Housing Market & Unemployment Rate: Back to Reality ~ market folly

Friday, September 26, 2008

Housing Market & Unemployment Rate: Back to Reality

Fresh off of the Wall Street bailouts and short-selling bans, I'm here to remind everyone that while things slowly are being resolved on Wall Street, there is still a whole nother set of problems on Main Street. The unemployment rate is 6.1%. Not to mention, the economy lost 100,000 jobs in June, 60,000 in July, and 84,000 in August. We're now at eight consecutive months of job losses. And, we also have a housing market that seems far from bottoming, as evidenced by existing home sales falling 10.7% in August, and August new home sales falling to the lowest levels since 1982.

Case in point: Professor Robert Shiller believes the decline in housing prices could be worse than that of the Great Depression. Courtesy of Barry Ritholtz at The Big Picture, we see that Shiller sums up the situation with 3 main points:

Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Then, also take into consideration the fact that the majority of any real 'demand' for housing currently could be artificial. Notable Calls mentions that the down payment assistance program is set to expire October 1st 2008. So, people may be in a hurry to buy a home to get that down payment assistance. But, after that expires, real estate veterans are saying that there is no other real demand outside of that program. So, the housing sales data coming up should be pretty positive. But, proceed with caution. We'll have to see if the demand was artificially swollen due to the assistance program expiring. If there really is no demand in the pipeline after October as those in the industry suggest, we could be in for a doozy. Just when people will have thought things are starting to improve, the demand could taper off yet again, as buyers continue to watch prices fall.

Sources: The Big Picture, Notable Calls, & Fixed Income Advisor

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