Investing in Housing: Denial isn't just a river...
By Ian Cooper
While I’m not sure of the source for the “Point of Maximum Financial Risk,” I still felt it necessary to bring it to your attention. As we stand now, bullish talking heads, real estate professionals, traders and economists don’t seem to want to leave the stage of denial even as housing prices drop and inventory builds. Let’s just say in the cycle of housing’s death, naïve bulls are stuck are still stuck in the first stage of Kubler-Ross, denial (this isn’t happening to me), soon to be followed by anger (you said it wasn’t so bad), bargaining (if you don’t take away my house, I’ll be a better person), depression (take it, I don’t care anymore), and finally acceptance (whatever will be, will be).
We’re looking to enter the fear zone later this month, between June 11 and 15, 2007. That’s when the Mortgage Bankers Association will release its mortgage delinquencies report. Any negative MBA read will only restrengthen lingering fears that mortgage delinquencies will eventually force consumers to cut back on discretionary spending as lenders tighten credit in the housing slowdown.
Once consumers spend less, the economy stops growing and our beloved stock market rally comes to a screeching halt and turns south. Plus, the economy must still contend with the probability that 1.1 million additional home foreclosures will transpire over the next six years as adjustable-rate mortgages reset at higher rates. These foreclosures account for about 13% of ARMs originated or refinanced from 2004 to 2006, which equals about $326 billion in debt.
After that report, we’re not looking for any improvement. Thirty-year mortgages are up for the fourth week to 6.53% from 6.42%. Lenders are tightening underwriting standards. Inflation, while allegedly stable, is likely to get worse given higher oil and food costs. Housing is no longer the “great” alternative investment to stocks. Pending sales of U.S. homes are dipping. Personal income fell 0.1% in April 2007 as savings rates fell 1.3%. And, considering that most of the economy is based on liquidity, which comes from borrowed money, we’re in real trouble.
Plus, home sales and prices are widely expected to fall at a quicker pace than previously forecast, according to the National Association of Realtors (NAR). According to the group (as reported by SmartMoney.com), new home sales could plummet 18.2% to 860,000, as compared with a forecast for a 17.8% drop. And get this: The NAR has forecast the first annual decline in the median price of national existing homes since it began keeping records in the 1960s.
The global rally was nice while it lasted…
Ian L. Cooper,
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