Housing Grinds Lower

You've heard it before: Homebuilder stocks will bounce back before the housing market recovers. That's the mantra of bottom-fishing hopefuls who keep waiting for the right time to pounce on Toll Brothers, Hovnanian Enterprises, KB Homes, D.R. Horton or any of the other big American builders.

Don't listen.

The chart should be enough. While the S&P 500 is still bouncing around a bottom, the SPDR Homebuilders ETF is slumping to brand new lows (chart here).

Terrible housings numbers today show the real estate bust continues, with housing starts at their lowest level ever. Plus, a 14.5 percent fall in single-family building permits (a number that shocked economists) says the worst isn't over because nobody wants to build. Unsurprisingly, homebuilders are feeling down as well. The NAHB/Wells Fargo Housing Market Index, which measures builder sentiment, hit an all-time low of 9 in November.

Meanwhile, Deutsche Bank recently looked at the Chicago market, and found some more reasons to expect a long, difficult recovery:

Builders looking for government help? - think local

While builders are busy promoting Fix Housing First at the national level, many local governments continue to straitjacket their ability to respond to the downturn. Not only did impact fees run wild during the boom, but also local governments are requiring lower and lower densities. Builders in Chicago and elsewhere need to create more affordable product to entice first-time buyers back to the market. Instead, higher regulatory costs mean Chicago builders cannot profitably build anything but higher priced homes. And so we find that starts of affordable homes in Chicago have dwindled to a fraction of what they were just five years ago.

Land bids reflect our worst-case, and then some

The worst-case impairment analysis we first published last December assumes that prices in non-bubble markets fall by -20-25%, and that absorptions reach 1/month and don't recover until 2012. Based on these assumptions, we calculated that land is worth roughly half of its peak value. Chicago confirms our worst-case assumptions for non-bubble markets and yet we found land bids in far flung areas are as low as one-quarter of peak values. Clearly there is a significant degree of economic uncertainty reflected in wide bid-ask spreads, as transactions have yet to pick up to any substantial degree. Also, we think buyers are pricing in both distress and less availability of leverage to finance residential investment. In our view, these risk premia may be affecting public builder valuations as well.

Chicago is a middle-ground market, unlike Las Vegas or Southern California. It may not have been the hardest hit in the bust but as debt-laden states meet frightened buyers across the country there's likely more to this downturn than a bailout can fix.

Another interesting tidbit from today's deluge of depressing economic data: Housing activity and stock prices have fallen by roughly the same amount.

Housing starts fell 38 percent from a year ago during October. On the last trading day of October, the S&P 500 was down 37.5 percent from a year ago. What's that say? Well, the correlation is really tenuous, mostly because stocks are more concerned about credit, consumer spending and the economy than simply the state of the housing market (remember the good old days when falling home prices, not global economic chaos, was the market's biggest worry?) Mainly, it's just the latest reminder that there are few places to hide in this downturn.