The housing recession isn't over

By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- The worst is over for the housing market -- at least according to Wall Street.

Shares of home builder Lennar were up more than 6% Monday after the company reported a stronger-than-expected profit for the third quarter (it reported a loss a year ago) as well as a 14% increase in sales. Other builder stocks moved higher as well.

paul_lamonica_morning_buzz2.jpg
chart_ws_stock_spdrsphomebuildersetf.03(2).png
The S&P Homebuilders ETF, which includes shares of several housing-related stocks, has been rising on hopes that the real estate market has hit bottom.

The news that the recession that began in 2007 officially ended a year ago helped boost stocks too.

But while traders are popping champagne corks, it's better to take a closer look at the Lennar (LEN) report. The past three months may have been decent, but the future looks less promising.

For the housing market, at least, it doesn't look like the recession is over just yet.

Lennar admitted as much, saying that new home orders during the quarter were down 15% from the same period last year.

In a statement, Lennar CEO Stuart Miller conceded that while his firm was holding up better than some rivals, "high unemployment and foreclosures have continued to present challenges for the national housing market."

The spate of foreclosures is particularly problematic since it continues to add to the housing glut. And until the number of homes on the market comes down, it's tough to imagine how sales and prices will improve all that dramatically.

"For housing to turn a decisive corner, the inventory overhang has to dissipate. That may take one to three years," said Adrian Cronje, chief investment officer of Balentine, an investment firm based in Atlanta.

We'll know more about just how challenging things are in housing later this week. The government will be releasing figures for home starts, building permits and new home sales in August. The National Association of Realtors will be reporting the latest statistics on existing home sales.

Dan North, chief U.S. economist with Euler Hermes, a leading credit insurer in Owings Mills, Md., said that it's one thing to say that the worst may be over for housing. It's another to declare that the market is actually improving.

"The economy and housing market may have bottomed out but that doesn't mean things are good," he said. "Foreclosures and underwater mortgages are still a big problem because of the absence of meaningful price appreciation."

The good news, if you will, for people willing to buy is that prices are down and mortgage rates remain low. But anyone that wanted to take advantage of that may have already done so earlier this year when there was a tax credit for homebuyers. That expired in April.

"Conditions are favorable for people that are ready to buy. But a large chunk of demand for housing was pulled forward because of the tax credit. I still think we're in a slump," said Terry Clower, director of the Center for Economic Development and Research at the University of North Texas in Denton, Tx.

Clower added that just because rates are low doesn't mean that credit is available for many people that do want to buy a home. Many banks are still reluctant to lend to borrowers unless they have pristine credit histories, he said.

Low mortgage rates may not even matter for some consumers sitting on the sidelines. Home values shot up to such ridiculously high levels in some hot markets during the real estate bubble that even after the drops of the past few years, prices may still be too high for prospective buyers.

"Unless you let home prices fall to a level that will bring in more demand, you won't find a bottom. Home prices in many markets like California are still very high and have room to fall further," said Kenneth Naehu, managing director and head of fixed income with Bel Air Investment Advisors in Los Angeles.

Cronje is even more blunt about why home sales may remain sluggish as long as consumers are nervous about the state of the economy.

"Nobody is going to take on debt -- no matter how low rates are -- to purchase an asset if there is a large degree of uncertainty about prices," he said. "What incentive is there to buy a house?"

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More


Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.