A Yellow Card For Housing?
The Dynamic Wealth Report
July 6, 2010
by Justin Bennett, Editor
The FIFA World Cup soccer match is coming to a (hopefully) exciting
finale this weekend. Teams and fans have come from afar to decide the
best in the world. The once every four year event has soccer fans in a
worldwide frenzy.
Personally, I’ve always thought soccer players were great actors. It’s
hilarious to see them writhe in agony when an opponent “trips” them up.
Of course, it’s usually a show to get the referee to give a yellow card
to the opponent. A yellow card is a warning. Two yellow cards and the
player is sent to the bench.
The U.S. housing market is getting a yellow card right now…
And the yellow card is coming from the lumber market. If investors are
wondering what the future of the U.S. housing market may look like, look
no further than lumber.
Lumber prices have fallen off a cliff in recent months…
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In fact, it’s down nearly 40% since mid-April. Prices are approaching the
lows set during the financial crisis in late 2008. This sudden drop in
prices could be pointing to big trouble for the housing market.
As you know, lumber is used in great quantities to build new homes. And
the number of new homes built is a good indicator of the overall health
of the economy.
Many analysts are calling for a “double dip” in the U.S. housing market…
In my opinion, the housing market never really recovered in the first
place. So calling it a “double dip” isn’t really accurate. It’s more
accurate to say the bottom in home prices hasn’t been hit yet.
As the government stimulus for the housing market expires, new
homebuyers are dwindling. New mortgage applications are coming in at
multi-decade lows. And new home sales recently posted the lowest numbers
on record.
Keep in mind, this is happening while mortgage rates are at record lows.
To be fair, many were expecting home sales to drop off after the
expiration of the stimulus. Homebuyers were rushing to meet the deadline
for the $8,000 tax credit. It’s only natural to see a drop off in demand
when the stimulus expires.
But this brings up an important point…
Can the housing market stay afloat without government support? By
intervening in the market, the government attempted to “prop up” home
prices. Their hope was the housing stimulus would create enough demand
to stop the bleeding.
And once the stimulus ended, the markets would take over and carry home
prices higher… or at least keep them stabilized.
But in my opinion, government has just delayed a natural correction…
All government has done is give people incentives to buy homes at
current prices.
Once the incentive is taken away, home prices may continue to fall to
where prices are truly affordable. Down to where “organic demand” comes
into the market. And by “organic demand” I mean demand where people
don’t need any incentives to purchase.
They buy because home prices are affordable. And they don’t need a
“whiz-bang subprime option-arm razzle dazzle” mortgage to get it.
Organic demand may not show up in home prices anytime soon…
How low will home prices go? Who knows, the market will decide. Different regions have different markets and different dynamics. Some
may drop farther than others… some may not drop at all.
But I do know that a lot of bankers, builders, and real estate agents
may be getting nervous right about now…
The IPO market had a big arrival last week with Tesla Motors (TSLA)
hitting the streets. The electric car company priced at $17, which was
above the expected range of $14 to $16. Initially the shares roared
higher, but later in the week, TSLA fell as investors exited before the
3-day weekend.
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