How's the housing market?

Fairly often I come across someone who thinks the housing market in America is somehow rebounding. This excerpt below doesn't explain the majority of the problems that will cause home prices to plummet, but it talks about a major one: millions upon millions of vacant and defaulting homes about to come on the market while builders are starting to build again. Combined with tightening credit, end of government home-buying handouts, and the tsunami of new defaults this year which will be slightly bigger than sub-prime, and it's home price Armaggedon.

"There's already a massive inventory of homes for sale in America. At the latest count, it's around 4 million houses. But partly because of the government's inefficiency at processing paperwork, there are almost 3 million households still in foreclosure and another 8 million households behind on their mortgage payments. Wall Street research I received this week predicts these "delinquent borrowers" will add another 5 million houses to the unsold inventory over the next two years.

It's true home sales have been rising. The problem is, this recent increase in real estate activity is temporary. The government has been giving $8,000 tax breaks to first-time home buyers and $6,500 tax credits to repeat home buyers. These tax breaks expired on April 30, 2010.

In short, anyone who wanted to buy a house over the next two years just bought a house before the April 30 deadline.

Now that there aren't any buyers left, activity in the housing market is going to plummet again. You can see this in the statistics for mortgage applications. Last week, the Mortgage Bankers Association announced mortgage applications had plummeted to their lowest level since April 1997... a 13-year low.

The problem is, when homebuilders see activity rising in the real estate markets, they build more houses...

Every month, the Commerce Department reports the number of new houses homebuilders start work on. They call this statistic "housing starts." In April, just as the tax credit was expiring, builders broke ground on new houses at a rate of 672,000 a year. This was a 5.8% increase over March levels and the highest level of housing starts in 18 months.

Builder confidence is a statistic compiled by the National Association of Homebuilders (NAHB). When builders are confident, it's likely they are preparing to build more houses. This statistic is a great indicator of the number of new home starts you can expect in the near future.

The NAHB released the homebuilder confidence reading two weeks ago. It showed builder's confidence rising to the highest levels in two years. With confidence rising to a two-year high, you can be sure homebuilders are preparing to build even more houses than they started in April.

In other words, homebuilders have been duped. They've ramped up production in response to housing activity that's about to disappear in a market that's super-saturated with existing houses.

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