My Prediction on U.S. Housing Market and Prices

This year will mark the worst for the U.S. housing market, as foreclosures rise and prices fall. But don’t expect prices to climb back up anytime soon. Should I buy real estate now? Where are property prices headed? Michael answers these questions and more.This year will mark the worst for the U.S. housing market, as foreclosures rise and prices fall. But don’t expect prices to climb back up anytime soon.

Let’s start by looking at the stark facts:

About seven million mortgages in the U.S. are now in the “late payment” phase—a delinquency rate of eight percent. Some 30% of all mortgages in the foreclosure pipeline have not made a payment in more than 24 months (source: Foreclosure Backlog Rises as Federal Aid Fails 3/30/11, HousingPredictor).

The S&P/Case-Shiller index of property prices says that property prices in 20 major American cities dropped 3.1% in January. According to RealtyTrac, foreclosure filings will jump 20% this year, marking a peak in foreclosures for the housing market.

Looking at the Dow Jones U.S. Home Construction Index, we see a bleak future for housing. While the broad stock market is up almost seven percent this year, the housing stocks are fighting to stay above their opening 2011 levels. It’s a bold prediction, but I wouldn’t be surprised to see the Dow Jones U.S. Home Construction fall to a new two-year price low later this year; about 15% below where it stands today.

Should I buy real estate now? If I need to buy a house, the later I waited until in 2011, the better deal I would get. More foreclosures coming onto the market and rising interest rates are two factors that the housing market cannot escape and that will keep prices low.

Where are property prices headed? I’m continuing with my prediction that U.S. residential home prices will fall between 5.0% and 7.5% this year.

If I were an investor, and there are plenty of them jumping into the U.S. real estate market, unless I have an exit strategy, I wouldn’t expect property prices to rise for years to come. If I’m correct and we are at the onset of new long-term trend of rising interest rates, U.S. real estate prices will remain depressed for years to come.

Michael’s Personal Notes:

Car sales are booming again. General Motors (NYSE/GM) posted a 9.6% increase in first auto sales, while Ford Motor Co. (NYSE/F) posted a 16% increase in first-quarter 2011 auto sales.

Unfortunately, the stock market doesn’t share this enthusiasm, which throws up a red flag for me. Ford is enjoying brisk sales, having outsold GM in the first quarter (for the second time in 13 years), but Ford stock is down 20% from its January 2011 peak. GM stock is down 18% from its January 2011 price high.

The stock market isn’t buying the run-up in auto sales, which is an area of concern. As a leading indicator, the stock market is looking out six to 12 months and saying it doesn’t like what it sees for the auto sector, an industry very dependent on consumer spending. This bodes well for my theory that all we have been witnessing since March of 2009 is a bear market rally and economic peril still lies ahead. Best stock advice I can give: avoid the auto stocks.

The auto sector is very sensitive to interest rates. Simplistic as it sounds, as interest rates start to rise this year, consumers will find their monthly payments for new vehicles rising, which could hamper demand.

Where the Market Stands: Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 6.9% for 2011. The bear market rally in stocks that started in March of 2009 remains intact. However, the easy profits in this rally have been made. While I expect stocks to continue trending higher, the upside for investors is limited at this point in this rally’s life cycle. The market has already discounted much of the better-than-expected first-quarter corporate earnings results.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.