Now the bear is starting to sink in his claws. The Dow fell 306 points yesterday. There were only 12 stocks hitting new highs, against 397 hitting news lows.
The fight between the inflation and deflation is beginning to resemble the Corrida de Toros we saw in Madrid . That is to say, it does not look like a battle between equal and opposite opponents. It almost looks like the fix is in.
The inflationary bull comes out snorting and pawing the ground. He charges at full speed and looks like he is going to knock down the stadium walls. He looks unstoppable. But the picador stands his ground and drives his spear into the bull’s back. Then, the banderilleros go to work...jabbing him with their little spikes. The bull weakens. The life bleeds out of him.
The bull can’t win. Not in a bullfight. Occasionally, he’ll gore one of the banderilleros. But the smart money goes on the matador.
Yesterday, news came out that Merrill Lynch had lost twice as much money as forecast...Lehman Bros. laid off 1,300 people in its mortgage unit...and housing starts hit their lowest level since ’91.
This last item is really good news, but investors didn’t seem to see it that way. The bear market in housing can’t end until new building slows. Until now, builders have been putting up houses that they had in the works before the crisis hit. These houses merely added to the inventory that needs to be sold off before prices can stabilize.
It’s going to be a long process. There are two million homeowners who face mortgage increases in the next two years. Their houses are already down 5% to 10%...and more. The Bureau of Labor Statistics added that, once discounted for rising prices, the wages of American workers fell 0.9% between December 2006 and December 2007. Now, with unemployment rising...many of them are not going to be able to keep going.
The ratio of unsold, vacant houses to the houses on the rental market is 50% higher than it was 20 years ago. And from the Bay Area of California comes word that sales are at a 20-year low.
It gets worse. Business Week warns of a “home equity crisis ahead.” People not only borrowed to buy houses...they borrowed against their houses to buy other things too. Now there is $14.7 billion of home equity line credit said to be delinquent. Bad home equity loans are up 130% at some lenders, from ’06 to ’07. It’s an $850 billion business...and much of it is going to go bad .
Even “rich” homeowners are having trouble, adds a Reuters article. Elite neighborhoods, of $1 million plus houses, are beginning to look a little gaunt, says the report. The influx of marginal new buyers...and the rise in house prices...teased middle-class homeowners into houses they couldn’t really afford. They stretched their finances in order to enjoy a bigger, more prestigious house...hoping that the rise in prices would pay off big. It didn’t. Now, they’re really stretched...and, for many, the elastic is beginning to snap.
None of this is bullish...not for housing prices...and not for stocks either.
What has gone wrong? Weren’t the feds taking action? Wasn’t Ben Bernanke warming up his helicopters , so they could drop cash onto the people who need it?
Yesterday, Ben Bernanke, former head of the Princeton Economics Department and now head of the biggest central bank in the world – the U.S. Federal Reserve – explained that monetary policy wasn’t enough. Already, as we pointed out here in The Daily Reckoning , the yield on 10-year Treasury notes is lower than the rate of consumer price inflation (or close to it). This means that the most qualified borrowers can get money on very favorable terms – it is practically free. But who wants to borrow? What would they do with the money? Buy stocks? The average stock market portfolio is down about 5% so far this year. Who wants a piece of that? Or maybe they could buy property? Forget it; not many speculators are eager to buy now. Or, maybe they could use the money to expand their business? But who expands before a recession? Only pawn shops.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Brian on 21 January 2008:
Looks like the price of houses in Australia will fall as well!
Interest rates are on the rise here and we are amongst the dearest places in the West to buy a home according to today's paper.
If prices of commodities are up, and interest rates are up, and affordabilitey is down, then it follows that sellers are going to have to drop their asking price and the expectation will have to be that buyers will drop their offer.
Not a time to be selling unless you can get the last rich buyer!
Comment by christina on 22 January 2008:
Yeah! And all these years, all my friends have been saying to me that "houses always go up", and I went to seminars and they said "houses always double every 7 years" and so I decided to go and check out the statistics myself from the last great depression, and I found out for a fact that "houses surely do not always go up!!" What people really mean when they say " houses always go up" is -"houses have always gone up in our life time, but we're too lazy or stupid to check back any further than that, so it must be true"
Comment by christina on 22 January 2008:
You know who else should expand before a recession? Mental hospitals. I read that in the last great depression,that the psychiatric hospitals were bursting at the seams because they were so full. I feel so sorry for the poor people who dont know what is coming. I wish I could help them all but its impossible. Recently on the tv show "a current affair" they showed the masses complaining about the recent interest rate rises, and they showed one mother with a little baby, and she said "They can't put interest rates any more, we're already stretched to the limit, and there's nothing left to cut back on!" Poor old souls, they don't know what's about to hit. I feel very sorry for the unimformed, all we can do is pray for them
Comment by Zaphod on 23 January 2008:
Well done christina, A thinking person, Hmmm quite rare in these times;)History is like that,I've only ever seen it go up in my life. I'm nearly 40 and silly me didn't buy before the boom. We do have a considerable sum to buy now, but what you get for your money now is crap.We're just gonna ride this one out and see what happens. We rent(OH no!!!)Ahh but we also SAVE! We figure to get something that we really want we just have to have a much bigger deposit.Or maybe the market will readjust/crash/crap itself.Then we can be in the bargaining position and just go around offering stupid prices for houses, just to watch their eyes rolling around and the perspiration on their faces.Houses doubling every 7 years? yes, about 2.5 times in the last 10 years. Will it continue? don't think so!people somehow think that housing will continue with a 10% return per year for ever.Compound that one out?People forget that If you pay say $200 per week in interest on your home loan repayment, then the price of the damned house has to go up by that much per week just to get your money back!On a $250,000 loan at 8% the house has to increase in value by $20,000 per year just to get your money back! then to spin a profit on it? forget it!People are saying that houses will crash. Well I think the best outcome for property is that prices just flat line for a few years.That's called a negative asset if you're still paying it off.Wait and see:)
Comment by Dom on 25 January 2008:
When oh when will real estate correct to a level which is 3-4 times the average wage...? Will it ever happen in Melbourne? The govt must phase out neg gearing for a start! I propose - no one buy a house for 1 week...i wonder what would happen then?