In the giant Monopoly game that is U.S. real estate, certain analysts have recently issued the housing market a "Free Parking" card. But where these expert folks sense market stability, I see ongoing risk for our collection of little green houses.
Uncle Pennybags' rose-colored monocle
The freshly released S&P/Case-Shiller Home Price Index reading shows that home prices fell at a slightly less terrifying pace during February, declining at an annual rate of 18.6% versus January's 19% plunge. While the media and the stock market seem to be celebrating, I'm less convinced. The fact is, the market is still declining -- just less severely. And if you date the start of the housing bull to 2000, we're still roughly 50% above that mark.
All this feel-good talk comes after many market-watchers found hope in the tight band within which existing home sales numbers have moved up and down over the past couple months. The logical conclusion is that a steady stream of buyers is coming to the table, and everyone knows that steady demand equals stable prices. Hey, that's super news for mortgage-holder heavyweights Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC), right?
Not so fast. To bring us a tad more current, I'm going to move us out of Case-Shiller data, and into the stats provided by the National Association of Realtors (NAR). Although housing demand does appear to be stabilizing, the national median price for a single-family home has continued to decline, with a seasonally influenced March jump being the exception. In other words, no such good news for banks.
Mediterranean Avenue vs. Marvin Gardens
The key to this puzzling behavior is quality, not just quantity. Distressed sales -- defined by the NAR as "foreclosed properties or those requiring lender mediated short sales" -- increasingly represent a larger percentage of existing home sales. Up from 35%-40% of sales in August 2008, distressed homes came in at about half of March sales. Because these lower-grade properties generally sell at a 20% discount to market, it's easy to see why the median home price has dwindled from $203,100 in August 2008 to $175,200 in March.
I know what you're thinking: If you add a bunch of short people to a room full of basketball stars, the median height declines, but that doesn't mean that the tall have shrunk. You're right -- except that in the case of home prices, the median price of single-family non-distressed homes has fallen, from an average 2008 price of $216,000 to a January 2009 sticker of $187,000. The fact that higher-quality properties have maintained a premium to the boarded-up dregs coughed up by banks and troubled borrowers is nice to see, but it doesn't save the day.
Pass go, lose $200?
Downward pricing pressure may continue. Even the rah-rah NAR recently acknowledged that 2009 might see an additional 2 million to 3 million foreclosures on top of the current inventory of 1.5 million-1.8 million foreclosed homes. Assuming that these shabby homes are brought to market, it looks like banks won't be getting a "Get Out of Jail Free" card any time soon. Likewise, investors interested in building-materials companies should exercise caution. The blistering stock performance of names such as Masco (NYSE: MAS) and USG (NYSE: USG) evokes the Monopoly race car token, but sector fundamentals suggest that as companies, these guys may be plodding along as the boot for a while longer.
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