Tuesday, July 25, 2006


Think rising rates won't affect you? Think again

For those of you who still doubt the housing bubble was a bubble and that prices are not in for a big adjustment downwards, Terry Savage of the Chicago Sun-Times is piling on.

Savage lists the reasons for a bear given by market historian James Stack after which she gives her opinion about what will really hurt the average American:

Those facts and more have Jim Stack deeply worried about a bear market. But here's my prediction: While a potential bear market will get all the headlines when and if it comes, far more damage will be done to the personal finances of American families by the impact of rising rates on their ability to stay in their family home.

The obituary of the debt-ridden American home-owner has been written and re-written over the past five years. But the "resilient" consumer economy has managed to survive all the dire predictions.

Maybe these articles compiled by Stack in his newsletter will open some eyes.

From the Associated Press: "The number of homes still on the market at the end of May climbed to an all time high -- 3.6 million units . . . At the May sales pace it would take 6.5 months to exhaust that inventory, the highest level since May 1997."

From Alan Abelson in Barrons: "The U.S. banking system is more exposed to the real-estate sector than at any time since the end of World War II [with] $3 trillion in direct mortgage loans sitting on their books -- a record 43 percent of bank assets."

And Stack collects reports from papers around the country: In metropolitan Phoenix, sales of existing homes were down 34 percent in May vs. a year ago. In Las Vegas, a record 20,515 unsold homes and condos are on the market, up from 10,555 a year ago, and 4,553 in 2004. During the same period San Diego homes took their "largest ever" plunge, down $15,000 since April. [Emphasis added.]

She ends with the warning that you have a finite amount of time to act on this information because by the time you read about falling prices in the paper it will too late to act.

This moment reminds me of the few days before the NASDAQ market top in March 2000 when Mark Mobius and Abby Joseph Cohen warned about speculation in Tech stocks. Mobius was a skeptic and Cohen had been a lead cheerleader for the market but both were respected market participants/analysts and that got peoples attention. I think that people are paying attention to the bad news and it is starting to sink in. Let the panic begin!

Diego adds: Has there ever been a time when BillC didn't predict gloom and doom in the markets?!

Back in January I attended a luncheon held by the Executive's Club of Chicago (don't ask what I was doing there!) hosted by Terry Savage. One of the speakers, Sam Zell, whose real estate opinion was eagerly anticipated by the audience shed some light on the market situation. His opinion was that housing prices would not fall but rather remain steady for quite some time. An interesting point he made about the recent rise in home values over the past ten years was that there has been an increase in the number of buyers on the market due to the fact that young people are getting married later in life. There are more single people in the late 20's and early 30's buying homes as individuals rather than as couples.

Terry Savage did not give a housing opinion at the time that I can recall. Zell did however answer some of the ant-Bush comments from the other speakers as politics crept into the opinions. When addressing the U.S. image abroad he countered the negativity displayed by relating the most often asked question he hears when foriegner's speak of America: "Where the FUCK is my visa?" People want to come here he said. It's better here than anywhere else.

Bill C adds:

Has there ever been a time when BillC didn't predict gloom and doom in the markets?!


To answer your question, yes but I have always believed that our stock market has been historically overvalued and, therefore, a bad place to invest your money. To further clarify, investing means, to me, leaving your money in the market for a decade or more. The stock markets volitility only smooths out if you leave your money over a period of time. There are times when it is better to sit in gov't securities. In my defense I started studying markets in 1990 and became bearish when the ratio of stock market capitalization/GDP exceeded the 1929 levels. Since then, as you may know, we have experienced the biggest asset price bubble in recorded history. Now it is understandable that the current state of affairs might seem normal to you. You have lived all of your adult life at a time when it is normal for assets like stocks and housing to increase multiples in short periods of time.

I look at it this way. If I started studying the market in 1920 and had warned of a bubble and against investing in the stock market I would look pretty stupid in 1929. In a few years when the bear market has run its course I will be bullish. In 10-15 years when it is possible to buy a house for 1/3rd of current prices I will invest in real estate. By then, I will know that I am investing for the long term.


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