Wednesday, June 07, 2006

Wall Street finally goes bearish on housing (about time!)

The stock market is now almost flat for the year with housing being one of the worst performers because of the selloff in the last few weeks.

What has surprised me is that all of the information has been mounting for a long while now. Anyone who googled 'housing bubble' over the last few years should have come up with Ben's Housing bubble blog, arguably the most convenient way to track daily housing bubble news. Ben pulls together relevant bubble commentary from respected news outlets throughout the country. I have been reading his blog daily, for over a year, and watched as the mainstream press slowly turned from (NAR spoon-fed) Bulls, to recent Bears.

Consensus is rising that the 'soft landing' scenario emitted by Bulls is in my opinion, er well Bull.. And finally some of the analysts are starting to agree. I expect more homebuilders to cut forecasts (or those who have cut, to cut them further) leading to further downgrades. Speculation in ending and the cold hard facts of fundamental affordability are beginning to return, as always.

The problem is, as goes housing, so goes the economy.

Mark Kessel of PIMCO has this very timely piece out on housing and the economy:

"Housing is a leading indicator of the overall direction of the economy. As housing slows, economic growth will surely follow. As such, we should expect to see tighter terms on credit extension, less liquid markets and a pick-up in the overall corporate default rate over time with a slowdown in the pace of economic growth. An eventual rise in the default rate, combined with higher near-term volatility, should lead to a more challenging market environment for credit. Watch the 'for sale signs' in both the housing and corporate bond market my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion."
Mark does an excellent job of explaining why we are heading for a downturn. I came to a similar conclusion last year and as of January 06 moved to cash, gold, and housing shorts.

As the housing market grinds to a halt, I believe the economy will drift into recession, possibly as soon as the end of 2006. It's been one hell of a party, but there is a hangover coming. If you are long in homebuilders, you may want to rethink things.

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