Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

The Great Housing Recovery Hoax

Friday, August 31st, 2012
By for Profit Confidential

The Great Housing Recovery HoaxIn a sign of economic growth, sales of new homes in the U.S. rose 3.6% this past July to the highest level in two years. New homes sales reached an annual rate of 372,000. (Source: U.S. Commerce Department.)

According to the Standard & Poor’s /Case-Shiller Index, home prices in 20 metropolitan U.S. cities increased by 0.5% in June, ending a 20-month price decline.

Reading these statistics, one is easily tempted to buy a house before prices rise further. Not so fast! The myth of economic growth and an improving housing market simply shatters if we go beyond the black and white of the economic news.

True economic growth happens when there are increases in economic productivity and demand and the standard of living increases. I have been harping about this for far too long, and will do it again. A tidbit of good economic news, such as a miniscule rise in new home sales or home prices, does not mean that there is economic growth.

Debunking the new home sales theory, economists in general believe 700,000 in new home sales in a year is considered normal during modest economic growth. We’re on pace for only 372,000 new home sales this year, 46% below the level that is considered normal.

Now let’s move on to new home prices. Home prices in the U.S. are still down about 31% since the peak in 2006. If I do some simple math here, for the homes prices to get back to the level they were six years ago, home prices will have to go up 45%. That’s just not possible with consumer confidence in a major slump, economic growth stagnant, and the unemployment rate so high, not to mention all the foreclosed homes overhanging the market.

The recent housing data simply look better because they’re being compared to results from last year, which was overly depressed.

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Reading other financial advisories, I see gurus telling their readers to get back into housing because it has bottomed out, economic growth is slowly happening, and interest rates are so low. I completely disagree!

Why do I believe housing is still a bad bet?

Firstly, the data show world economic growth is slowing, not rising. Eventually, the Fed will need to expand the money supply further. Long-term, the more money there is created in the system, the higher the chances of inflation and rising interest rates as history has shown us so many times. No one but me is talking about rising interest rates!

Interest rates will not rise this year or in 2013. But what about if interest rates start to rise in 2014? A simple one percentage point increase in interest rates will send the housing market flat on its back again. Remember, one in five houses with a mortgage on it is still worth less than the mortgage. Economic growth and rising house prices cannot happen in such a scenario.

Michael’s Personal Notes:

I spent the earlier part of this week in Sunny Isles, Florida. If you are not familiar with Sunny Isles, it is a small town on the Atlantic Ocean about half an hour’s drive north of Miami Beach.

Half of the homes and condos in Sunny Isles are vacation properties. A decent condo on the beach starts at $1.0 million. Sunny Isles exemplifies the boom and bust real estate years of the mid-to-late 2000s. After the bust hit in 2007, buildings that were under construction were frozen. The now bankrupt Lehman Brothers financed some new construction. Of course, those buildings were put on hold.

But construction is happening in Sunny Isles again. Halted construction is a thing of the past; new construction is the present. There are several new buildings going up, including Chateau Beach Residences, Mansions at Acqualina, Regalia, and Porsche Tower (where an elevator takes your car up to your condo unit). A decent condo in any of these buildings starts at $3.0 million.

Sunny Isles is marketed to the nouveau riche of Russia as the “French Riviera of America.” It’s a small community of about 20,000 and a favorite vacation spot of the well-to-do. The skyline is full of ultra-modern buildings. It can literally be looked at as a playground for the rich.

On Wednesday morning, while riding our bikes to the local Starbucks, my wife and I saw a person running away from the coffee shop amid yelling and screaming. A homeless person had struck an employee of Starbucks in the head. For what reason (food, money), we were not told. The police were called. A report was made. I saw the redness on the upper part of the Starbucks employee’s face from the hit.

When I went to the cashier to place and pay for our order, I casually said to the cashier, “Eventful morning at Starbucks. I’ve never seen that happen here before in Sunny Isles.” The cashier replied, “It never used to happen; now it’s almost a weekly event…these poor homeless people.”

Wherever I travel in the U.S. these days, I see this more and more: the rich getting richer, the poor getting poorer, the middle class eroding. Eighty-five percent of middle-class Americans say it is now more difficult than a decade ago to maintain their standard of living (see: “U.S. Middle Class on Verge of Collapse?”). A near-record 46.5 million people are on food stamps (see: “Not a Good Sign: Poverty in the U.S. Reaches a 50-year High”). About half of retired people in America will die with less than $10,000 in the bank (see: “What We’ve Come to: About Half of Retired People in the U.S. Die with Less Than $10,000 in Financial Assets”).

These are desperate times for much of America. And the politicians are doing very little for them. We are moving closer and closer to “EuroAmerica.” In major European cities, there is a huge gap between the rich and the poor, with the middle class extinct unless they are lucky enough to work for the government. I see the U.S. going down the same, sad path.

Where the Market Stands; Where it’s Headed:

Down for the month of August? Yes, it’s true. Despite all that talk about the stock market making a run for a new 52-week, if today isn’t a big day for the Dow Jones Industrial Average, we will leave August 2012 a point lower for the stock market than when the month started!

Time is passing. All eyes are on the Fed for more quantitative easing, because that is all there really is for the market to move on. Corporate revenue growth in the third quarter might be negative, earnings growth has stalled. Let’s be realistic. Sustained stock market advances happen when the companies that trade in the market are experiencing both revenue and earnings growth—things that now elude us. Beware the market rally. Its lifespan is very limited.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

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  • Darla

    I'm Canadian and we do not have the same banking laws and regulations that entitled your system to over lend. As an outsider, I can see the whole picture that you continue to deal with now. You have numerous banks, government that opened the doors to sub prime clients and road the gravy train to extinction. Yes, greed is part of the problem but the other side is the elitist government that grew this situation. When I saw loans being written for 110% of the value, I knew that you couldn't be far from trouble. You still have a chance as long as you look to a government that is not elitist ie. Romney, who pays less tax than his hired help. That will only worsen your situation as they and their ilk will continue to suck the life out of your country.

  • curtis

    ref "Darla" comment: Are you sure that either is/is not elitist? Have you tracked the contributions received by either candidate or by either party? If not, I submit that you investigate it.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles