EYE ON THE CONSUMER - HOUSING

I can almost guarantee you that nobody is making this call today. I believe that the worst of the housing crisis is behind us. Economic bottoms are processes, not points. Keith McCullough and I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, and apparently Ben Bernanke agrees. Earlier today Mr. Bernanke suggested that “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery." The timing of Bernanke’s 2009 bottoming process is in line with ours.

It was reported that the S&P/Case-Shiller 20-city index fell 18.5% year-over-year, the biggest drop since the study began. Every headline you read about today’s data will focus on the year-over-year numbers. Yes, it was the worst month on record, but the rate of deceleration continues to slow. The quarterly sequential change in year-over-year home price declines slowed to -1.5% in 4Q08 versus -5% in 1Q08. On the margin, this is a positive. As we noted early this year, we believe that as we reach the spring, we will have reached the peak in declining home prices. Home prices will continue to decline but at a much lesser rate.

The market is looking for leadership that can get us out of the downward spiral we are in. Many have relied on leadership coming from Washington to lead us to better times. It now appears that partisan politics will not let a leader emerge from the rubble in Washington. Therefore, we need to look elsewhere for something that will give consumers increased confidence that the worst is over. The political debate over the solvency of the nation’s leading financial institutions is not instilling confidence that there is a clear direction on how to fix the system, which is causing the market to set new lows. So can real estate be the asset that brings us out of the decline?

The bubble in residential real estate is the root cause for the problems we face today. Therefore it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow the assets to obtain higher prices and ultimately, a higher valuation.

The bears point to the fact that home values will continue to decline contributing to what’s already been the biggest destruction of American household wealth in many generations. Consequently, the decline in home prices makes banks even more reluctant to offer mortgages. Yes, that is true, but there is a significant amount of money being thrown at the issue, helping to form the bottom.


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