Housing's Bottom Isn't Showing Yet

It's amazing that two years ago, we were eagerly anticipating a bottom to housing's slide. The amazement escalates when you stop to consider that, by most indicators, the world of housing is infinitely worse off today than it was then.

In fact, we really didn't fall off a housing cliff, as much as it may seem we did. After starting construction on just more than 1.7 million units across the U.S. in 2005, we've slipped steadily to the seasonally adjusted July figure of 965,000 released earlier this week. That's the lowest level since early 1991, but don't be surprised if the slippage continues.

Still glum
I apologize for my dire predictions to those for whom the crumbling housing market is becoming a real burden. But reality says we're probably not within sight of a real bottom for this important sector of our economy. Here's why I say that.

Foreclosures
We're currently experiencing a home foreclosure rate approaching three-quarters of a million households a quarter, and with house prices and other aspects of the economy fading, it's unlikely that the real number will decline in the short term. However, Fools should be on the lookout for new foreclosure notification requirements in New York, California, and Massachusetts that may delay the pace of filings between now and later in the year, making it appear that the problem is reversing itself.

Housing inventories
We've all heard about the bloated size of our nation's inventory of homes for sale. I continue to believe, however, that the number is far bigger than we know: Don't you know several households who, if it were realistic to list their homes and expect a relatively rapid and financially advantageous sale, would do so in a heartbeat? On that basis, there could be an underground inventory twice as high as the level we hear so much about.

Consumer confidence
On Thursday, the National Federation of Independent Business Optimism Index of consumer confidence decreased to the lowest level in nearly three decades. Along with the Conference Board and the University of Michigan, the NFIB rounds out a threesome of household confidence measurers. For some months, however, the key indication from all three indexes has been that consumers are more and more down in the dumps. And forlorn consumers rarely sign on the home-purchase dotted line.

The mortgage market
One good sign that the mortgage market is in tatters is that Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) -- the matched pair of U.S. mortgage underpinnings -- are currently trading at share prices 90% below their levels two years ago. In fact, in the first three days of this week, each lost nearly 45% of their valuations.

But that's clearly not the only reason that mortgage applications are falling. In addition to the items discussed here, you need to add in energy prices, concerns about inflation, and a host of other economic worries.

What's going on with the builders?
The builders aren't feeling much better than consumers. The National Association of Home Builders says that builders' sentiments are stuck at an all-time low index level of 16. The group would have to pull itself up to a 50 on the NAHB survey just to display breakeven feelings.

Clearly, the builders weren't helped by the elimination of seller-funded down-payment assistance on FHA-backed mortgages from the Housing and Economic Recovery Act of 2008. Under that opportunity -- which will be discontinued in October -- buyers can accept down-payment gifts from a nonprofit group. Those gifts are then reimbursed by the seller, frequently a builder, and essentially permit the buyer to purchase the home with little or no down payment. Between 20% and 33% of the sales of many of the big builders have benefited from that assistance.

So how have the builders fared thus far in 2008?

In about a month, then, the five builders above have improved from an average 14.5% decline for the year to just a 3% slide. However, one of the interesting new phenomena is the uneven rate at which the builders are recovering; Pulte has gained more than 25% for its shareholders, while Ryland has given up 27%. For my money, I still think luxury builder Toll Brothers could actually benefit most from the Recovery Act, since it increases the conforming limits of Fannie- and Freddie-guaranteed loans, along with FHA loans, to a $625,000 ceiling.

Conclusion
Clearly, as compared to a month ago, the table is more positive than the news items above it. On that basis, I'm inclined to agree with my Foolish colleague, Richard Gibbons, who just the other day said of the builders, "I wouldn't go near them until there's actually some evidence that the housing market has bottomed." Remember, it's entirely possible that you'll become injured jumping on a bandwagon.

Toll Brothers still gets just a single star from Motley Fool CAPS players. Any thoughts on raising it to two?

For related Foolishness:

• Housing's Worst May Lie Ahead
• Avoid These Ugly, Risky Stocks
• A Glimmer of Housing Hope?