Your House Is in a Wealth Spiral

If hope and finger-crossing were a viable investment strategy, about 100 million people across the country would currently be retired. Unfortunately, things in the real world just don't work that way, but good luck telling that to the homebuilding sector.

Homebuilders have been ramping up production as if the market were booming again. The overzealous KB Home (NYS: KBH) unsuccessfully tried boosting the sale price of its homes a few months ago, while Beazer Homes (NYS: BZH) and Hovnanian (NYS: HOV) have seen their stocks rebound considerably off their lows despite heaps of crippling debt and an endless sea of losses.

There are exceptions in the sector with Lennar (NYS: LEN) demonstrating the highest homebuilding gross margin of the group and D.R. Horton (NYS: DHI) noting solid new home order growth. But once again, the macroeconomic picture is pointing decisively against the homebuilders over the next few quarters.

Data released last week from RealtyTrac indicate that 26% of all first-quarter home sales were foreclosed properties. That figure is a moderate boost from the 25% in the year-ago period and a significant reversal of the 22% noted in the fourth quarter.

Short-sale, anyone?
At the heart of the increase was a 25% jump in short-sale properties. However, an increase in properties being short-sold shouldn't come as a surprise to anyone for a number of reasons.

First, banks are growing weary of the increasing length of time it takes to take possession of a home. Taking a loss upfront and getting the asset off its books is proving more efficient for banks than taking possession of the home itself.

Secondly, the jobs picture has grown particularly pessimistic of late. Employment data last week indicated one of the lowest job totals added (69,000) in a long time and included an uptick in the unemployment rate back to 8.2%. In short, job opportunities may be drying up for some homeowners who need the income to make payments on their home.

Finally, wage growth has been anemic in relation to the inflation rate. With the rising prices of fuel and commodities outpacing wage growth, homeowners are choosing necessities over their mortgage payment, especially considering banks' lack of motivation to foreclose these days given the new foreclosure regulations.

It gets better, in a sarcastic sort of way
On top of this, according to Zillow, and as reported by the Fool's Morgan Housel, 31% of all mortgages are now underwater -- myself included. That's up dramatically from just 22% of all mortgages one year ago. With few repercussions to homeowners other than a temporary credit ding, we've seen a spike in those walking away from their mortgages again.

The icing on the cake was seen in the foreclosure prices themselves, which fell an additional 2% year over year to $161,214. These foreclosures were sold at an average discount of 27% below non-foreclosed properties and represent a major drag on current and future pricing.

The wealth spiral
So there we have it, a major disconnect between foreclosure pricing and new home pricing. My assertion is that something is going to have to give, and my research into the glut of foreclosed and pre-foreclosed properties that are waiting in the wings to hit the market leads me to believe that homebuilders are living in fantasyland. With little foundation under housing prices and homebuilders building like everything is hunky-dory, don't be surprised if the value of your home continues to spiral lower.

Homebuilders may not be on your buy list, but these stocks are definitely on the buy lists of America's smartest investors. See which stocks the market mavens are buying by clicking here to get your copy of our latest FREE special report.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. Perhaps he finds himself underwater because he never learned how to swim? You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Zillow. Motley Fool newsletter services have recommended buying shares of Zillow. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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