My Prediction on U.S. Housing Market and Prices

This year will mark the worst for the U.S. housing market, as foreclosures rise and prices fall. But don’t expect prices to climb back up anytime soon.

Let’s start by looking at the stark facts:

About seven million mortgages in the U.S. are now in the “late payment” phase—a delinquency rate of eight percent. Some 30% of all mortgages in the foreclosure pipeline have not made a payment in more than 24 months (source: Foreclosure Backlog Rises as Federal Aid Fails 3/30/11, HousingPredictor).

The S&P/Case-Shiller index of property prices says that property prices in 20 major American cities dropped 3.1% in January. According to RealtyTrac, foreclosure filings will jump 20% this year, marking a peak in foreclosures for the housing market.

Looking at the Dow Jones U.S. Home Construction Index, we see a bleak future for housing. While the broad stock market is up almost seven percent this year, the housing stocks are fighting to stay above their opening 2011 levels. It’s a bold prediction, but I wouldn’t be surprised to see the Dow Jones U.S. Home Construction fall to a new two-year price low later this year; about 15% below where it stands today.

Should I buy real estate now? If I need to buy a house, the later I waited until in 2011, the better deal I would get. More foreclosures coming onto the market and rising interest rates are two factors that the housing market cannot escape and that will keep prices low.

Where are property prices headed? I’m continuing with my prediction that U.S. residential home prices will fall between 5.0% and 7.5% this year.

If I were an investor, and there are plenty of them jumping into the U.S. real estate market, unless I have an exit strategy, I wouldn’t expect property prices to rise for years to come. If I’m correct and we are at the onset of new long-term trend of rising interest rates, U.S. real estate prices will remain depressed for years to come.

Michael’s Personal Notes:

Car sales are booming again. General Motors (NYSE/GM) posted a 9.6% increase in first auto sales, while Ford Motor Co. (NYSE/F) posted a 16% increase in first-quarter 2011 auto sales.

Unfortunately, the stock market doesn’t share this enthusiasm, which throws up a red flag for me. Ford is enjoying brisk sales, having outsold GM in the first quarter (for the second time in 13 years), but Ford stock is down 20% from its January 2011 peak. GM stock is down 18% from its January 2011 price high.

The stock market isn’t buying the run-up in auto sales, which is an area of concern. As a leading indicator, the stock market is looking out six to 12 months and saying it doesn’t like what it sees for the auto sector, an industry very dependent on consumer spending. This bodes well for my theory that all we have been witnessing since March of 2009 is a bear market rally and economic peril still lies ahead. Best stock advice I can give: avoid the auto stocks.

The auto sector is very sensitive to interest rates. Simplistic as it sounds, as interest rates start to rise this year, consumers will find their monthly payments for new vehicles rising, which could hamper demand.

Where the Market Stands: Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 6.9% for 2011. The bear market rally in stocks that started in March of 2009 remains intact. However, the easy profits in this rally have been made. While I expect stocks to continue trending higher, the upside for investors is limited at this point in this rally’s life cycle. The market has already discounted much of the better-than-expected first-quarter corporate earnings results.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan, The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter

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Canada Home Prices: Headed For Steep Correction?

Home price indexes for January were released this week for the U.S. (Case-Shiller) and Canada (Teranet), see chart above.  Both home price indexes for both countries equal 100 in January 2000 in the graph.  U.S.  home prices more than doubled between 2000 and 2006 and peaked at 206.52 in July 2006 when the real estate bubble burst and home prices plunged by 32.4% before hitting bottom in April 2009 at an index level of 139.26.  Canadian home prices have more than doubled between 2000 and 2010, and peaked at 204.59 in August 2010, before flattening out over the last six months.  

There has been some speculation that the Canadian real estate market is headed for a major correction, here’s an excerpt from yesterday’s WSJ article “Housing Booms North of the Border“: 

“As much of the U.S. housing market limps along, home prices north of the border are on a fresh tear, fired up in part by a borrowing binge that has sent Canadians’ debt to record levels—and now higher than their notoriously profligate U.S. neighbors—while income growth pokes along. All that has raised worry at the country’s central bank, which repeatedly has warned about rising debt levels, and among some economists, who say the market is ripe for a correction—maybe a steep one.David Madani, Canada economist at Capital Economics, an independent research consultancy based in London, says Canadian housing prices could be in for a 25% drop in the next three years, a correction he says is warranted by the now-inflated ratio of house prices to income. House prices have risen to almost 5.5 times disposable income per worker, well above the long-term historical average of 3.5, he says.”

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Why I Think Economic Growth & Stock Prices Are Going Up

Change is in the air, and it’s happening all around. There is growing expectation that both the Bank of England and the European Central Bank will soon raise their benchmark interest rates. The inflation rate in the U.K. just hit 4.4% in February, which is more than double the central bank’s annualized target of two percent. Higher oil prices aren’t helping the situation and you can bet that, over the coming quarters, there will be increasing pressure on central banks around the world to raise interest rates. The interest rate cycle has already begun to reverse.

