Earlier today, the U.S. Department of Commerce reported that sales of new homes declined 21 percent during August (as compared to the same period a year ago), while the median sales price of new homes fell by the most (-7.5 percent) in more than 36 years.
Well, guess what? Several "experts" responded by saying that the housing slump will likely worsen in the months ahead. Gee, what a revelation! The "experts" are finally starting to agree with what I and my colleague John Browne have been telling our readers for quite some time now.
Financial Intelligence Report began warning subscribers about the housing slump back in February 2005 in its exclusive interview with Sir John Templeton. His advice is still valuable today.
For example, the CEO of the Federal National Mortgage Association ("Fannie Mae"), Daniel Mudd, said in an interview this morning that liquidity is not returning to the housing market and that "we don't think we [the housing market] will hit bottom until the end of ‘08".
Meanwhile, Lehman Brothers Chief U.S. Economist, Ethan Harris, said this morning, "the housing market is getting worse".
My question for these "experts" is where were they when you needed them — when you could have actually benefited from their knowledge. The answer of course is quite simple — these "experts" have business and personal agendas that are often in conflict with most investors' goals.
So, as I've stated on numerous occasions in the past, you may want to stop listening to these "experts" and instead focus on the facts. And the facts continue to support what I've been telling our readers over the past couple of months — declining home values, rising energy prices, and extremely high consumer debt levels will likely cause consumers to significantly tighten their pocketbooks over the coming months, thus leading to a big slowdown in U.S. economic growth. In the event such a development does occur, corporate profits will likely fall and more and more companies will likely reduce their workforce. Stock prices, in turn, could fall sharply over the coming months.
So, you ask, what are the factors that could cause home prices to continue falling? Well, there are actually several factors: (1) commercial banks have significantly tightened their lending standards over the past two months; (2) more than 100 mortgage companies have discontinued their operations; (3) and most importantly, the supply of homes for sale are currently much higher than the demand for homes. Just like any other product, when the available supply is greater than demand, prices fall.
Historically, whenever the ratio of the supply of new homes to recent sales of new homes rose above 60 percent for more than two consecutive months, stock prices in general fell. And, during periods in which both the housing market was in a slump and energy prices were rising significantly — the type of environment we are currently experiencing — stock prices fell sharply. (See the chart below).
So, once again I suggest you not get overly excited about the recent rebound in stock prices. And I remind you that contrary to popular belief, stock prices don't always trend higher after the Fed cuts short-term interest rates. For example, the Fed needed to cut its target Fed Funds rate eleven times between January 2001 and November 2002 — from 6.50 percent to 1.25 percent — before stock prices finally bottomed and a new bull market began.
Oh, by the way, there's an exchange-traded fund (ETF) that enables investors like you to actually benefit from the deteriorating housing market. In fact, there are now more than 500 ETFs that enable investors to profit from during virtually any investment environment.
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