Housing Market Hasn't Hit Rock Bottom Yet

Pending home sales increased 8.2 percent in May.  Compared to an 11.3 percent drop in April it is a considerable swing.  But the April decline was a historic drop and way outside the norm, even in the bubble deflation.  The increase means that we'll have stronger existing home sales numbers in the coming months, assuming all the pending transactions close.  However, most people want to know if this means we've hit the bottom of the housing markets decline.  We haven't, says Anthony Randazzo, director of economic research at the Reason Foundation.

• To start, we'll likely see pending home sales numbers fall again in the coming months since mortgage applications fell by 3 percent the week of June 20th to the lowest level since February.
• New home sales fell 2.1 percent in May and existing home sales also continued to fall, sliding 3.8 percent.
• In context, these numbers for housing sales are essentially some of the lowest since we began keeping records.

There are four core elements of the housing market right now that need to be addressed in one way or the other, says Randazzo.

• First, housing prices are off their historical trend and need to fall further before we can see any recovery start.
• Second, housing inventories need to be worked out. There is a massive supply glut of homes today (about four million) that needs to be sold before the residential construction industry can fully return. But what is worse is there are about two million homes in the shadow inventory, that is, stuck in the foreclosure process for one reason or another and not officially on the market to be sold.
• Third, state attorneys general and federal banking regulators have been waging a war on mortgage servicers. The longer this process takes, the more uncertainty there will be for mortgage investors considering jumping back into the market.
• Finally, the fourth matter to address is the inexplicable continued existence of Fannie Mae and Freddie Mac.

Source: Anthony Randazzo, "Rosy Housing Numbers Have Many Thorns," Reason Foundation, June 29, 2011.