If you think the housing market is at a bottom, think again. Not only is the subprime mortgage market at risk, as I have discussed in recent commentaries, but for homeowners, especially those that purchased at near the housing market peak, we are seeing a decline in wealth across America as housing prices continue to fall. Lower prices translate into less material wealth and this negatively impacts the way homeowners spend, especially in regards to bigger ticket items.
On Tuesday, we saw more evidence of the declining housing prices, as July prices represented the largest decline in 16 years, based on the S&P/Case-Shiller home price index. An index of 10 U.S. cities showed a 4.5% year-over-year price decline in July. The data pointed to the fact that home prices have declined in each month since January.
It is clear that the problems in the housing market could translate into further pressure on the mortgage and credit markets. Even last week’s surprise move by the Federal Reserve in cutting the benchmark Fed Funds rate by 50 basis points to 4.75% may not be enough to turn the tide, at least immediately. The Fed hopes the large cut in rates could halt the decline in the housing market. We saw last week the continued softness of the August housing market numbers, which have not been at above two billion since February 2006. The picture for building permits was even worse.
As we move forward, we need to see confidence return to the consumer and potential house buyer; otherwise, the downward trend could continue driven by the fragile state of the subprime market and increased credit concerns in the banking system.
My view continues to be for you to stay clear of housing and housing related stocks, and wait for solid evidence of a potential reversal before jumping in.