The National Association of Home Builders housing market index receded by 23% in May over the previous month to hit its lowest level in three months. Furthermore, the future sales outlook based on fundamental components that measure expectations for the next six months of the year decreased by four points, the largest dip since the height of the great recession.

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Following the January 2008 New Residential Construction report, or housing starts, which measures the construction of privately owned homes, the indicator slowly fell from 1084 (thousand) to 477 in April of 2009. Although there was some slight volatility in monthly results, generally housing followed an upward trend through April 2010. However, the most recent monthly statistics indicate a drop in housing starts from 659 to 593.

Foreclosure Still a Problem
As government home buyer tax credit incentive programs expire and foreclosure remains a significant problem in America, the housing market is retracting from the artificial gains it has experienced in recent months. According to RealtyTrac, monthly foreclosure activity for May surpassed 300,000 for the 15th consecutive month.

Failed Bailouts
The housing crisis was the major catalyst in the financial crisis, and was exacerbated as credit conditions worsened. Despite all this, the economic environment seemed to gradually be improving throughout the latter part of 2009 and the early months of 2010. But more bad news emerged for the sector when Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) were ordered to delist from the New York Stock Exchange when their shares fell below the $1 benchmark requirement. After an estimated $1 trillion in bailouts, the drastic measures of the government were not able to prevent menacing issues within the housing market. The mortgage insurers intend to file Form 25, Notification of Removal, in late June.

Failed Measures
An increasing amount of housing inventory at a decreased price does not bode well for new housing construction companies since the supply of existing homes surpasses demand. Even firms in the lumber and building materials business - and not directly in the home building industry - such as Weyerhaeuser (NYSE:WY) and USG (NYSE:USG), may feel the negative affects of a persistent downward trending housing market. However, since such firms are typically involved in various cross-border operations, they will likely face less difficulty than exclusive American homebuilders.

Expiration of the tax credits resulted in a sharp pullback in the housing sector, indicating that full economic recovery has been delayed. As single family housing construction fell, the artificial increase in demand based on unsustainable subsidized government programs proved to only be a temporary measure. Further fueled by the news regarding Fannie and Freddie, homebuilders saw major stock pullbacks. Beazer HomesUSA (NYSE:BZH), D.R. Horton (NYSE:DHI) and Standard Pacific (NYSE:SPF) saw respective losses of 6.29%, 3.11% and 4.78% on Thursday toward the end of trading.

Bottom Line
There are at least two major concerns regarding the positive data emerging in the housing sector throughout 2010. The first, as previously mentioned, is that government programs helped inflate indicators to artificial levels, suggesting that the economy is progressing beyond fundamentally sustainable levels. The numerous incentives allowed potential home buyers to purchase homes they would otherwise be unable to afford and allowed those who could not meet their obligations to remain in their homes for an extended period of time before facing foreclosure.

The second major problem, and one that persists, is the high rate of unemployment. Because the housing sector is a major employer, if this industry suffers, many more individuals will lose their jobs. As more people file for unemployment programs, they will not be able to buy a house, further escalating the real estate troubles. When the foreclosure issue will be resolved is not clear, but one thing's for certain: the housing market is not likely to recover until this happens. (For a general overview of the economy, see May's Economic Pulse.)

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Tickers in this Article: FRE, FNM, WY, USG, BZH, DHI, SPF

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