It Could Soon Be Time for a New Investment Property

The housing market continues to be in the doldrums and I continue to see this as a major risk for the economy and stocks. The reality is that the steady reduction in home wealth could cause a “poverty effect” to occur that makes homeowners feel they are less secure. This in effect would negatively impact consumer spending going forward. There is still no evidence of a near-term reversal in the housing market. The housing market is already in its own recession.

The percentage of equity held in homes by Americans declined to below 50% for the first time since 1945, when records were first kept, according to the Federal Reserve. This is a concern, as debt in homes on average is now greater than equity. The percentage of debt to equity could rise further as housing prices decline, as has been the case.

The Standard & Poor’s/Case-Shiller U.S. National Home Price Index, a key measure of housing prices, fell 15.4% year-over-year in the second quarter. The index of 20 major U.S. cities plummeted 15.9% year-over-year in June, representing the biggest decline since the data was first gathered in 2000. The index of 10 cities fell 17%, which was the largest drop in 21 years.

What this all means to you is quite simple: you need to be concerned about the negative implications of a weakening housing market that shows little evidence of turning around in the near term. Yes, there are some signs of stabilization in the existing home sales, but we are not at a bottom. And until the housing market reverses, it will continue to be difficult for homeowners and the economy alike. If you are looking for property, whether for recreation or investment, it may soon become an opportune time to begin looking at distressed regions of the country. Of course, there could be further downside weakness.