December 23, 2005
Pop pop pop
From Bill Cara today....
Clearly, the tipping point was reached as mortgage rates rose in the 3Q05. Should rates increase further in 1Q06, buyers will disappear.
Today’s data shows that the inventory of new homes on the market has gone from a supply of 4.3 months a year ago to 4.9 months today. Further increases in mortgage costs will remove demand and increase supply.
There are experts today who believe that the market will take as much as five years to stabilize, during which time we should expect generally flat to falling prices, particularly in the over-priced California coastal market, and in NYC-New England, the mid-Atlantic states, and South Florida.
This is a good sign, I think, for bonds, but you know that it was the wealth effect of the housing market that has supported the growth in the U.S. economy and stock market in the past year. At the end of Jan-06, should there be further weakness in the reported December U.S. housing data, that would be a major negative for the U.S. economy and the coup de gras in terminating the 2002-2006 bull market.
Of course, with the amount of research done being today, this trend reversal would already be known, and starting to be priced into the stock market early in January. The first losers would be the California regional banks, the mortgage lenders, and the consumer sector, which needs a healthy economy to support the earnings growth priced into stocks at these levels.
Traders will be watching the flatness and possible inversion of the U.S. Treasury yield curve as an indicator of economic weakness and possibly recession. They will also be watching the level of real estate foreclosures as well.