Tuesday, June 06, 2006

Stocks and housing

I've said before that housing IS the US economy. Last year US home-owners pulled $750 billion out of their homes through refinancing. What they spend that money on I don't know, but I suspect that one way or another it was spent, not saved.

The chart below shows the Phila. housing index in what I would have to call a free-fall or a crash. I know a lot of analysts are calling for a "soft landing" in housing. I'm not at all sure it will work out that happily. So far, the Phila. Housing Index is in the process of what I call a "hard landing," and, of course, it's not at all clear whether the housing index has hit bottom at all. The true or final bottom may lie many months away.

Looking ahead, if housing really starts collapsing, I would expect the Fed to reverse itself and go all out in reliquifying the economy while at the same time bringing short rates down in a hurry. Housing has been declining even while it was thought that the Fed was finished with boosting rates. Now with the chances of another rate boost this month, I expect housing could take it on the chin. Inventories are high, buyers are loaded with variable-rate mortgages, and interest rates may be heading higher. If you own a home with a big mortgage, cross your fingers. If you are planning to buy a house, my advice is -- wait. Maybe I should make that suggestion a little bigger -- WAIT.

Note -- Both Fannie Mae and Freddie Mac gapped to new lows today, thus joining the ranks of the fading building stocks -- just not a good picture

Please remember this -- there are times when the stock market in its actions impacts on the economy. I'm not talking about the stock market as it discounts what lies ahead, I'm talking about stock market action that immediately affects the economy. This happens only rarely, but it occurs when the stock market either surges wildly higher or when the stock market becomes disorderly on the downside.

If the current decline becomes disorderly (a panic) on the downside, it's going to frighten America's consumers, in which case, they could cut back sharply and rapidly on their spending. It would not surprise me if this is where we're headed now. Therefore, the action of the stock market will be crucially important during the weeks ahead.


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