Housing Recovery Already Comes to an End?

Rising Mortgage RatesThe housing market simply isn’t improving at the rate many in the mainstream media are telling us.

Home prices are still significantly lower than what they were during 2005 and 2006. On its own, there is no housing market recovery. All we are witnessing is the mere reflection of easy money provided by our central bank.

As I often write, to see a real recovery in the housing market, we need to see first-time home buyers active in the market. Unfortunately, they are not involved.

In April, first-time home buyers accounted for only 29% of all existing home purchases in the U.S. housing market. This was three percent lower than the previous month and 17% lower than April 2012, when first-time home buyers accounted for 35% of all home purchases. (Source: National Association of Realtors, May 22, 2013.)

According to a survey by Fannie Mae, last month, 40% of Americans said it’s a good time for them to sell their home. In April, the survey showed only 30% thought the same thing, and in the same period a year ago, this number stood at 16%. (Source: Realtor Magazine, June 11, 2013.) Hence, we are going to see more listings hit the housing market.

The inventory of homes for sale in the U.S. housing market increased four percent in April from the previous month nationally, but what’s troubling is that in a few areas, such as Stockton and Sacramento, California, new listings have surged 75% from a month earlier.

The basic concept of economics: when demand declines and supply increases, prices go down.

And the most common mortgage in the housing market is seeing rates tick higher. The Bankrate.com U.S. home mortgage 30-year fixed national average has skyrocketed since the beginning of May to 4.14%. While this is still historically low, it’s the highest rate in at least a year. (Source: Bloomberg, June 11, 2013.) Mortgage rates rising mean more costs are put on home buyers.

The housing affordability index (a measure that shows how affordable a mortgage is to home buyers) has declined 13% since the beginning of the year. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 12, 2013.)

Taking all this into consideration—first-time home buyers absent from the housing market, the rising number of homes on the market, mortgage rates climbing higher, and housing affordability squeezing—the news for the housing market is not good.

All of a sudden, the housing market that was propped up by institutional investors’ buying seems to be running out of juice.

As a matter of fact, if the Federal Reserve ever takes the punch bowl away from the party (that being the artificially low interest rates and paper money printing) only then will we see how pathetic the housing market really is.

Michael’s Personal Notes:

My advice: if you want to know what’s happening in the global economy, do not look to the key stock indices. They are misguiding investors into believing all is well, while the global economy stands on the verge of an economic slowdown.

In these pages, I have written about major economic hubs in the global economy, namely China, Germany, and France, going through an economic slowdown. But now the smaller countries are flashing warning signs as well.

India grew at the slowest pace in a decade in its fiscal year (ended March 31, 2013). The Central Statistical Office reported that production in India at factories, in utilities, and at mines only increased by two percent in April from a year ago. In March, it increased 3.4%. (Source: Bloomberg, June 12, 2013.)

The troubles for the global economy don’t end there.

In April, Malaysia reported its trade surplus fell to the lowest level since 1997. The country’s exports to the global economy surprisingly declined 3.3% from a year ago. There are now fears that Malaysia can very well run its first trade deficit in 16 years. (Source: Reuters, June 12, 2013.)

Exports from the Philippines fell 12.8% in April from a year ago. Indonesia has been witnessing an export slump for 13 consecutive months and recorded a trade deficit in April.

In the other parts of the global economy, the situation is similar.

We have no further to look than exports of iron ore from Brazil to China. In terms of tonnage, in 2012, Brazil exported 170 metric tons of iron ore to China, three percent higher than the previous year. But in terms of value, iron ore exports to China from Brazil were $14.9 billion in 2012 compared to $19.8 billion in 2011. (Source: Shanghai Metals Market, May 30, 2013.)

The chart below of the Baltic Dry Index (BDI) is a good indicator of demand in the global economy.

BDI Baltic Dry index (EOD) INDX

 Chart courtesy of www.StockCharts.com

The BDI has been declining since the beginning of 2012, suggesting demand in the global economy is bleak.

As the optimism of stock advisors rises, I’m keeping a keen eye on the weakening global economy.

Where the Market Stands; Where It’s Headed:

This morning we woke up to the news that the Japanese stock market fell 6.3% overnight. Japan’s stock market boomed as the country’s debt-to-gross domestic product (GDP) ratio hit 200% and the Japanese central bank printed an enormous amount of new money to spur the economy. Sound familiar?

Now, Japan’s stock market is falling like a rock as people figure out the economy was never really improving. Money printing and artificially low interests rates masked the true economic picture—the same thing that will happen here.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in Profit Confidential, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.