before I finish up I want to wish everyone a very Happy Thanksgiving!  I will hop on when I get a chance in the oncoming days.