Housing Market Drives Fear
Thursday, January 31st, 2008
By George Leong, B.Comm. for Profit Confidential
There continues to be bad news for homeowners, and there are no signs of a pending turnaround. Data was just released that showed that the sale of new homes fell by a record in 2007, characterized by weak prices and a buildup in unsold homes. For both sellers and homebuilders, it remains a nightmare.
On Monday, the Commerce Department reported that the sales of new homes sank by a whopping 26.4% in 2007 to its worst year on record. The previous worst was a 23.1% decline in 1980, when the housing market was in crisis due to a slowdown.
The news impacted the financial stocks, especially those with a large exposure to mortgages and subprime mortgages. The concern is that the housing crisis could drive a recession. The Federal Reserve has already cut interest rates by 75 basis points at an emergency meeting, and it could cut rates further at Wednesday’s FOMC meeting.
The soft housing markets are impacting wealth and consumer spending in what is called the “poverty effect.” When housing prices decline, homeowners believe that they are poorer than they actually are, and they spend less, which impacts the economy. Lower prices translate into less material wealth, and this negatively impacts the way that homeowners spend, especially in regard to bigger-ticket items.
As we move forward, we expect to hear about more impacts that are driven by the fragile state of the subprime market and increased credit concerns in the banking system.
My feeling is that the ripple effect from the housing market may continue to spread into 2008 unless we see some stability in the credit and housing markets. For those who are looking to buy, prices have come down in some of the pricier regions across America.
Clearly, the credit and housing markets are not improving and could get worse. Foreclosures are at record highs across the nation, and homeowners are beginning to get scared, as evidenced by the declining consumer confidence sentiment.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
