Monday, May 18, 2009

The Housing Surplus Question

The market did some strange things today. Those who follow it (and maybe trade it), will tell you it went up. The catalyst: communists lose some Indian political leverage, which will usher American style... socialism... in India, and homebuilders apparently are building homes again. The first item is open to discussion (mostly by political pundits), however to assume that the Indian market can shoot 20% higher on a "surge of urgency" seems like a bit of a pipe dream. As for the second item: how the market can cheer the builders addition of inventory to an overglutted market is simply beyond logic (and thus reproach). The chart below straight out of Freddie Mac, demonstrates the excess inventory in unsold homes in the U.S... and these are just the "permitted" numbers.

When one also considers the shadow inventory of houses, which some estimate at 2.5 million, one's head starts spinning. Lastly, as the foreclosure moratorium tapers off any day now, the glut will become a massive tidal wave of oversupply.

But in the meantime Lowe's beats on some metric or another, just in time for the biggest maker of the key component of house paint to be on the verge of liquidation. But who really gives a damn about supply/demand when all everyone (or at least the Hank Paulson's Chief of Staff) cares about these days are the Dow Jones futures. When you fire enough people, and bleed your business to death (COGS =0) eventually revenue will become earnings. And the market will cheer it all the way.

The entire presentation from Freddie Mac is reproduced below (hat tip Richard).

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