Late last year and again in early 2011, I made my prediction that U.S. house prices will fall between 7.5% and 10% in 2011. I’m sticking with that prediction and see analysts that had first been predicting a flat year for housing prices starting to make house-price loss forecasts for 2011.
Real estate info compiler Zillow Inc. reports that the average price of a home in the U.S. fell three percent in the first quarter of 2011 from the fourth quarter of 2010. It expects home prices to fall nine percent total for 2011. Michelle Meyer, Bank of America’s senior U.S. economist, predicts that U.S. home prices could fall five percent or more this year.
Robert Shiller, co-creator of the S&P/Case-Shiller Composite 20-City Home Price Index, says that U.S. home prices will fall five percent to 10% this year. According to his index, home prices have fallen 33% so far from their July 2006 price peak.
Most disturbing, about one-third of all U.S. homes that have a mortgage on them are worth less than their outstanding mortgage.
I’ve been involved in real estate and stocks for 30 years. I’ve been analyzing the economy for just as long. And, in that time period, and in my studies, I have never seen an economic recovery without a corresponding recovery in the construction and real estate industries.
Given that we have finished a 29-year down cycle in interest rates, how can housing prices possibly recover in light of rising long-term interest rates? Hence, you can see why I’m so suspicious about the apparent economic recovery we are currently supposed to be experiencing.
Michael’s Personal Notes:
I look around at my fellow market analysts and it seems I’m the only one left who still believes we are in phase two of a bear market. One by one, most of my colleagues have turned bullish.
In phase one of a stock bear market, stocks move lower quickly. This can be defined as the period from October 2007 to March 2009 (a period of 18 months), when the stock market fell 55%.
Phase two of a bear market works to bring investors back into stocks. Phase two is what’s often referred to as the “psychological” period in a bear market, when investors start to feel that the economy is improving and the stock market is a safe place to be again.
It is my opinion that we are presently in the late stages of phase two of the bear market. Phase two of a bear market can last twice as long as phase one, as it takes that long to convince investors they should get back into stocks.
Phase three, the final phase of the bear market, brings stocks back to or below the level phase one of the bear market took them down to. In this case, 6,440 for the Dow Jones Industrials. Phase three of the bear market is quick in nature. Stock prices fall rapidly. And, once they reach their low, they tend to trade in that range for months, if not years.
Sobering thoughts, I know. But this is my belief…we are in phase two of bear market.
Where the Market Stands; Where it’s Headed:
It’s hard to believe that the Dow Jones Industrial Average has risen 1,119 point this year, but that’s exactly what’s happened. The Dow Jones Industrials are up 9.7% for 2011 so far.
But if we look closer at the numbers, a different scenario reveals itself. In 2009, the Dow Jones gained 18.8%. In 2010, the Dow Jones gained 11%. In both cases, in 2009 and 2010—and this is important to note—the Dow Jones had a weak first four months of the year and a strong second half of the year. This year, we have the opposite, which gives me cause for concern.
Since March of 2009, when the Dow Jones hit an intraday low of 6,440, the market has risen 97%. This bear market rally, which still prevails today, is reaching the final stages of its limited life span.
What He Said:
“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons. Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.