House Prices, Bonds, and Investors
Wednesday, September 20th, 2006
By Michael Lombardi, MBA for Profit Confidential
Two very interesting bits of news to share with you, each alarming for the economy and American consumers:
Yesterday, the U.S. Commerce Department released this very important news about home construction. New home construction in the U.S. declined 6% in August to its lowest level since April, 2003. Housing starts are now down 20% from a year ago.
On Monday, a group of economists from Merrill Lynch & Co. said they expect house prices in the U.S. to actually decline 5% in 2007.
If U.S. home starts continue to decline, we will soon start to see layoffs in the construction sector, the ramifications of which are obvious to the U.S. economy. I see a few economists now coming out and raising their bets on a U.S. recession next year. Any way you look at it, the Fed will have to start lowering interest rates to fend off the hard landing in the housing market and to keep the economy out of recession’s way. Bonds, which I recommended months ago, are still the place to be.
If Merrill Lynch is right, and housing prices in the U.S. actually do decline an average of 5% next year, the impact on the U.S. economy could potentially be greater than anyone can fathom at this time. While this may not be you, imagine the poor home owner who put 10% down to buy last year. By next year, 50% of their equity would be wiped out. If they bought with an adjustable rate (“buy now, pay me later”) mortgage, they are in double trouble.
I continue to be very bearish on the U.S. housing market–I believe it has the potential to take down the U.S. economy next year. Always looking for a positive in a negative, I see bonds as the only avenue for investors looking for upside. I believe interest rates in the U.S. could actually plummet, which would obviously have a huge impact on the prices of good quality bonds. Bonds might not be too exciting, but they sure may prove to a safe place to be in the short-term.
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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
