A couple days ago, I posted Understanding the Housing Correction in an effort to explain my opinion that most people don’t necessarily understand the housing bubble and that housing has entered a long term bear market .   This isn’t meant as an insult but rather to show just how conditioned we are/were about housing prices.  And, it is understandable.   Up until 2007 housing prices had risen for decades without pause.  Of course, we had a blow off top that most people want to pretty much forget about.    The many years prior to the blow off top (Note: the “blow off top” is the period roughly from 2004-2007 where housing went parabolic) were gradual increases in home values tracking real wage growth.  This is similar to what happened in the general stock market from 1980-2000 with the blow off top in tech stocks form 1996- 2000.  Of course, monetary policy gave us one more “umph” from 2002-2007 (this also facilitated the blow off top in Real Estate)   So, here we sit in “correction ville.”

The housing bubble has placed us on a different trajectory and cycle now that will not be easily accepted for it is not understood.  People will disagree, fight, offer up senseless (emotional) reasons why real estate is coming back and at the end of the day the only cliche that makes sense to me is “Adapt or Get Left Behind.”  And while politicians from both sides battle useless arguments, the market asserts it’s truth.  There is no political power or  financial entity that is strong enough to fight the markets natural trend.  History shows these cycles are a completely expected.  Not having the contraction in the business cycle is about as senseless as trying to stop the natural tide of  the ocean.   However, politicians do not want to let the cycle turn down on their watch or at least run its course.   This is what we are witnessing today.   Instead of trying to learn from the market they are trying to fight it.  But guess what?  The cycle will come anyway…You can see all of this and the results of the housing bubble popping playing out in the following article.

New home sales plummet 11 percent in January, the 3rd monthly decline in a row

WASHINGTON (AP) — Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who were expecting a 5 percent increase over December’s pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

“There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that doesn’t take away from the fact that the housing sector has taken another big step back, even with the government aid,” Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

A rebound in housing in the second half of last year helped to boost overall economic growth back into positive territory. Each new home built, for example, creates about three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.

However, economists are worried that if housing falters in coming months, that will be one more headwind the recovery will have to overcome. The decline to an annual purchase rate of 309,000 in January was 6 percent below the previous record low set in January last year.

“I don’t think we are going to have a double-dip recession in housing, but it is going to take us longer to recover from a very deep hole,” said Patrick Newport, an economist at IHS Global Insight.

January’s weakness was evident in all regions except the Midwest, where sales posted a 2.1 percent increase. Sales were down 35 percent in the Northeast, 12 percent in the West and almost 10 percent in the South.

The drop in sales pushed the median sales price down to $203,500. That was down 5.6 percent from December’s median sales price of $215,600, and off 2.4 percent from year-ago prices.

New home sales for all of 2009 had fallen by almost 23 percent to 374,000, the worst year on record. The National Association of Home Builders is forecasting that sales will rise to more than 500,000 sales this year, an improvement from 2009 but still far below the boom years of 2003 through 2006 when builders clocked more than 1 million new home sales per year.

January’s data increased concerns that the housing rebound could falter in coming months as the government withdraws the support it has used to try to bolster the housing market. The real estate crisis was the epicenter of the country’s overall recession, the worst downturn since the 1930s.

The Federal Reserve has been holding down mortgage rates by buying $1.25 trillion in mortgage-backed securities, but that program is set to end March 31. And temporary tax credits to bolster home buying are scheduled to expire at the end of April.

Federal Reserve Chairman Ben Bernanke told Congress Wednesday that by holding the securities on its books the central bank would continue to help keep mortgage rates low. Economists believe that as long as the Fed owns the securities it will reduce the overall supply and thus help support the price.

Bernanke, delivering the Fed’s twice-a-year economic report to Congress, said that the Fed’s record low interest rates were still needed to attack high unemployment levels and help the overall economy recover.

Understanding This Real Estate Correction Part 3

Related posts:

1. Understanding This Housing Bubble and Correction
2. Understanding This Housing Bubble Part 3, Final (How To Prepare)
3. The Paradox of a Housing Recovery
4. Understanding Gold’s Future w/ Jim Rickards – Economics and National Security – Part 5
5. Underwater Mortgages, The Next Bubble