In almost all occasions, higher interest rates for borrowing don’t help the economy. In this particular situation, however, increased rates won’t necessarily hurt economic growth. Because we’re coming from a base of rates at record lows, businesses and consumers can handle an increase of point or two. A modest rise in short-term interest rates isn’t going to hurt an already lackluster housing market.

The other big change that’s in the air for investors is the upcoming earnings reporting season. Because of the shocks from Japan and Libya, the market hasn’t run up in anticipation of the numbers. I think we’re going to get strong earnings, especially from large corporations that continue to increase their selling prices. This pricing action goes right to the bottom line and all indications are for a strong first quarter.

If you think about all the shocks that financial markets have had to deal with over the last few months, you might agree with me that equities have held up exceptionally well. The one thing that investors don’t like is uncertainty. So far this year, we’ve had a regime change in Egypt, major civil protests in other big oil-producing countries, battles in Libya, record-high prices for food and precious metals, and a catastrophic earthquake in the world’s third largest economy. Yet, the S&P 500 Index is only about 45 points from its 52-week and three-year highs. This to me is exceptional, and it makes me think that stock prices could go a lot higher this year.

Goldman Sachs is predicting that the world economy will grow by about 4.8% this year. JPMorgan Chase expects 4.4%. According to Bloomberg, the average global growth rate over the last 20 years is around 3.4%.

Now, as we all know from history, economic booms (in Western countries) tend to follow cataclysmic events like war and natural disasters. As the world’s third largest economy, Japan has to engage in a multi-year rebuild that will be the cause of much higher than normal domestic economic stimulus. This unforeseen economic spending could have quite a positive effect on the global economy (lumber stocks remain strong) and will only add to overall growth rates.

So, from my perspective, the outlook for both the domestic economy and the stock market continues to improve. The one certainty I do know going forward is that there will be increasing pressure on interest rates. Right now, the stock market and the economy can handle this eventuality.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.

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Housing Prices Still the Bane of Economic Recovery

03/18/11 Baltimore, Maryland – Whoa…this looks bad too.

In the housing sector, the fed’s ultra-low interest rates are supposed to make it easier to refinance…which is supposed to help firm up prices. But prices haven’t firmed. They’re still giving way.

The latest numbers show prices falling, hitting post-bubble lows in 11 cities. Of the 20 major cities in the survey, only two of them had positive price movements last year. No surprise, only one – Zombietown itself, Washington, DC, home of the feds – showed an increase of more than 2%.

Worst hit were the sunshine states – California, Florida, Nevada, Arizona and Georgia. Along with Michigan, more than a third of homeowners in these states have negative equity in their houses…with 70% of them underwater in Nevada.

Wealth effect? Not in housing. According to the Case/Shiller numbers, homeowners saw their net housing wealth decline by $650 billion in the last quarter of 2010. And since many more households own houses than stocks – 66% are homeowners – falling housing prices has a much bigger effect on the economy than rising stock prices.

And it gets worse. The big wave of resetting (and recasting) ARM loans begins to crash into the housing market next month. There are about $700 billion worth of loans in this group. Many will not be successfully rewritten. Falling housing prices will make it impossible. Homeowners will prefer to walk away, rather than be shackled to a long-term mortgage 30% to 50% higher than the value of the house.

Says housing expert Robert M. Campbell:

“I continue to believe that the second downward leg in house prices that began in 2010 will likely take US housing prices to a point that is 15% to 20% below current levels.”

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning . 

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Meat prices skyrocket

Natural disasters, market fluctuations, prices soaring for gas and grain: these are world events that don’t just make it onto your T.V. screen. They’re affecting what’s on your dinner table.

Several factors are at work that have meat prices on the rise. Watch the video to see how one local market is dealing with the soaring prices.

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Peaceful Saudi Streets Won’t Curb Oil Prices

Don’t expect all hell to break loose in Saudi Arabia when demonstrators hit the streets today in a planned show of strength. Protests are likely to be subdued, according to a Rick’s Picks subscriber who lives there.  “You need to take what the news and Internet are saying with a grain of salt,” he wrote. “I am currently living in Saudi and have been talking to the locals the past few weeks. Everybody I have talked to does not believe anything will happen this weekend, nor do they want change. I am not saying nothing is going to happen, but that is the ground report. Everybody I have talked to, regardless of which Muslim religion they practice, loves the king and is grateful for what has occurred in thecountry over the past generation. You need to remember that these people were 98% nomads less than 30 years ago.” 

