Just When We Thought Housing
Couldn’t Get Worse

The number of nails needed for the housing market’s coffin box has yet to be finalized. Consider just some of these startling numbers and trends:

The median price of a resale home in the U.S. fell 5.2% in February 2011 to $156,100 (the lowest level since April 2002) from $164,600 in February 2010, according to the National Association of Realtors. Some other interesting facts reported from the association:

• Purchases of homes fell 9.6% in February to an annualized rate of 4.88 million.

• Cash purchases accounted for 33% of all transaction in February, as homebuyers continue   to experience difficulties in obtaining mortgages.

• The number of resale homes on the market rose to 3.49 million homes. Based on the current sales rate, it would take 8.6 months to sell these homes.

Other startling numbers, this time from RealtyTrac Inc.:

• Homes in the foreclosure process sold at an average discount of 28% from the foreclosure price in 2010, with properties in distress accounting for about 26% of all home sales.

• Foreclosure filing will rise 20% this year.

The new home market is in worse condition than the resale market:

• In 2010, new home buyers purchased the fewest number of homes in 47 years, according to the U.S. Commerce Department.

Where are property prices headed? I believe home prices will drop between 5.0% and 7.5% this year. It’s no longer a case where property prices had gotten too ahead of themselves and needed to come down. The problem now is that the high unemployment rate is making it difficult for homeowners to keep up with their mortgage payments. One in five homes in this country is worth less than the mortgage on it.

Should I buy real estate now? The year 2011 may be the best year ever to buy a second home or a rental home, because prices have fallen so low, but here is my caveat: don’t expect housing prices to rise for years to come. Just when we thought housing couldn’t get worse, the housing market now has the added stress of rising interest rates to deal with.

For months, I have been writing about why I expect interest rates to rise (as support for the declining greenback and an incentive for foreigners to buy U.S. Treasuries, and to offset rising inflation). Unfortunately, the coming high interest rates are the last thing the housing market needs—the final nail in housing market coffin.

Michael’s Personal Notes:

Effective tomorrow, the world’s second biggest economy will require its banks to set aside even more cash before it makes new loans. It is the third time this year that China has asked its banks to increase their reserve requirements. Starting Friday, reserve requirements for China’s biggest banks will rise to 20%.

Consumer prices rose rapidly in China in February, up 4.9% on annualized rate, well above the government’s target rate of 4.0%.

Raising the reserve requirement of Chinese banks is usually a preceding move to higher interest rates. The one-year lending rate in China (its benchmark) sits at 6.06%, having risen three times in six months. I expect the next interest-rate increase to be announced in April.

Must be nice; a country where you can increase bank cash reserve requirement and interest rates aggressively and the country still continues to boom. Unlike North American governments, China’s leaders are proactive, not reactive. The balance of economic power is shifting. While economic and social risks remain very high in China given its accelerated rate of inflation, I’m continuing with my prediction: By the end of this decade, by 2020, the Chinese economy will be equal to and maybe larger than the U.S. economy.

Where the Market Stands; Where it’s Headed:

In the immediate term, stocks are headed higher. The bear market rally in stocks that started in March of 2009 has yet to complete its work. While the short- and long-term outlook for stocks is negative, I continue to expect higher prices in the immediate future.

The Dow Jones Industrial Average opens this morning up 4.4% for 2011.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.