Why The Blind Optimism Behind The Housing Recovery Won’t End Well

real estateMichael Lombardi: The news headlines are saying the U.S. housing market is witnessing robust growth and flipping homes for profit is back.

While many are now saying there is growth in the U.S. housing market and that it will continue, I disagree with them, based on many different factors…all of which I want my readers to know about.

Yes, home prices have gone up, but that’s about it for positive developments. The housing market still suffers, and there are problems that need to be fixed before it sees a full-on recovery.

The delinquency rate on single-family residential mortgages in the U.S. remains staggeringly high. In the second quarter of this year, it was 9.41%. Yes, again; it has declined from its peak of 11.27% in the first quarter of 2010, but it’s still almost 140% higher than its historical average of 3.94%! (Source: Federal Reserve Bank of St. Louis web site, last accessed November 8, 2013.)

As I have been harping on about in these pages; institutional investors jumped into the U.S. housing market buying residential homes in bulk, and as a result, prices increased. But we didn’t see first-time home buyers run towards the housing market—an increase in first-time home buyers is essential for any economic recovery.

According to the National Association of Realtors, in September, first-time home buyers accounted for 28% of all existing home sales in the U.S. Meanwhile, investors were behind one-third of all existing home sales! (Source: National Association of Realtors, October 21, 2013.)

The “U.S. Economic and Housing Market Outlook” report issued in October by the Office of the Chief Economist at Freddie Mac said, “According to our forecast, the U.S. economy will add less than 1 million housing units in 2013, and around 1.5 million in 2014, significantly below normal levels.” (Source: “U.S. Economic and Housing Market Outlook,” Freddie Mac, October 2013.) In simple words, it suggests demand for new homes in the U.S. isn’t strong.

With all this, I believe homebuilder stocks (NYSEARCA:XHB) face a precarious future ahead. Since May, when we heard the Federal Reserve was debating tapering its quantitative easing program, homebuilder stocks shed value—and I would not be surprised to see them fall further.

Don’t buy into this housing market rebound. It’s not real. It is fueled by investors. I’ve never seen a housing market recovery that wasn’t fueled by people who bought houses to live in them. Like the stock market, this will not end well.

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