"Here's something interesting Dan. People are bringing back furniture they bought seven years ago and asking us to buy it back. The major hardware chain in the area is headed for bankruptcy. Everything housing related is falling apart."
A friend called to tell us how things were at his business in Northern California. It shows the other, darker side of America's housing collapse. Our focus has been on the financial side and the systemic challenges that come from the collapse in asset-backed commercial paper, CDOs, RMBS etc.
But the stock market seems to be waking up to the fact that there will be a deep impact in the real economy from the housing crisis. At the household level, 2008 will be much worse than 2007. More adjustable rate loans will re-set at higher rates. Wages are flat. More households will be unable to maintain debt loads.
Cottage industries associated with the housing boom-real estate, mortgage lending, home hardware, landscaping, furniture, consumer electronics-will all suffer. There's a whole raft of consequences ready to set sail in 2008.
For Australia, it's obvious the share market is trying to discount what investors now grudgingly acknowledge is a very serious situation. But we wouldn't be surprised if the rise in rates eventually triggers this country's own version of a housing correction. Houses are fundamentally unaffordable here because the market's been driven by cheap money. That's changing. And it may mean many of the same things in Australia that are happening in America.
The saving grace for Australia is the resource boom. That, of course, is why our investment analysis for paid subscribers focuses on commodity stocks. And while they will behave like stocks during a correction, there should be some great buys too.
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by AC on 9 January 2008:
In regards to the housing fall in Australia, there are some notable differences between Australia and US:
1. Housing shortage, highlighted by very low vacancy rates and rising rents
2. Higher cost of raw materials
3. Higher labour costs
4. Very low supply of land in inner city areas
5. Low unemployment and boom in mining etc industries
In light of this, do you view that a housing correction will happen in Australia?
Comment by Dayahka on 10 January 2008:
There are industries associated with the housing boom that you did not mention--lumber (woodpoles extending utilities into the new subdivisions), highway and roadway construction, infrastructure maintenance personnel, many small businesses like flower shops and gas stations, then there are the restaurants, the coffee huts, video and movie rentals, and similar small businesses. The main point is that the housing boom was the economy; the housing bust means not just a downturn in housing, but a systemic economic bust. You're going to see a lot of small businesses slowly close their doors (and who rescues them with frozen mortgage rates?).