Thursday, June 01, 2006

Housing and Stock Market recaps...

Since I began the blog back in February I've been talking about the precarious position of the US economy. The housing slowdown will impact the US consumer at a time when long-term rates have to rise to continue to fuel our government spending.

The more I have read about the real estate markets around the US, the more I'm convinced that we are not heading for a soft landing and the prospects of a real estate crash (prices down 40-50%) is very real. Consider some numbers from selected markets and some national data:

* Nationally, the number of new homes for sale stands at over 550k units. Only twice in the last 35 yrs have we ever had as many as 450k units for sale. Current inventory of new homes is 20%+ above the historical peak. Also, this figure does not take into account the tremendous inventory of condos and townhouses for sale or existing homes for sale.

* Inventory of homes for sale in Northern NJ is up 60% since January 1st!!!

* Mortgage rates are at 4 year highs and climbing. I still think we might see 7.5% by year-end which will completely kill the housing market.

* In Northern Virginia, a part of the Washington DC metro area, the number of active listings was 2,983 in April 2005, which increased by 241% to 10,038 in April 2006!!

The real estate bubble is bursting and you don't want to be the last one into this party because the clean-up will be ugly.


The stock market has been all over the map. I was off by about 2 weeks - I really expected the market to start cracking around now 6/1, but it started early. I'm looking for a little of a reflex rally to really get short, because the signs are there that we are really top heavy in the market.

Our economy is so interconnected today that you can not overlook the importance of stock market moves. If, as I expect the market is weak in 2007 and 2008, look for dramatic reductions in tax revenues which will lead to hard choices come budget time for Congress. A Congress which apparently has never seen a spending bill they didn't like.

Finally, all those days of paying $3/gallon for gas appear to be catching up with the lower end of the economy. It's annoyance for most, but when $3 gas went from an aberration to permanent reality it severely curtailed spending for some (see Walmart's recent weak outlook). Again, I think gas will fall in 2007/2008 (assuming the hurricane's stay out of the gulf) but if you're house goes down in value 40%, your job is at risk b/c of budget cuts and your retirement portfolio goes down 20% with the market, is it really a good thing to be paying $2/gallon of gas?

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