How Quickly a Housing Boom Becomes a Housing Bust

Here’s some sobering data on the U.S. housing market:

— There were 556,000 unsold new homes in the U.S. at May 31, 2006, a five and a half month’s supply and close to a record high.

— The median price of a new U.S. home rose 3.1% in May 2006 from May 2005–this is the smallest year-over-year increase in price since 2003. If you bought a new home in May 2005 and needed to sell it today, you’d actually lose money when you take into consideration real estate commissions.

— Sales of existing U.S. homes fell in May to the lowest pace in four months. Meanwhile, the inventory of existing homes for sale in the U.S. is now at the highest level since May 1997.

Earlier this year I was bold enough to predict that by mid-summer we might see the bellwether U.S. 30-year fixed mortgage at 7%. Today, that mortgage is 6.71%… slowly closing in on my prediction.

The chain reaction I anticipated from the housing market is happening before our very eyes. Activity in the housing and construction sector is slowing because consumer debt obligations are rising too quickly.

In turn, the U.S. economy is starting to slow because of weak consumer demand for big ticket items such as houses. The stock market knows what’s going on… and that’s why we are experiencing pathetic performances by the popular averages like the S&P 500 and the Dow Jones Industrial Average–indices that haven’t really gone anywhere in six years.

The U.S housing market is quickly turning from a seller’s market to a buyer’s market. The boom is becoming a bust quicker than most real estate market participants would have liked.

At this point, I just can’t see a soft landing in the housing market. I wouldn’t be surprised to see the U.S. economy starting to feel the pinch by the end of this year. That’s when we’ll start seeing a spat of foreclosure activity. Investors beware.