Can a Recession Really Be Far Away?

Retail sales in the U.S. fell 2.3% in April, the biggest single monthly drop since 1970. While analysts continue to preach that “it’s not the because of the depressed housing market,” I continue to believe the opposite is true.

Wal-Mart may also be thinking that the poor housing marketing is hurting retail. The world’s biggest retailer saw its same store sales drop 3.5% in April, the largest decline in monthly sales since Wal- Mart started keeping track about 30 years ago.

Analysts and economists were quick to blame higher gasoline prices as the culprit for April’s downturn in consumer spending. As I continue to preach, we can blame the worsening housing market. Let’s face it, most big retail stores are now as common as convenience stores used to be, in terms of both numbers and location. Will a typical consumer spend less at Wal-Mart because the return ride to their home may cost an extra two dollars? I don’t think so.

Now, if we are talking about consumers having difficulty meeting their monthly payments and thus cutting down on spending because of it… that’s the real story. As the chief economist for the U.S. National Association of Home Builders said late last week, “The sudden tightening of mortgagee conditions has had a profound impact on the housing market and it is hard to know how far the credit pendulum will swing.”

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Ryland Homes, the largest U.S. homebuilder for first-time buyers, just reported a loss of $24 million in the first quarter of 2007 compared to a profit of $90 million in the same period of last year. Pulte Homes, Inc., another big American home builder, said it lost $86 million in its first quarter of 2007 — down from a profit of $262 million in the same quarter of 2006.

Home builders are bleeding simply because demand for housing has plummeted amid consumer fears the housing market will get worse. Why buy now if you can get a better deal later? That seems to be the common thinking nowadays.

The subprime lending market, which has been pushed aside by Wall Street as “no big deal.” is another problem. With over 50 subprime lenders closing their doors or in financial trouble, home buyers will have trouble qualifying for home purchases even if they want to buy. Now think about all the millions of Americans facing resetting Adjustable Mortgages (ARMs) that they will likely not be able to refinance, and we see the real reason American consumers are putting the spending brakes on. Can a recession really be far away?