With home prices at the lowest point in 10 years, one cannot claim the a recovery will be built on the back of the housing industry. Many key economist believe that the recovery of the United States will be based on the housing aspect of our economy. These experts fail to realize the effects that the housing bubble had on the consumer side of the market, the bubble has popped and even those able Americans that can afford a home won’t buy one. For the U.S. recovery to be fueled by housing, prices need to increase, not decrease. Putting the housing bubbles in different terms that are much easier to understand, lets consider Netflix. After seeing Netflix rise to its high over $300 and fall to $70, would anyone buy today thinking it will once again go back to $300 tomorrow? No, after a bubble pops a consolidation period is needed and prices will reestablish in a more realistic area, and those prices may be closer to the bottom then the top. With prices at these levels for housing, a full fledged housing recovery is out of the question. Yes profits can be made, but the expectations for this sector are outlandish.
Looking at the recovery from a less intuitive aspect and more of a numbers standpoint, things are not much better. Existing home sales were revised down last month. This speaks volumes, the existing home sales is not a straight increase and is not as rosy as was first perceived. We have also been at these levels before, and also gone back the other way. Investors should be leery of what is yet to come. Not only that but MBA purchase applications were down as well. The markets once again shrugged off this negative news, though in fact things are not looking so picturesque.
Now that the true picture of the housing industry has been established, it must be explained why the recovery cannot be build on the back of the housing industry. The key point mentioned this morning was that home prices were at a 10 year low. This means that if any contractor wanted to build a new home his margins would compressed dramatically. The only way he could combat that problem being that all his cost are fixed (land, lumber, etc.) would be to decrease his labor cost. Though he may be able to squeeze cost elsewhere the contractor would see the best results via employing less people or cutting wages. Those looking for the housing industry as the source of the american recovery will have to look elsewhere. The idea that the housing industry will fuel the recovery comes based on the idea that it will help put america back to work, but with home prices at the levels they are, it may put your neighbor back to work, but you are still on unemployment.
“Sometimes your best investments are the ones you don’t make.” – Donald Trump