Recently, there’s been a lot of hope that the housing mess is coming to an end. In my opinion, we’re not even close to the end. Consider one simple fact: Inventories of homes are almost twice their normal level. On top of that, fixed mortgage rates haven’t been falling–they’re rising. The average rate for a 30-year fixed mortgage is now 5.25%. It’s gotten so high that mortgage applications are falling.
Observers of the housing market were excited that home sales rose 2.9% in April. But if you look below the surface, you’d see that nearly half the sales came from distressed sales, foreclosures and short sales (people with negative equity giving their home back).
In April, the inventory of unsold homes increased by 8.8% to four million homes. That works out to 10.2 months worth of sales which is the highest reading since November. This is a clear indication that home prices won’t get better any time soon. At the high-end of the market, the problem is even worse. For homes over $750,000, the current inventory is equal to 40 months’ of sales.
The bottom line is that the housing market will be in rough shape for a few more years, not months. The spillover is that the housing market is the foundation for many bank loans. On top of that, there are mounting problem in commercial real estate. A blow-up there could put the squeeze on many smaller regional banks.
As a former banking analyst, I can’t recommend any bank stocks right now. There are better opportunities in other industries with more promising outlooks.