Six Reasons Why I Remain SkepticalA healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.

To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.

We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.

The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.

$$HSNGSTARTS Housing Starts New Privately chart

Chart courtesy of www.StockCharts.com

Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.

Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 21, 2013.) Construction spending is not only a measurement of activity in the housing market; it directly affects gross domestic product (GDP).

Finally, those closest to the housing market are showing concerns again—they’re turning outright pessimistic on the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) registered at 44 in April. (Source: National Association of Home Builders, May 15, 2013.)

Any number below 50 indicates that homebuilders view market conditions to be more poor than good. Remember: homebuilders see the changes in the housing market much quicker than other market participants. If they are worried, it’s certainly not good news for the U.S. housing market.

As I continue to preach in these pages, rising home prices don’t mean that the housing market—a critical component of economic growth in the U.S. economy—has recovered.

And as I have written before, first-time home buyers are missing from the U.S. housing market recovery, because they continue to be worried about their jobs, falling real income, and rising expenses.

The bottom line is: the recent rise in home prices that we’ve witnessed over the past year is a reflection of financial institutions rushing to buy homes for rental income—and this is exactly why I remain skeptical of the housing recovery.