Our Annual Forecast: How Much
Home Prices Will Fall This Year

For the past four years I’ve been singing the same tune…

The U.S. economy cannot recover unless the U.S. housing market recovers. As a past “real estate man,” (in my life), I’ve never seen an economic recovery unaccompanied by a real estate market recovery.

There was a lot of speculation going into 2011 that it would be a year for the U.S. housing market to find a bottom. Well, the U.S. housing market hit a “bottom” last year, but not one to build upon.

U.S. new home sales fell 2.2% in December, which closed out 2011 with 302,000 new homes during the year, down from 323,000 new home sales in 2010 (Source: U.S. Commerce Department). In terms of number of units sold, this makes 2011 the worst year on record for new home sales—since 1963. So much for a U.S. housing market recovery.

Even though mortgages are at historically low interest rates, the low rates are not translating into new home sales. Sure, fear of further price declines in the U.S. housing market is discouraging people from buying new homes and directing consumers to rent instead, which I’ve been talking about.

And although fear of further home price declines may play a role, I’m more inclined to believe that the stagnant jobs market and weak economy are resulting in the greatest fear: uncertainty. This is what is really driving more people to rent homes instead of buying homes.

There are those still forecasting a rebound in 2012 for the U.S. housing market, but as I’ve been talking about in PROFIT CONFIDENTIAL, government estimates for foreclosures are still high at 1.8 million homes to be foreclosed upon for each of 2012 and 2013 (source: Federal Reserve Bank of New York). That will place serious pressure on home prices and new home sales; builders are going to be very hesitant towards breaking new ground.

Another factor that will pressure the U.S. housing market is the typical consumer having to pay down those debts and save, after the consumer credit-induced spending spree that occurred late in 2011.

Over the last month, I’ve been talking about how consumer spending cannot be maintained at this pace, since it is based on credit—debt—and not an increase in wealth or an increase in wages (both of which have stowed away on a ship years ago and are lost somewhere in the middle of the ocean).

The Commerce Department just reported that personal income advanced at the fastest pace in nine months in December, probably due to year-end bonuses. Still, with the nice bump in wages, did the consumer take the extra money and spend? No. The savings rate increased to a five-month high, as consumers remained frugal.

If we look at the average family household with still-high debt levels, no wage growth, an uncertain economy, and high gas prices, how can the average American be expected to spend or go out with great confidence and say, I want to buy a home because the U.S. housing market is cheap?

Watch out for those homebuilder stocks that have been rising lately. And be suspicious of this past January’s stock market rally—it will not be a barometer of what’s ahead for 2012.

For the record: my prediction at the beginning of 2011 was for home prices in the U.S. to decline between five percent and 10% in 2011. Final actual figures have not yet been released yet. Once I get them, I will of course pass them on to my readers. For 2012, I’m predicting U.S. housing prices will fall again—about five percent this year.

Michael’s Personal Notes:

When the world’s largest toy company—Mattel, Inc. (NASDAQ/MAT)—raises prices in order to offset rising material costs (as detailed in their latest earnings report), one takes notice.

When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.

The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.

The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.

These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.

There are two trends happening here, my dear reader…

Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.

The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.

I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.

As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.

Where the Market Stands; Where it’s Headed:

Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.

We are in a bear market rally in stocks that started in March of 2009.

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.