Ouch. This Housing Market Is Starting to Hurt

Sales of existing U.S. homes dropped in December for the third consecutive month in a row. Sales of homes fell 5.7 percent in December from November, bringing the seasonally adjusted rate of sales to the lowest level since March, 2004.

The effects of higher interest rates on would-be buyers are obviously taking their predicted toll. However, to those watching the housing market, the market is cooling off faster than expected. The National Association of Realtors may have to lower their 2006 housing sales and price forecasts.

While the average rate on a U.S. 30-year fixed mortgage was 6.27 percent in December, The Mortgage Bankers Association now predicts that rate to hit 6.4% in mid-2006 and to stay there until the end of 2007. (Please see Monday’s issue of Profit Confidential.) If the U.S. dollar comes under too much pressure, U.S. domestic interest rates could go much higher and, the proverbial nail on the coffin will then hit the housing market.)

In my opinion, it’s more than just interest rates that are putting home buyers on the sidelines. Prices have gone up too far too fast, thus pricing out many would-be buyers. And, it’s the states that saw their house prices rise the fastest that are seeing them drop faster. In California, sales in December were down about 11%.

A word of caution to those analysts following the housing market: It’s not all about interest rates. Confidence plays a huge part in the demand for any investment. And, once that confidence is gone, prices can fall faster than most expect. Just look at the tech bubble in 2000 as an example. Once investor confidence was lost in tech stocks, demand for tech stocks fell dramatically, affecting prices more than analysts would have ever expected. We would have been hard-pressed to find one analyst in 2000 that would have predicted the NASDAQ 100 would have fallen from 5,000 to 2,500 today. But, that’s exactly what’s happened throughout history to investments that get overheated-once confidence deteriorates, so do prices. Buyer beware.