For Once, I Agree with Him

by Michael Lombardi, CFP

Long-time readers know I have never been a fan of Alan Greenspan. In fact, I blame Greenspan for most of the financial problems we face today. I’ve always believed Greenspan should have never dropped interest rates so low in the summer of 2004 and that such action caused the housing bubble.

Since Greenspan retired, and his job was taken over by Ben Bernanke, Greenspan has made a couple of public predictions that have proven to be wrong. (I still remember when he said the housing bust would not affect the remainder of the economy and that the bust would be confined.)

Yesterday, at a conference of the National Association of Realtors in Washington, Greenspan, in respect to the housing market, said “…we are finally beginning to see the seeds of a bottoming.” For once, I agree with what Greenspan is saying about the U.S. housing market, but I need to stress we are only seeing the “seeds” of a recovery.

According to the National Association of Realtors, home prices in the U.S. fell the most on record during the first three months of 2009 compared to the same period in 2008. A 14% median price drop to $169,000 in the first quarter of 2009 is the biggest drop ever when comparing one quarter to the same quarter a year earlier.

It was also encouraging to see the inventory of previously owned homes on the market fall to 3.7 million in March from 3.8 million in February. Please, let’s not kid ourselves: 3.7 million homes on the market is no small number. It will take months, even years, to clear that inventory out. But the free fall in home prices in the U.S. has subsided.

Would I go out and buy a home right now? Depends. If you need a home and can’t wait, you will be buying at the bottom of the market if you buy today. But, because of the glut of homes on the market and the tight credit conditions, don’t expect to see home prices rising for years. Personally, I like to buy when prices are rising, not when they are flat, so I can see my values increase faster, as opposed to slower.

As for the new homebuilder stocks, I still don’t see them as a buy. This is because my interpretation of the current market action is one of a rally in the confines of a major bear market. The new homebuilder stocks, being so fragile, will be the ones to drop first when the bear takes hold of the market’s next leg.

Michael’s Personal Notes:

I have the feeling that most individual investors have missed the big run up in stock prices since the market bottom on March 9, 2009. Most stock indices are up at least 30% since the March lows and I believe most “retail” (the brokerage community name for individual) investors have missed the market advance. This gives more credence to my theory that stock prices will move even higher before the bear steps back in. We need to still get the retail investor back into this market and, as history has proven; the retail investor always comes into the stock market with the worst possible timing.

Where the Market Stands:

Getting closer and closer… The Dow Jones Industrial Average is only 397 points away from breaking even for 2009. At present, the index is down only 3.5% for the year and I expect that loss to soon be erased. All other major market indices are already up for 2009. Looking at a chart of the Dow Jones, we see an almost perfect 90-degree angle upward from March 9, 2009. This rally, in the confines of an overall bear market, will continue.

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.