Why We’re Far From “Out of the Woods” with Housing

by Michael Lombardi, CFP

If this isn’t big news, I don’t know what is:

The widely followed S&P/Case-Shiller home price index rose 0.5% in May from April, the first monthly gain in three years.

The findings of S&P/Case-Shiller are augmented by a report from the National Association of Realtors that said, last week, home sales rose 3.6% in June from May. We now have three consecutive months of rising home sales — something we haven’t seen since 2004.

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So is the bottom of the housing market in?

Of course not. Housing sales activity and prices have fallen so much since 2005 that we are bound to see some life. Yes, housing prices may have reached a bottom, but the possibility of a second shoe dropping for this sector of the economy is still a strong possibility.

Here’s why we are not out of the woods with housing yet:

Interest rates are at a record low. They only have one way to go, and that is up. What happens to housing prices when interest rates go up? Housing prices go down, because buyers can afford less with their monthly payments.

According to the NAR, the median price of a home that sold in the U.S. in June 2009 was priced 15% below the price in June 2008. There is a backlog of foreclosures that still need to come onto the market and this will keep prices depressed.

Getting a loan for a new home is not as easy as it once was. Banks want quality credit-rated customers and the banks are asking for larger down payments. This is reducing the pool of buyers.

Finally, there are 3.8 million unsold homes in the U.S., an inventory that will take almost nine months for the market to absorb.

So the short answer is no, we are far from out of the woods in the housing market. All those homebuilders seeing their stock prices rise lately — enjoy it while it lasts.

Michael’s Personal Notes:

If you have been reading the recent news about Fed Chairman Ben Bernanke, you know he has been on somewhat of a road show lately defending the actions of the Federal Reserve during the financial crisis. I find this somewhat of a slap in the face. If I were grading him, Bernanke’s response to the financial crisis would be graded nothing short of excellent. He moved quickly and swiftly to stop the financial crisis from worsening…his actions were invaluable in stopping a second Great Depression. Now he has to waste his time explaining his actions to law-makers who know very little about monetary policy and most of whom never graduated with economic degrees.

Where the Market Stands:

The Dow Jones Industrial Average sits 3.6% above where it started the year, and, more impressively, 42% higher than its March 9, 2009. Most analysts are coming out now and saying that this is a new bull market. I beg to differ. We continue to trade in a rally (which could bring the Dow Jones close to the 10,000 level), but the overall picture is that of a secular bear market. While the earnings reports of companies have been better than expected this quarter, corporate earnings would have to increase by more than 200% to bring the price/earnings multiple of the Dow Jones to a respectable level…and I just don’t see that happening.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public has taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September 21, 2005. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.