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The market was ecstatic on Wednesday in anticipation of Friday’s big job’s report.  But while the market rallied 2.5%+ there was a potentially far more important story than the census driven job’s report: the real estate data.  While the data came in “better than expected”, primarily due to the end of the home buyers tax credit, there was an underlying red flag.  As the end of Spring buying season coincided with the tax credit the buyers have literally become non-existent in the housing market.  This was clear in the most recent mortgage applications data also released on Wednesday.  Diana Olick at CNBC has done a fantastic job covering the housing market.  She had the details yesterday:

“Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.

That means real organic buyers are exiting in droves.”

And she isn’t the only one noting the red flag.  In Thursday’s missive David Rosenberg also pointed to the plummeting mortgage applications:

The good news at least is that U.S. mortgage applications for refinancing purposes rose 2.4% during the May 28th week — the fourth increase in a row and while hardly a major boom that should cause any forecast shift and it does add a bit of coinage in household pocketbooks. But the big problem is with housing demand given that the homebuyer tax credits are behind us — mortgage applications for new purchases fell 4.1% and down for four weeks running. This is where the rubber meets the road for new home sales — a fresh 13-year low.

The year-on-year trend in purchases is -34% and that is compound off a late-May 2009 trend of -20%. How bad is that? And this is with mortgage rates at 4.83%? No doubt there are scars left over from the misery of being a homebuyer following the detonation of the last bubble and attitudes towards debt and housing have been altered semi-permanently.”

Is the housing market already double dipping?  That certainly appears to be the case – and exactly on cue as the government steps aside.  While the mortgage applications are no guarantee of a renewed trend the warning flags are popping up all over the place.  In addition to the negative seasonal trends ahead of us, we are also seeing lumber prices off 33% in the last month, continuing high historical inventories, a slew of mortgage resets in the coming years, and the biggie – the end of government intervention.

Earlier this year I detailed my outlook on housing and why I believe the real estate market is on the precipice of a double dip.  I said we were likely in for further declines of 7-15% starting with the end of government stimulus:

House prices decline 7%-15%.  This is the most probable outcome in my opinion.  In this scenario the private sector remains weak, labor markets rebound slowly, wage growth remains tepid, the economy grows below trend, government stimulus stops bolstering markets in 2011/2012, the economy perhaps double dips or re-recessions in 2012, and house prices ultimately succumb to the laws of supply and demand and decline another 15% or so.”

Investors are keenly focused on the potential time bomb in Europe, but housing is the domino that set the whole collapse in motion in 2007.  The housing market was largely stabilized by government intervention.   The consumer is likely to move in tandem with their largest asset.  If we experience the 7-15% price decline over the coming 24 months that I expect we should see a retrenchment in consumer balance sheets and further tightening of the credit markets.

I have maintained that the housing stimulus was an enormous waste of money and nothing more than price fixing that would temporarily stabilize the markets.   The government is about to find out why bailing out the losers ultimately works to the detriment of markets.  Let’s just hope the downturn isn’t more severe than I suspect.  And let’s all pray it doesn’t coincide with increasing contagion across Europe…..

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