As we've mentioned numerous times on Market Folly, a large part of America's economic problems are tied to housing. Until the excess inventory is removed, we still have a situation. Below is a chart of housing inventory levels from 1999 to November 2009 as per data from the National Association of Realtors. As you can see, inventory is well above the historical average. And while a reduction in inventory from the recent peaks has occurred, there is still a need for further reduction.
(click to enlarge)It seems that government programs such as the first time homebuyer credit have certainly helped spur buying. However, the question remains: what happens when those programs end in May 2010? Many hypothesize that buying will dry up once those benefits cease.
Further complicating things is the Federal Reserve's actions in the mortgage markets. Their purchases of mortgage backed securities (MBS) and agency paper have filled a large hole. Besides them, who else has been buying those assets? No one really. At some point, they will have to stop their purchases. They've already delayed their exit once and are now looking to exit around the end of the first quarter of next year.
Come March of 2010, we could be facing a serious rise in mortgage rates due to the Fed's exit. While this may not stop transactions in their tracks, it certainly will impact potential buyer's monthly payments and could deter them. The combination of rising mortgage rates and the removal of government incentives for buying will most likely not help reduce the massive inventory overhang.
Not to mention, America still has the problem of many people looking to get out of their current homes as they owe more than what it is worth. Hedge fund manager Paolo Pellegrini long ago proposed a mortgage solution but we really have yet to see a true solution enacted. Then there's the whole situation of tons of homes being tied up in the court system, waiting to be repossessed, etc.
The main point of all of this is to remind everyone not to get too giddy. Sure, equity markets have rallied over 60% off the March lows and the economy has started to show some signs of recovery. However, on an economic level we still have fundamental problems to deal with... problems at the heart of the crisis. You have to keep in mind that the economy and markets don't always tell the same story. For true signs of economic recovery, keep your eye on the mortgage and housing markets. There will definitely be some fireworks in these arenas in the first half of the year.