The “experts” would indeed have us braced for the worst. “Although most political analysts predict any demonstrations to be swiftly – and perhaps bloodily – suppressed by the government,” the Financial Times reported, “any hint that the protests enjoy wider-than-expected support is likely to spook investors once again.” We suspect that even if Riyadh remains relatively peaceful, however, that crude oil prices will continue to head higher.  A short while back, we wrote here that the spike in crude caused by mounting troubles in Egypt and Libya would seem relatively tame in comparison to what we might see if Saudi oil production were to come under threat. While we still think that’s true, we now expect a quiet weekend in Saudi Arabia to ultimately have little impact on energy markets that seem likely to remain in the grip of speculators. They are quite obviously determined to keep squeezing until the fever breaks, but will it? The Saudi demonstration is not the only one planned for today. There’s another in Bahrain, where Shia protestors are planning to march on the Sunni-dominated royal court in Riffa. That doesn’t sound like a very mellow mix. And in Libya, the battle could drag on indefinitely, perhaps turning even uglier if the country’s energy resources come under attack in an escalated conflict.

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Prohibitive Air Fares

Concerning the technical picture for crude oil futures, we are currently using a Hidden Pivot target at 109.17 as a minimum upside projection for the NYMEX continuous contract.  So far, it has gotten as high as 106.95. If the pivot fails to contain the rally, however, the breakout could go all the way to $151 before it hits a pocket of supply deposited on the charts as crude fell from a frenzied, all-time peak at $188 recorded in the summer of 2008. Even if this Middle East-driven short-squeeze does not break any price records, the persistence of tensions in the region is apt to keep quotes quite buoyant for the foreseeable future. Under the circumstances, we should tune out the ostentatious sighs of relief on Wall Street whenever stocks rise on a day when oil prices have fallen. The two are connected, for sure, but any bullishness based on cheaper crude is bound to be short-lived.  Fuel costs have already pushed air fares so high that airports are going to seem relatively deserted this summer.  How will the stimulus-addled stock market react if gasoline is headed toward $5 a gallon, as seems plausible?

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Record Gasoline Prices in Europe, Over $8 in UK, Italy, Germany; California Faces $4; Reflections on "Inflation"

Bloomberg reports Record Gasoline Grips Europe, California Faces $4 a Gallon.

Gasoline prices are setting records across Europe and exceeding $4 a gallon in California as the rise in crude oil caused by the conflict in Libya punishes companies and consumers.

Households are cutting back on travel, cinema visits and groceries in the U.K., where prices jumped to 130.68 pence a liter ($8.06 a gallon) yesterday, according to research from the Automobile Association, Britain’s largest motoring organization. Prices set records in the Netherlands and Italy today. The current average U.S. gasoline price is near a two-year high at $3.81 a gallon, according to the AAA website.

The impact on consumer prices may push European Central Bank President Jean-Claude Trichet to raise interest rates as soon as next month to discourage higher wages and head off the threat of an inflationary spiral.

“Rising fuel costs are negative because they push inflation up and slow the economy down,” said Philip Shaw, chief economist at Investec Securities in London. “It is essentially energy costs that have resulted in ECB putting its finger on the interest rate trigger.”

In Italy, gasoline prices reached 1.544 euros a liter and diesel climbed to 1.438 euros a liter ($8.17 a gallon), according to a chart published by web energy daily Quotidiano Energia. Gasoline prices in the Netherlands reached a record 1.697 euro a liter from 1.692 euro in June 2008, according to Paul van Selms, head of UnitedConsumers, a lobby group for consumers in the Netherlands.

The average price for super-grade gasoline in Germany, Europe’s largest economy, was 1.55 euros per liter today, close to the 1.58 euro record from 2008.

Reflections on Inflation

I do not know if Trichet hikes short-term interest rates soon or not. It is conceivable it is the correct move.

However, the idea that something needs to be done in the face of a supply shock on top of overheating in China and peak oil constraints is ridiculous. Supply shocks are anything BUT inflationary.

If Europe or the US was on a rampage with credit expanding wildly it would be a different matter. However, credit expansion is not happening in the US or Europe.

Dumb things happen (in both directions) when central-planning jackasses view inflation in terms of prices rather than money supply and credit, then take (or fail to take) action because of prices.

For example, Greenspan ignited an enormous housing bubble by failure to consider reckless credit expansion. Instead, Greenspan foolishly focused on the CPI which suggested low inflation.

Such policies have central bankers forever-chasing their tails.

Where Should Rates Be?

Nothing above implies agreement with central bank rates set near zero.

The free market, not a bunch of bureaucrats, should set interest rates. None of the central bankers saw this crisis coming, so how the hell do they think they know what interest rates should be?

I don't know where they should be and they sure don't know either. At least one of us is smart enough to admit it.

For more on this line of thinking, please see Goldman's Blood-Sucking Leeches Model, Money Multipliers, Macroeconomic Dark Ages, the Taylor Rule, and Nonsense from Trichet.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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