"In the sphere of thought, absurdity and perversity remain the masters of the world, and their dominion is suspended only for brief periods." - Arthur Schopenhauer 1788-1860, German Philosopher
This article was extracted from the Sept 08 market update reserved for our subscribers; new comments and charts have been added to reflect the new data that has come in since then.
The wall street journal and several other news outlets all made it look like the housing sector was still on fire when the July numbers were released. They all focused on the same aspect; house sales rose 6.5% and broke yet another record during the month of July. But they left out some rather important info; the median price fell down by 7.2% in the month of July. In June the commerce Dept stated that the median house price dropped by 6.5% for the month of May and we are sure that June must have experienced a decline of a similar magnitude Full Story. Even if we leave the June numbers out we get a whopping 15.5% drop in just two months. The August figures came in recently and the median price dropped once again. In China Shanghai led the housing boom but right now it has seen the largest decline in price Full Story. The media is masking this bad news by twisting the numbers and now comparing prices to what they were a year ago rather then on a month-to-month basis. This week a big deal was made about housing starts jumping up with construction permits surging to their highest levels since 1973 Full Story.
Australia led the way with the real estate boom, then the housing market started to cool about 8 months ago and we stated it was a matter of time before the same thing happened in the US. The housing sector dropped from the number 1 position 6 weeks ago to the number 27 position this week; a rather huge and potentially dangerous move. The housing Index has lost about 17% of its value since the beginning of August; a rather huge drop in a relatively short period of time. Make sure you pay down your mortgages and lock in a fixed 30-year rate. If you are adventurous the best thing to do now is to sell and rent. In fact renting is the best investment in the real estate sector now.
In Britain they are trying to hide the year long slow fall in housing prices by stating that in the month of September housing prices declined at the slowest pace since Sept 2004 Full Story. If prices are falling there is nothing positive about it no matter how it's spun; someone is losing money and that's all there is to it. A revision in the US Tax code could hit housing prices. President George W. Bush's Advisory Panel on Tax Reform will issue its final report by Nov. 1, and it's possible that tax deductions for housing may be pared. If passed by Congress, such a proposal would raise the after-tax cost of a home and reduce prices in the hottest markets. Full Story. Rates on 30 year mortgages rose to their highest level in 15 years while rates on adjustable mortgages hit a 4 ½ year high Full Story.
Wisconsin has now joined the band wagon of allowing Illegal aliens the right to buy a house without a social security number; to date 150 have been sold. Looks like they will go to extreme lengths in their bid to try to keep this sector alive; they might be able to buy some time but without a doubt they will fail in the end.
There is a channel formation that threatens to fall apart; notice that the bottom of the channel formation is also sitting right on the top of the main up trend line. So a break here will probably result in a fast move to down to the 450 ranges. In dollar terms the median price of a house has fallen some 30,000 dollars in the last few months. We stated that when the housing market started to correct the price would drop in increments of thousands of dollars as this market is rather illiquid and it takes over a month to usually complete the transaction; this leaves room for rapid price erosion should the masses panic.
The first chart is about a month old and you can see that the channel formation has broken down and the up trend line has been broken in the short to intermediate time frames in the 2 nd chart (1-2 years). Bottom line stay out of the housing sector unless you plan on buying a house in an area that has not experienced a huge gain in prices. Renting still remains the best option when it comes to the real estate sector; one day in the future you will not be able to believe the bargains you will find in this sector; many properties will sell for fraction of what they are commanding today. Everything that goes up must and will come down and the longer it s held up the harder it falls. Be patient, be wise and most important of all be tactical.
There is always a way to spin a story and make it look like things are not so bad especially when so much is at stake but the following facts cannot be changed
- Housing prices have been dropping for 3 months in a row.
- In many cities the more expensive houses are taking longer to sell.
- Inventories are slowly building up, nothing dramatic yet but that's how bubbles usually pop.
- Mortgage rates are rising across the board. The 30-year mortgage has just hit a 15-year high.
- More and more individuals are slowly starting to look into the option of renting VS buying. In time this will gather even more steam
- Real Estate is also taking a breather in several hot international markets; China, Australia and Britain are the main ones that come to mind.
- A revision in the US Tax code could also have potentially detrimental effects on the housing sector.
So one can sit down and pretend everything is fine or pay attention to what's really going and then take appropriate measures to protect oneself. In the end patience and perseverance are always handsomely rewarded; buying a house now is not the smartest thing to do. Paying down one's debt and trying to put as much money away for a rainy day are the things that should be on top of the prudent investors mind.
"Greed is a bottomless pit, which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction." - Erich Fromm 1900-1980, American Psychologist
Read our previous article on the same subject: Housing: Consolidation or Potential Crash?
All charts were provided courtesy of www.stockcharts.com