Still a Shaky Foundation for Housing

08/08/2009 05:12 am ET | Updated May 25, 2011

We're now in the heart of a major home buying season and prices are soft practically everywhere. Just maybe you're one of the lookers. So is this a good time to buy a house? The answer: No!

The reason: While the housing horror tale of the past couple of years is winding down, it's not over yet because more financial fright lies ahead.

That's the conclusion of two recent studies and the emphatic view of a couple of fellas who had the foresight to call the housing bubble before it burst in 2006. In brief, the thinking is the same in all quarters. Termites continue to gnaw away at home prices, and Florida investment adviser Michael Larson and Chicago real estate developer Robert Sheridan -- both of whom called the bubble -- see no letup in falling prices for at least another year.

That's also the gist of the two studies, which suggest a number of Wall Street economists who are forecasting a home-buying upturn later this year are merely spinning housing hokum.

No one, of course, can time an exact bottom, which many housing experts believe is on the way. When, though, is anybody's guess. So unless you can steal one of those abandoned or foreclosed homes at some ridiculously low price, Larson tells me he would wait at least another 9 to 12 months before buying a house. He reasons that in this period home prices will be struck with additional losses in the high single digits.

"The housing bust won't end with a bang, but with a whimper," he says. "It should be more of a U-shaped recovery than a V-shaped recovery."

In support of this view, Larson points to a million existing homes on the market and growing foreclosures. In the first quarter, a record 3.85% of the housing population were in some state of foreclosure, according to the Mortgage Bankers Association. And Larson reckons we'll be saddled with excess supplies for at least 2 years, leading him to conclude that home prices are unlikely to stabilize until late 2010 at the earliest. Yet another industry problem, says our housing bear: a new wave of homes could hit the market, namely the inventory being held by banks waiting for some pickup in prices.

To Larson, it suggests that the idea of a quick rebound in housing is nonsense. What's more, he doesn't see a rip-roaring housing market for years and believes that a return to peak housing prices may not be realized for another 7 to 8 years.

What about all the buying of those beaten-up housing shares? "Naïve, that's dead money," he says.

Though home sales activity has picked up in some regions, much of it reflecting clearing of distressed inventory, the latest reading of the country's 10 major mortgage markets from financial biggie Deutsche Bank calls for a further 14% decline from the first quarter of 2009 before we hit bottom. In New York, however, where home prices went through the roof during the most recent outbreak of real estate-mania -- with 100%-plus gains commonplace -- the bank sees an even bigger hosing in housing, a wicked 40.6% drop from this year's first quarter.

Over the last several months, notes Deutsche Bank, many of the top 10 mortgage markets have reached their all-time high in affordability, helped by low mortgage rates. Unfortunately, though, says the bank, affordability is no longer the driving issue, but rather such factors as unemployment, distressed inventory and home price momentum (which is currently on the downside).

"The bottom is closer, but we're not there yet," the bank concludes.

Sheridan concurs. Pointing out that mortgage delinquencies -- now at a record 10% of all mortgages -- he figures home prices should keep falling over the next year. In some areas, though, notably New York, Las Vegas, Phoenix, Ariz., and parts of Portland, Ore., he thinks the fall could last even longer.

One of the more ominous housing comments came the other day from mortgage insurer PMI, which, predicts that home prices in more than half of the largest U.S. cities will decline through the first quarter of 2011 as unemployment and foreclosures head higher. It also estimated that 30 of the 50 largest metropolitan areas have at least a 75% chance of posting lower prices through early 2011.

The bottom line: Would you buy a stock that has a good chance of going down in the current slumping stock market? If your absurd answer is yes, you might also want buy a house.