Homes-for-sale inventories continue to rise. Forty percent of home sales in many regions of the country are sales of foreclosed properties.
THE DEFLATION OF THE
HOUSING AND AUTO SECTORS
Deflation of the housing and auto industries will push the U.S. into the deepest recession since the Great Depression. The boom in housing began in 2001, when former Fed Chairman Greenspan pushed the Fed Funds interest rate down to one percent in order to address the 2000-2002 bear market and recession.
The S&P 500 lost 49.1 percent between the January 2000 top and the October 2002 bottom. Investors pulled money out of the stock market and bought homes and condos. Housing prices soared during the four-year boom, which peaked in July of 2005. Speculators bid-up home and condo prices, with the intention of flipping the properties after closing on them. The net result is a record glut of homes and condos that still hangs over the market today.
Buyers have little incentive to purchase homes and condos because they know home prices will be cheaper next month or next year. The downward spiral in home prices began in July 2005. More than three years later, home prices are still falling. When home prices fall below mortgage balances, thousands of homeowners simply give their keys to the bank or mortgage lender and walk away.
Realtors warn that foreclosures over the next 12 months will contribute to still lower home prices. Wall Street bought and packaged trillions of dollars in mortgages into SDOs. Since no one knows how to price these declining assets, no one will purchase them.
Worldwide, banks, brokerage firms, and pension funds, etc., still have well over one trillion dollars in debt to write-off. As a result, the FDIC expects more banks to fail over the next 12 months.
I do not expect a bottom in the housing market because interest rates will be rising in 2009. In the meantime, home and condo prices will continue to decline. Now is not a good time to purchase a home.
It will take years to muddle through the worst financial mess since the Great Depression of the 1930s!
On July 16, 2008, Fed Chairman Bernanke urged the House Finance Committee members to approve Treasury Department proposals to back-up mortgage markets (Fannie Mae and Freddie Mac). “The housing market is really the central element of this crisis,” he said.
Did the stock market bottom on July 16, 2008, while the regulators were offering solutions (Band-Aids) to Congress? Only time will tell. Our regulators are working overtime to deal with the problems created by oil, debt, inflation and the downward spiral of the housing market. But these are not the only problems that influence stock prices.
The dollar is one of the bright spots in our economy. At current levels, American manufacturers are the most competitive since the early 1990s. The American export boom keeps economic growth positive month after month. American manufacturers who moved to China are returning to the U.S. because China is now importing higher priced products to the U.S. Toyota and Honda continue to build automotive plants in America.
The challenge for the Fed and the Treasury Department is to keep the dollar at current levels. Deficit spending by Congress and our fragile banking system threaten to push the dollar still lower. Meanwhile, plunging auto sales threaten the survival of GM, Ford, and Chrysler.
