3 Signs the Housing Crisis Is Over

Trying to read the tea leaves when it comes to the recent rash of housing data and earnings from home builders and home improvement retailers is enough to make anyone's head spin. Even the experts are wrestling with the seemingly contradictory numbers coming out of the government, individual companies and the National Association of Realtors.

Just last week, for example, the NAR reported that, in July, existing home sales posted their largest monthly increase in at least a decade; housing starts apparently stabilized, according to the Commerce Department; and Home Depot (HD: 27.36*, -0.14, -0.50%) beat analysts' average second-quarter earnings forecast by a whopping nickel a share.

That's all good news, of course -- the SPDR S&P Homebuilders ETF (XHB: 15.50*, +0.16, +1.04%) posted a gain of 3% on the week -- but here's the problem: For every good data point that indicates that the housing market is recovering there seems to be a negative counterpoint.

Mortgage delinquencies hit an all-time high in the second quarter, for example, and foreclosures aren't forecast to peak until the end of next year, the Mortgage Bankers Association said Thursday. Home Depot may have beaten analysts' estimates, but only because of cost cuts, not sales growth -- something rival Lowe's (LOW: 21.25*, +0.09, +0.42%) was less successful at (it missed the Street estimate by a penny a share). Building permits, a sign of future construction, fell. And even the surging existing home sales number was largely fueled by tax credits for first-time buyers -- and falling house prices.

At the very least, things have stopped getting worse and that is the first step toward getting better, says Mickey Cargile, managing partner at WNB Private Client Services, a Midland, Texas-based financial management firm. "There's an old saying: 'If you want to get out of a hole, you've got to stop digging,'" Cargile says. "That's where we are right now."

To help make some sense of the crazy quilt of housing news, SmartMoney drilled down into the earnings from home builders and home improvement retailers, as well as recent housing data and asked the experts to help us suss out what it all means -- and what signs to look for that this crisis is finally coming to an end.

Housing Data: Finding a Balance Between Supply and Demand

"The data are a mixed bag," says Richard Moody, chief economist and director of research at Forward Capital, an Oakton, Va.-based real estate investment company. "You've got all these conflicting stories. Starts and sales are rising, but so are delinquencies and foreclosures. And prices are falling."

While new construction and sales are starting to rebound off their bottoms, Moody doesn’t think they can really recover until foreclosures abate. The marketplace is glutted with inventory, he says, which puts further pressure on prices and total sales -- not to mention the need for new houses.

The latest sales figures may also be a little artificially inflated thanks to the up to $8,000 tax credit for first-time home buyers, Moody says. And even if the government extends the credit past the Nov. 30 deadline, first-time home buyers typically buy cheaper, smaller, existing homes, which will only benefit one section of the housing market.

"It also creates distortions because the people buying these first homes come from somewhere," Moody says. So a new home sale just leaves a vacancy someplace else, usually in the rental market. Ultimately, it comes down to the very basic economic problem of supply outstripping demand, he says. Vacant properties, whether they are for sale or rent, will weigh down the market.

What to Look For:
A decline in vacancy rates and a shift back to "For Sale" from "For Rent."

On the Street by Dan Burrows (Author Archive) Published August 24, 2009