Thursday, August 24, 2006

Housing Hits the Ceiling

With this week's release of housing data, it's clear that the residential real estate market is on a downward spiral. But will the landing be soft or hard?

Existing home sales were down 11% year-over-year. Inventories were up 40%. The supply of previously occupied homes on the market now stands at 7.3 months. The median price fell in every region of the country except the South. Overall, the median price was up just 0.9%.

New home sales are also suffering. They were down 4.3% year-over-year, and there is a 6.5 months supply of new homes on the market. The median price was up just 0.3%.

We talked a little about the existing home sales figures last night on Kudlow & Company on CNBC. Larry Kudlow believes the slowdown is good news because it makes it even less likely that the Fed will resume raising interest rates. That's certainly true. But I pointed out that if the Fed continues to stand pat, it will be because the economy has slowed too much, and not because inflation is under control.

We also talked about higher-than-expected inventories of oil and gasoline. Oil and gasoline futures prices fell in response. Optimists say gasoline will soon be down to $2.70 per gallon.

I'm constantly amazed by people who think something is cheap when it comes off its recent highs. Gasoline at $2.70 per gallon is certainly cheaper than the $3.00 or so we saw recently. However, it's much more expensive than prices just one year ago.

Furthermore, we should ask why inventories were up. I see two possible explanations: 1) Demand fell, or 2) Imports rose. Neither is good for the economy.

Back to housing. So far, prices haven't fallen. But as I said in my August 22 posting, this is most likely due to sellers making concessions. It won't be long before we see falling median prices nationwide. A soft landing is still possible in the residential real estate market. Unfortunately, a hard landing is looking more likely.

I'd also like to encourage you to watch my latest MoneyMasters interview with Vincent Catalano. Vinny is President of Blue Marble Research and author of the recently published Sectors & Styles. He explains how ordinary investors can create effective portfolios just like the pros simply by using Exchange-Traded Funds.