My Bold Prediction on Housing Prices & What It Means for Stock Investors

This will be the year. The year U.S. housing prices decline and the U.S. economy starts rolling over.

After the average American home rose in value almost 9% in 2005, 2006 saw the average increase in home value come in at a paltry 1%. And, this year, I expect the average value of homes in the U.S. to decline.

While the National Association of Realtors has repeatedly thrown in our face a report showing the supply of homes for sale in the U.S. declined in the last two months of 2006 (which is supposed to bode well for the market)… The fact of the matter is that if a seller takes his or her home off the market in November or December because of a lack of offers, hoping to re-list it in the traditionally stronger spring market, the statistics don’t pick this up.

What should be of great interest to investors is a little-known gauge kept by the U.S. Census Bureau that tracks homes for sale that are empty. According to the Census Bureau, in the final quarter of 2006, there were 2.1 million vacant homes for sale in the U.S. — the highest level since the Census Bureau started keeping track nearly 40 years ago!

The “national home owner vacancy” rate, as they call it, is now 2.7% (3% in the South), a big jump from 2% in 2005. Combine this inventory problem with both the fact that new home builders are continuing to have difficulty and the simple lack of buyers in the market, and we have a good formula for lower housing prices this year.

With home ownership at its highest level in history in the U.S., with about one-third of the homes bought in 2005 with 10% down or less, and with nearly $2 trillion in U.S. home mortgages having their interest rate reset this year because they were adjustable rate, consumers are bound to feel a big pinch. And that’s not good for the economy or the stock market.

As an economic history buff, which I understand Fed Chairman Bernanke is as well, it’s important to make the following comparison to the Great Stock Market Crash of 1929:

Before the stock market crashed in 1929, the economy topped out a year earlier. Before the economy came down in 1928, the real estate market came down first. Do you see a startling similar situation today?

Heed my advice dear reader, and tread very carefully.