During his company’s recent earnings conference call, JPMorgan CEO Jamie Dimon said the housing market had “turned the corner.” That’s easy to say when your company has just posted a huge quarterly profit, due in large part to your mortgage business.
But several other data points have also supported the recovery idea. Last month, for example, the Case-Shiller 20-City Index showed another month of housing price growth, although at a reduced level.
Then last week, the Commerce Department reported that US housing starts surged 15% to their highest level in four years, adding, as Bloomberg News put it, to “signs of revival” in the industry.
Many people investing in housing stocks have also benefited in comparison to the broader market. The S&P Homebuilders SPDR exchange-traded fund has remained essentially flat over the past month, while the S&P 500 has dropped 2%.
Yet last Friday brought news that existing home sales fell 1.7%, below most expectations by analysts, and an apparent hiccup in the recovery meme.
So, which is to be believed — the boom in housing starts or the slump in existing home sales?
The answer, according to fund manager John Hussman, is that both can be true, when you keep in mind the overall inventory that technically constitutes the housing market.
For starters, about 22% of mortgages are “underwater” – the debt exceeds the value of the home. In addition, banks now have millions of homes as part of their own portfolios and are gradually putting them on the market.
As a result, the amount of existing homes for sale is well below what would be available if underwater homeowners or banks were willing to sell. That tighter supply of homes has held up prices, which isn’t much of an enticement for potential homebuyers, who instead may find it more desirable to build their own. (Hussman also points out the interesting tidbit that the average time to sell a new home has been rising, not falling, over the past year.)
With this “misallocation of capital into new homes,” starts are up, even though existing home sales are down. At this rate, Hussman contends, we’re due for gradual growth that doesn’t signal “liftoff,” but rather market distortion.
The other bad news? The recent surge in housing starts has just now reached a level that was previously seen only briefly at the bottom of past recessions.
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