The unprecedented collapse of the U.S. housing market since 2005, is it opportunity or does more risk lie ahead? In our daily Profit Confidential e-letter, we regularly comment on the U.S. housing market, offering our readers investing in real estate advice. Is it time to buy real estate? Where are housing prices headed? In 2005 we begged our readers to exist the U.S. housing market. It was the best investing in real estate advice we ever offered. Today, we regularly follow housing prices in major American cities, foreclosure rates, interest rates and the home building stocks to continue offering our readers timely investing in real estate advice. If you are thinking about investing in real estate by buying a vacation home, investing in rental property or simply looking for the best time to make your move in this market, look to Profit Confidential for timely guidance.

There are two key variables that continue to hamper the country’s economic renewal—the housing market and jobs growth. Unfortunately, while both are showing some encouraging signs, I feel it will still be several years before we see sustained strength in both. Without jobs or the confidence of getting a job, you cannot expect people to buy houses.

The housing market is clearly better than it was when the subprime mortgage fiasco led to a downfall in theU.S.economy and sent the unemployment rate spiraling higher. Yet we continue to see home prices decline across the top 20 metropolitan cities in America.

In November, housing starts came in at seasonally adjusted annual rate of 685,000 units, according to the Commerce Department. The reading was the highest since April 2010, but still well below the monthly one million plus housing starts that make up what is considered a healthy housing market.

Building permits of 681,000 in November were also ahead of estimates; but again the number is far below what is widely deemed to be a healthy housing market.

What the readings offer is some hope of better readings to come, albeit as I said, we also need to see a concurrent strengthening in job creation to drive a strong housing market. With strong jobs growth, consumers become more confident in buying homes and big-ticket items. Unfortunately, this has yet to happen and I feel it will not be until at least 2012 and 2013 before the situation in the housing market improves.

A strong housing market is critical for the retail sector as homeowners will tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales—a situation in which homes are sold below mortgage value. An S&P report showed that homes sold under these distressed circumstances are going for 20% below the actual value of the mortgage. Great, if you are buying; not so great if you are selling.

The reality is that foreclosures are driving the buying in the housing market and this does not bode well for housing price appreciation. It may not be until 2013 until we see prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

The unemployment rate fell to 8.6% in November, but there are still close to 15 million Americans officially still looking for work. I think the number of jobless people is higher.

If I were a homebuyer, I would likely be shopping given the massive inventory of homes for sale at prices well south of a few years ago. There is value in many regions whether as a primary or secondary investment property. For instance…looking for a retirement property? There are thousands of cheap condos available for sale in Florida and Arizona.

The current market risk is high and I continue to question the sustainability of upward moves in stocks. As such, you may want to make sure your risk management is in place, which I discussed in You Profited Big on the Stock Market Rally…Now What?

The Dow Jones Transportation Average is now showing some real strength around the 4,500 level. This important index got hammered quite significantly. It dropped about 1,000 points since the beginning of July and you can see this in many of the railroad stocks that dropped like a stone when the broader market began to correct.

This index is only about 160 points away from achieving its 50-day simple moving average and this is another illustration of the resilience of the stock market. Several of the large railroad companies look like good values in this market and their yields are becoming quite attractive. Like the rest of the market, however, expectations for the future have been reduced. You’ll find that virtually all of the North American railroad companies have seen a reduction in Wall Street’s earnings estimates, this year and next. For quite some time, the railroad stocks were really leading the broader market. Now they are consolidating after the market’s correction.

It is difficult to be a buyer of stocks in this market, whether it’s for short-term speculation or long-term investment. The earnings picture is still looking decent for the bottom half of this year. But, without the expectation for growth in gross domestic product (GDP) in the first half of next year, it’s difficult to imagine much in the way of capital appreciation in share prices. This is why so many investors are sitting on the sidelines. There isn’t a lot of reason to be a buyer of equities, other than for yield if you’re a long-term investor.

I know lots of retirees who are not expecting much of anything from their equity holdings other than their quarterly dividends. Ever since the subprime mortgage meltdown and the stock market’s almost total collapse, a lot of individual investors have chosen not to participate in equities and this is why cash balances in brokerage accounts have been skyrocketing. Bonds and money market funds pay very little and the stock market’s been extremely volatile. It’s certainly no surprise that investors (and corporations) have been moving to cash. There’s not much out there other than investing in real estate and expected returns in this sector have also been dramatically reduced.

The common theme throughout the recent financial crisis and the current state of things is debt. Whether it’s mortgage debt, personal debt, or national debt and deficits. Economies, countries and individuals are experiencing their own consolidation of finances and, without question, this will adversely affect economic growth in all Western economies. We very well could be in a slow GDP environment for the rest of this decade.

Importantly, I believe that policymakers should take a hands-off approach in trying to manage the economy and thereby let the system correct itself over time. The hands-on approach would be helpful in getting a firm hold on sovereign finances. Naturally, less debt-induced government spending would adversely affect Main Street economic growth. But, short-term thinking has only proven to put us in the current pickle that we’re all experiencing. It’s time for some thoughtful, long-run austerity to get the entire system back to solid footing.

Global stock market investors want short-term monetary action from central banks, but, at the end of the day, this kind of thinking is a big part of the reason why we’re in the current bind.

Smaller companies are the backbone of the economy, but they are also the ones that struggle the most when the domestic economy isn’t growing. Accordingly, domestic small-cap stocks should have a more difficult time than larger companies that can “pad” their earnings from international operations and a weaker dollar. This is why I expect the Dow Jones Industrial Average (DJIA) to outperform all other major home indices going forward.

For the year, the DJIA is down about 2.5%, while the S&P 500 Index is down around six percent and the NASDAQ is down about 5.5%. With dividends, the DJIA is about breakeven, which is an accomplishment these days.

