Over the past couple months, I have had many people tell me “the housing bottom is in”. Supposedly the stock market bottom is in as well, and in just a couple years the S&P; will be back at 1500. Really?

Stock market bulls have no idea how weak earnings will be as consumers continue to retrench and unemployment climbs. As noted previously a “Buy The Dip” Mentality Is Fully Entrenched among fund managers and individual investors in spite of the fact Insiders Dump Shares at Fastest Pace in 2 Years.

Moreover, housing bulls ignore shadow inventory, seasonal factors, and temporary effects of the soon to expire $8,000 first-time home buyers credit.

Shadow Housing Inventory Will Halt A Housing Recovery

iStockAnalyst is reporting Shadow Housing Inventory Will Halt A Housing Recovery.

Any optimist talking up a housing recovery might want to pause and look deeper into the housing crisis. Amherst Securities Group analysts believe the market faces about 7 million properties that are likely to be seized by lenders have yet to hit the open market. There are two sources that contribute to a huge shadow housing inventory; ARM mortgages which are due to reset now through 2012 and current home owners who are struggling to make payments.

Assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman.

The favorable seasonality will be over come the October housing numbers and the reality of a 7-million-unit housing shadow inventory is likely to set in.

The uptick in the housing numbers are due to banks slowing down the filing of forecloses due to the government loan modification program, the spring/summer seasonality strength of the housing market, buyers rushing to take advantage of the soon to expire $8,000 first-time home buyers credit and the record low mortgage rates thanks to the Federal reserve buying treasuries to help keep mortgage interest rates artificially low but that program is due to be over during the 1st quarter of 2010.

When the shadow inventory is unleashed and government is out of stimulus gun powder for the housing market, reality that the housing correction is not over will set back in.

In Breakfast with Dave, Rosenberg is wondering: Improvement In Case-Shiller Housing Index – Will It Last?

There is no sense in quibbling with the CS home price data, which continue to show improvement — a 1.6% gain in July on top of +1.4% in June and +0.5% in May. These numbers, remember, were for July — when the Red Sox were still leading the AL East.

We already see from the August data-flow that average resale home prices fell 2.0% both on an average and median basis in their worst showing since January, and median new home prices collapsed 9.5% MoM and on average fell 6.0%. And, some homebuilders are now back resorting to national discounting programs to lure buyers — after all, it is now taking builders a record 13 months to make a sale upon completion.

Moreover, the supply data have been distorted in part because of all the inventory that has been held off the market on bank balance sheets, but this cannot last forever. Estimates we have seen, peg the “shadow” inventory at 7 million housing units — those in foreclosure, those just entering the process, and those that have been in arrears for the past year but have yet to receive a notice. Tack these on to the “official” unsold inventory count of 3.6 million and what we are talking about is an overhang equivalent to 25 months’ supply. It is truly hard to believe that home prices are doing anything more than a wiggle right now in a long-term downtrend; a wiggle, mind you, that has come courtesy of unprecedented government support.

Housing bulls can and will believe what they want. However, the reality is houses (especially low-end houses) are selling for the same reason cash-for-clunkers temporarily improved auto sales: free money and no down-payments. Excuse me but isn’t this what started the housing trouble in the first place?

Meanwhile, unemployment is rising and will likely keep rising for another year minimum. Rising unemployment will increase credit card writeoffs, foreclosures, and bankruptcies. This is not a pretty picture for the existing pie-in-the-sky earnings estimates or continued strength in housing.

A close scrutiny of the facts suggests neither the stock market bounce nor the housing bounce is close to sustainable. In theory, anything and everything can happen. However, not everything has equal odds of success.

Mike “Mish” Shedlock
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