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Housing Chill Could Trash 2011

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Imagine sitting on a four-legged stool and one of its legs suddenly collapses. Or, put another way, let's say one of the key organs in your body stops functioning. Obviously, you're in trouble in either case.

You can say the same thing about the economic ravages from the ongoing hell in housing, which, because of the heavy media focus on quantitative easing (namely QE2) and Obama's tax cut fight, has been swept under the rug amid the renewed wave of economic enthusiasm.

But it's not something to casually ignore because the present housing picture could be scarier than The Picture of Dorian Gray or one of those ghost-filled haunted houses in the amusement parks.

Why so? Because current trends show that housing, a critical leg of the economic stool, is getting increasingly shakier. In turn, that means 2011 could produce a renewed wave of housing dousing, dangerously threatening the vigor of the widely expected economic recovery that most economists tell us is a sure thing.

Speaking of the recovery, the stock market is displaying a lot more zip, with ma and pa now buying the Wall Street story that the economy is starting to hum again and that 2011 should be better, maybe considerably better, than 2010. Indicative of this belief, last week, according to West Coast liquidity tracker TrimTabs Research, investors went on a buying spree, snapping up $2.9 billion worth of U.S. equity mutual funds, the biggest weekly inflow this year. Clearly, if they're committing their capital, they see better economic times ahead.

But try spinning that better times scenario to any of the following New Yorkers. They'll laugh in your face, such as two elderly women, who, despite freezing temperatures in the mid 20s a few days ago, were forced to sleep in the street below the Manhattan Bridge. Or for that matter, a well dressed, well groomed couple in their 60s (the woman was wearing one of those $2,000 to $3,000 sheepskin coats) who refused to pay for a prescription in a Manhattan east side pharmacy catering to an upscale clientele. The bill was $100. "That's $6 a pill; I'm not going to pay," the woman screamed. "I need the money more than the pills." And then she and her companion turned around and walked out. Or a dry cleaning store that recently opened its doors on Sunday (the first time I've ever seen that in New York City). Or the growing number of New Yorkers now charging taxi rides under $5.

But let's get back to housing and housing services, which, according to the National Association of Home Builders, accounted for 15.1% of the economy in the past quarter. At the moment, housing -- which the experts have said time and again over the past two years was on the verge of a meaningful rebound -- is still an economic bad guy, currently diminishing GDP by a minus 1.4%.

If you're looking for any near term improvement, don't hold your breath, suggest several keen housing eyes. For example, Florida investment adviser Harry S. Dent, Jr., notes that despite minor improvements in mortgage applications for purchases and pending home sales, there is still no sign the housing markets will recover to anywhere near normal. This means, he says, banks are going to have to put more of their backlog of foreclosures on the market and get real about writing down bad loans.

Taking it one step further, Dent contends "the mortgage and banking crisis is coming back." It's just a matter of when, he says, speculating a likely timing is between late 2011 and mid 2012. But before that, he worries, the financial markets should start to react months ahead, probably between early and late summer of 2011.

David Rosenberg, the chief economist of Gluskin Sheff, a leading Canadian wealth money management firm, also raises questions, noting that U.S. housing starts are the quintessential leading indicator for economic activity and "right now it is going absolutely nowhere."

Madeline Schnapp, TrimTabs' research chief, likewise strikes an ominous note, telling me "the housing depression is unlikely to end before 2013." Documenting this warning, she cites the following deterrents to a housing recovery anytime soon:

  • As of October (the latest month for which data is available), 7.04 million households were not current on their current mortgages, up 1% in the past two months.
  • 25% of mortgage holders or 6.2 million are under water, meaning they owe more on their house than it's worth.
  • Housing prices are at risk of declining another 20%, putting more homeowners under water and more into foreclosure.
  • Recent documentation flaws are keeping foreclosures off the market, but foreclosures currently account for 25% to 40% of all housing sales. Without a foreclosure inventory, sales will continue to decline, taking housing prices with them.
  • The unsold housing inventory, visible and shadow (foreclosed or seized homes held by banks that have not yet been put on the market) stands at 6.2 million units or a 1.5 years' supply.
  • A recent backup in mortgage rates to 4.83% from 4.17%.
  • Between 2003 and 2007, 40% of all new jobs were in some way related to housing.

To Schnapp, the message is clear. It means, she says, the economy has to grow with a shattered leg.

Factor in, as well, she points out, $140 million of state and local government budget gaps over the next two fiscal years (July 2010 through June of 2012)--which will put about 1.4 million or more jobs at risk--and she argues that Wall Street's economic exuberance is way overdone.

Her 2011 outlook: a lukewarm, muddle-along economy, accompanied by an uninspiring stock market confined to a narrow trading range (1,100 to 1,350 in the Standard & Poor's 500-stock index).

My take on all of this: If you buy a house at the asking price or one of those supposedly dirt-cheap housing stocks that some brokerage houses are pushing like crazy, maybe it's time for you to rejoin the real world.