The National Association of Realtors released a relatively gloomy report today that showed that sales contracts on previously owned U.S. homes fell 4.7% in May from the prior month. The Association, which has a reason to be optimistic, forecast that housing sales will rise later in the year.

"Existing-home sales are expected to grow from an annual pace of 5.01 million in the second quarter to 5.75 million in the fourth quarter. For all of 2008, existing-home sales should total 5.31 million, and then increase 5.0 percent next year to 5.58 million."

But an interesting post in Accrued Interest does the math on the housing market and finds huge inventory of unsold houses.

"Normal household formation won't soak up the supply for a while. A recent report from Lehman Brothers indicated that there will be 4 million units which need to be absorbed by the end of 2009, both foreclosures and new home construction. About 1 million can be taken down by normal household formation. That leaves 3 million homes to sell, a pretty big nut to crack.

Demand could come from either current renters becoming home owners or investors. In both cases, prices need to drop a large degree to stimulate demand for 3 million marginal homes."

Sales may be on the rise but that's only one piece of the picture. Prices are going to have to continue dropping for some time to soak up all of the new, existing, and foreclosed houses that have flooded the market.

It's all over the business press today. The latest Case Schiller numbers are out and they show that the price of houses dropped a record 15.3% in the past year, bring value back to their 2004 levels. Here are some of the headlines:

• Four years of gains in home prices wiped out - Marketwatch
• Home Price Declines Hit Everywhere - WSJ
• US Home Prices Fall in April at Record Rate - LA Times
• Consumers Wary Over Economy Reports State - NY Times

An interesting article in the WSJ says that Rich Investors Dumped Real Estate in 2007.

"Surprisingly, the report says the real-estate decline was due to profit-taking, not lower values. 'In 2006, real estate experienced record returns across various categories. Many investors took profits from these increased valued and moved their money into other asset classes.'

In other words, it seems that the rich pulled out of the real-estate bubble earlier than most."

Interesting. So who were these rich? They certainly didn't work work for the major investment banks, except for maybe Goldman Sachs.

The US Census Bureau released their housing data for May and it showed continued deceleration in residential home construction:

"Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 969,000. This is 1.3 percent (±1.2%) below the revised April rate of 982,000 and is 36.3 percent (±1.3%) below the revised May 2007 estimate
of 1,522,000.

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This is 3.3 percent (±10.7%)* below the revised April estimate of 1,008,000 and is 32.1 percent (±5.1%) below the revised May 2007 rate of 1,436,000."

As the chart on the right shows, housing starts have fallen significantly from their recent peak in 2005. Nonetheless, the drop-off is consistent with other housing slowdowns and doesn't appear catastrophic - yet. I calculated the 2008 data by avering the first 5 months of the year and then multiplying by 12. A further slowdown in future months could bring the level to an historic low.

BusinessWeek says that option ARMs are the next peg to fall in the housing crisis.

" The Mortgage Bankers Assn. said on June 5 that the option ARM problem is growing. The group reported that the national rate of foreclosure starts for prime ARMs, including option ARMs, increased to 1.55% in the first quarter, up from 0.53% a year earlier. In California the foreclosure start rate in the first quarter was 2%, vs. 0.5% a year earlier. In Florida, the rate was 2.57%, compared with 0.5% in the first quarter of 2007. "California, Florida, Arizona and Nevada combined…represent 62% of all foreclosures started on prime ARM loans, and 84% of the increase in prime ARM foreclosures," the group said.

The option ARM loan defaults could accelerate next year even if subprime defaults subside, said Chandrajit Bhattacharya, vice-president and mortgage strategist at Credit Suisse Securities. He said California will see the bulk of the option ARM foreclosures and the rest will be spread out across the country."

Tens of thousands of consumers with decent credit got in over their head with real estate and the bill is coming due over the next couple of years.

A few years ago, there was a market collapse. People were seething and needed a fall guy. In order to restore confidence and give people what they wanted the SEC and DOJ were easily able to get a hold of the Enron guys, Bernie Ebbers and Dennis Kozlowski. All were convicted and I believe that all were guilty.

We have a similar situation today, which is in fact in many ways more dire. The collapse of a certain sector of the economy (the housing sector) has now spread throughout the economy like a virus and has taken apart many previously-thought solid financial institutions. It doesn't take long to trace the originator of the current mess. It is Countrywide and it is Angelo Mozilo.

Mozillo recently sold Countrywide to Bank of America at around $6 a share in an all-stock transaction after the stock traded over $45 less than a year ago. The terms of the transaction - which provide Mozillo a $100 million golden parachute are suspect enough. However, it isn't even certain that the transaction will go through. As the Wall Street Journal reports, conventional wisdom is now that Bank of America will bail out of the transaction before closing, leading Countrywide to file for certain bankruptcy.

Regardless of whether Countrywide is ultimately acquired, a lot of people have lost fortunes on Countrywide, and virtually everyone (save about 2 hedge funds that saw this housing collapse coming and shorted it) have been damaged by the housing collapse. It is time for someone to pay the price and there is nobody who has set himself up so perfectly as Angelo Mozilo.

For the time being, Angelo has stopped roaming the halls at Countrywide like a little raving idiot who owns the place. Rather, he is laying low (working on his tan) and avoiding the media hoping that he will be forgotten. He won't be. There are enough people who want to see him behind bars. Indictment coming.

The WSJ is reporting this morning that the Feds and several large mortgage lenders are close to an agreement that will freeze the introductory rate on certain types of subprime loans. I've long predicted this would happen and to be honest, I'm disappointed.

While I understand the pain the real estate market is causing for some, it's just not right to reward people who bought more house than they could afford. This program doesn't come free. It's subsidized by all of the borrowers who have done their homework, been responsible, and not gotten themselves into trouble.

This is also the hedge funds, private equity companies, and banks screaming for relief. They've created this mess through loose lending standards and by pumping obscene amounts of money into the mortgage market. We're all paying for that via inflated prices on our houses. They've made absolutely ridiculous amounts of money over the last 10 years and I hope they plan on absorbing the cost of this. There better not be a dollar of government money spent on this relief.

In our society we have reached the point where borrowing money no longer has any consequences. The only suckers here are the people who are trying to save their money while watching inflation and the falling dollar eat away at anything they've been able to sock away in the bank.

My advice to you. Stop being responsible. Go out and borrow as much money as you can. Rack up your credit cards. Because if you get into trouble, all of us responsible people out here will bail you out.

The housing market is in a slump so its no surprise that the remodeling business is expected to follow. Today, the Harvard Joint Center for Housing Studies released the latest numbers from its Leading Indicator for Remodeling Activity (LIRA). The indicators show that homeowner activity on remodeling will drop in 2007 for the first time since 2003 and continue to decline into 2008.

“As homeowners become increasingly concerned about falling house prices and a slowing economy, home improvement spending is dragging” explains Nicolas P. Retsinas, director of the Joint Center for Housing Studies. “Coupled with very modest home sales, spending levels are likely to fall.”

The Center blamed the drop-off in the credit crunch.

“The recent problems in credit markets are expected to dramatically reduce the level of cash-out mortgage refinancing activity,” comments Kermit Baker, director of the Remodeling Futures Program of the Joint Center. “Given that equity withdrawals have been a key source of funding for home improvements, market spending is expected to suffer.”

One can only wonder how this will impact stocks like Home Depot and Lowes and the general economy.

Home Depot stock has dropped recently but is nowhere near its 5 year lows:

Less spending on remodeling will hit a broad swatch of laborers and companies who have ramped up over the last couple of years to satisfy almost unending demand for new kitches, bathrooms, family rooms, etc.