Some of the best stocks that have done well since the low set in March of 2009 have been breaking down lately. These include: Caterpillar Inc. (NYSE/CAT), IBM (NYSE/IBM), DuPont (NYSE/DD), The Procter & Gamble Company (NYSE/PG)…and the list goes on. For the last two years, the top stocks have been large-cap, dividend-paying securities with major international operations.

Caterpillar is an important benchmark company to follow. Its second-quarter earnings came in a little light and the stock sold off on the news. The implication is that the global economy is slowing down, not just the U.S. economy. IBM is faring a little better, as its services business continues to be a jewel of an enterprise. But now, even the strongest economy in Europe (i.e. Germany) is experiencing the same slowdown that’s occurring in most mature economies.

According to SEC filings, Warren Buffett’s company is buying shares in this market. But then again, that’s what you do when you’re sitting on $48.0 billion in cash. There really isn’t any other strategy to undertake with the exception of investing in real estate.

We’re in a market that’s stuck under the weight of declining expectations. Economic data continue to come in soft and the trading action reflects this. My read is that the stock market is going to trade in a range around its current level for quite a while. Higher-dividend-paying stocks will outperform, because institutional investors are starved for investment returns. With little prospects for growth in the domestic economy and declining expectations for growth in the global economy, corporate dividends are becoming the most attractive asset out there.

As I have been saying, housing continues to be a cesspool for capital. The latest reading from the S&P/Case-Shiller Home Price Index of 20 major metropolitan areas in the United States continues to show declines, which, in my economic analysis, is not good.

What makes the situation that much worse is the fact that housing is now officially in a double-dip recession, with prices in 12 of the 20 markets selling below their 2006 low prices, according to the Case-Shiller 20-city Index. This key index has declined in eight straight months and clearly continues to point to the fragile housing market driven by high foreclosures and short sales of properties. This is a real problem that will hamper growth.

The NAHB Housing Market Index, an indication of the sentiment of builders, came in at a dismal 16 in May, which is terrible, as a reading below 50 suggests negative sentiment amongst builders. The reading has not been above 50 since April 2006.

Housing Starts were weaker than expected in April, with an annualized rate of 523,000, which was below the estimate of 563,000, and the result of 585,000 in March. Building Permits were also soft at an annualized rate of 551,000, below the estimate of 590,000, and a revised 574,000 in March.

I remain bearish on the housing market in 2011 and into 2012. Yes, there are some encouraging signs, but the constant price declines and weakness among the homebuilders remain issues that need to be remedied.

The reality is that the continued weakness in housing impacts wealth and consumer spending, and could drive a double-dip in the most extreme circumstance.

The major hurdles remain the continued high foreclosures and short sales in housing, along with declining home prices. Obviously, there are still reasons to be concerned.

The housing market is improving and is better than where it stood a year ago, but I feel there will continue to be barriers as we move ahead.

Consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage and not to worry about jobs and missing payments.

There is major concern in the critical jobs area following a weak ADP Employment Change that showed a mere 38,000 jobs generated in May. This was well below the estimate of 170,000 and the revised 177,000 in April. The result was not just a bit off, but was well off the target and is a significant concern. The ADP reading is generally a precursor to the key non-farms payrolls on Friday, so this is not encouraging.

The key will be the non-farm payrolls on June 3, in which 185,000 new jobs are expected to be added in May, below the 244,000 generated in April. And to make matters worse, the unemployment rate is predicted to rise to 9.1% from 9.0%.

This is not exactly a vote of confidence for the suffering housing market.

It will take a bit of good fortune, but I think the S&P 500 Index can achieve 1,500 this year. We’ll likely get a correction or some sort of prolonged consolidation in the not-too-distant future and, barring any unforeseen shocks to the system, the stock market should reaccelerate due to continued growth in corporate earnings.

We are seeing the market somewhat topping out at this time. Investors are greeting good earnings from brand-name companies with a little apathy. Of course, stock prices did already go up in anticipation for solid first-quarter numbers, so this is no surprise. The numbers from Merck & Co. Inc. (NYSE/MRK) and Caterpillar Inc. (NYSE/CAT) were excellent.

There are some headwinds that stocks will have to face this year, and the big one is inflation, which is happening all over the world. A little price inflation is good. A lot of price inflation is bad. Most definitely, the devaluation of the U.S. dollar to prop up the economy is a double-edged sword. While this does have direct stimulus benefits, it also contributes to inflation, as most global commodities like oil and gold are priced in U.S. dollars, thereby aiding the inflation contagion. While there’s no prospect for interest-rate hikes at this time, they are inevitable.

The current economic situation seems destined to produce a period of low, but steady growth over the next several years. While this isn’t what the market is used to, low and steady actually makes it easier for monetary policy to change in a manner that’s more helpful. When we get strong periods of growth, the Federal Reserve wants to ramp up interest rates. What we don’t need now is anything drastic that could kill off the current economic recovery.

The housing market continues to be a drag on the economy and investing in real estate isn’t likely to pay off anytime soon. There remains too much inventory for housing prices to accelerate in a meaningful way. The real estate market is still trying to balance itself out after its bubble burst.

The month of May has a tendency to be kind of slow for equity prices. With most companies reporting their first-quarter numbers in April, it isn’t surprising that stock market trading action may be lackluster this month.

I want to repeat a market view that I’ve had for a while. I do see the stock market able to tick higher later this year. I think it’s reasonable to expect a correction, perhaps soon. I also don’t think this is a market where investors need to be doing much that’s new. There’s no big rush to be investing in gold for example, even though the spot price of gold keeps hitting new records. The stock market has already done extremely well over the last eight months. Everything is due for a break.