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Economists have been calling for a turnaround in the housing market for years without any lasting success. Yet as recent news starts to point toward at least the possibility of housing hitting bottom, it's important to realize that there's one important reason why home prices have another threat looming over them -- and it's one that could take years to manifest itself.
Later in this article, I'll talk about the coming crisis that could throw housing for another loop. But first, let's take a closer look at why optimists are coming to the conclusion that we may finally be near the end of the housing bust.
Happy news all around
Lately, the news has gotten a lot more upbeat about housing. Consider these recent tidbits:
- Hovnanian (NYSE: HOV ) announced a fourth-quarter loss, but it was lower than the previous year's level. A big 26% boost in backlogs points to improving revenue in the coming quarters, and a slight reduction in cancellations bodes well for buyers' willingness to follow through on purchases.
- Beazer Homes (NYSE: BZH ) won't announce fourth-quarter results until Thursday. But in the third quarter, it saw new home orders jump 33%. Backlogs jumped at an even faster pace, with a rise of more than 80%.
- Standard Pacific (NYSE: SPF ) is in the same boat as Beazer, with a 38% rise in orders in the third quarter.
- Pulte (NYSE: PHM ) hasn't seen the backorder gains that investors had hoped to see. But losses are narrowing, while a few companies have actually started eking out profits again.
Put all that together, and you get a good beginning to 2012 from SPDR S&P Homebuilders ETF (NYSE: XHB ) and other investments tracking housing.
More generally, we've seen a lot more positive news about the housing economy. The National Association of Home Builders recently released bullish estimates for 2012's housing activity, with new home sales pegged to rise almost 20% and housing starts jumping 17%, with further gains expected in 2013. And while you may doubt the NAHB's objectivity, Wall Street analysts come in with a range of predictions, many of which are quite optimistic as well.
What could pop the bubble -- again
Unfortunately, any assertion that the worst of the housing bust is behind us is premature. The coming problem has to do with the difference between raw home prices and true affordability of homes.
Right now, the cost of home ownership is extremely low compared to where it was during the housing boom. Fallen home prices and extremely low interest rates combine to give prospective homeowners the lowest monthly payments they can expect to see for the rest of their lives.
But low interest rates aren't going to last forever. As long as today's buyers haven't repeated the mistakes of their predecessors and instead have gotten fixed-rate financing that won't rise with interest rates, they'll already have locked in favorable financing. But when it comes time to sell those homes, new buyers could see much higher monthly mortgage payments even if home prices stay the same -- let alone if they rise.
When that happens, one of two things will result. New home buyers may once again overextend themselves to pay higher home prices, leading to another round of defaults. On the other hand, if buyers prudently refuse to pay more than they can afford for housing, then home prices could see another big leg down when rates rise.
Buyers, it's your market
If you're buying a home, fear of what the future may bring is actually your biggest asset. Sellers have already sat on properties longer than they wanted, and they might actually consider buyers' demands that they would have refused a year or two ago. Given the very real risk of further declines, use your willingness to take on that risk as a way to get more concessions from sellers.
As painful as the housing bust has been, it will only end once affordability becomes stable. With rates at unrealistically low levels, we haven't yet seen the other shoe fall. Until it does, there's more potential downside to the housing market.
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