Housing Market Woes Not Over Yet

The news continues to be bad in the housing market. A friend down the street from me just sold his home, but had to settle for below his asking price, which in our neighborhood has not generally happened in close to a decade. In fact, now we are seeing multiple homes selling for below asking. The positive is that the home prices have doubled over the past eight years.

The news continues to be bad in the housing market. A friend down the street from me just sold his home, but had to settle for below his asking price, which in our neighborhood has not generally happened in close to a decade. In fact, now we are seeing multiple homes selling for below asking. The positive is that the home prices have doubled over the past eight years.

The reality is that the housing market remains problematic. It will impact consumer spending, hence taking a toll on economic growth, as we saw with the miniscule 0.6% GDP growth in the first quarter. On Tuesday, there was more bad news after government-sponsored Fannie Mae (NYSE/FMN), a provider of mortgages, announced that it had lost a whopping $2.2 billion in its first quarter, driven by rising home-loan delinquencies coupled with declining home prices.

According to Fannie Mae, it expects the housing market to see “severe weakness” this year, characterized by a trend of higher mortgage defaults and foreclosures. Fannie Mae also said that it would cut its dividend to $0.25 per share beginning in the third quarter. In my view, dividend cuts are not good and point to potential cash flow issues, as the company’s current balance sheet is terrible.

For the investor, the continued credit and housing issues must be taken seriously. I expect the economy to continue to struggle and slow, perhaps entering a recession later in the year. The fact is that when people see their homes decline in value, there is a feeling of insecurity, causing a shift in attitude towards spending on non- essential goods and services. Add in the rising energy and gasoline prices, which also take a bit out of your budget, and you have a climate of trepidation in spending. The impact of this is obvious.
The reality is that the housing market remains problematic. It will impact consumer spending, hence taking a toll on economic growth, as we saw with the miniscule 0.6% GDP growth in the first quarter. On Tuesday, there was more bad news after government-sponsored Fannie Mae (NYSE/FMN), a provider of mortgages, announced that it had lost a whopping $2.2 billion in its first quarter, driven by rising home-loan delinquencies coupled with declining home prices.

According to Fannie Mae, it expects the housing market to see “severe weakness” this year, characterized by a trend of higher mortgage defaults and foreclosures. Fannie Mae also said that it would cut its dividend to $0.25 per share beginning in the third quarter. In my view, dividend cuts are not good and point to potential cash flow issues, as the company’s current balance sheet is terrible.

For the investor, the continued credit and housing issues must be taken seriously. I expect the economy to continue to struggle and slow, perhaps entering a recession later in the year. The fact is that when people see their homes decline in value, there is a feeling of insecurity, causing a shift in attitude towards spending on non- essential goods and services. Add in the rising energy and gasoline prices, which also take a bit out of your budget, and you have a climate of trepidation in spending. The impact of this is obvious.