Wednesday, September 27, 2006

So much for that...

OK, merely hours ago, I claimed that intra-day buying would gain momentum. Based on that, you would have gone long the bond market early today and wound up losing your shirt this afternoon. The 10-year finished the day down 1/8.

Apparantly, the market sold off on housing data, but I'm wondering about that. Look at the figures below (Source: Department of Commerce):

New Home Sales:
June: 1,091
July: 1,009
August: 1,050
August 2005: 1,271

Months Supply:
June: 6.3
July: 7.0
August: 6.6
August 2005: 4.6

Bear in mind that the July figure was originally reported as 1,076, so it isn't as though we drew a trend line from 1,091 to 1,009 and are now relieved at 1,050. Housing is still weak. I think it will remain weak until the excess inventory is worked off. The billion dollar question is how much pain will be required to work off the inventory?

I've argued that home prices are sticky on the downside, because people are very reluctant to put their home up for sale at a loss. In many cases, people just can't put their home up for sale at a loss. Let's say I buy a $200,000 house with 10% down. The house declines in value by 5%. Now I've invested $20,000 and have a $10,000 loss. I want to buy a bigger home for $300,000. I have to pay off a $180,000 loan with sale proceeds of $190,000. In order for me to put 10% down again, I've got to come up with $20,000 in cash. If I'm like most Americans, I haven't saved very much, so coming up with the cash would be difficult.

So what do I do? I just stay in my current house. Ride out the housing downturn.

If people delay their decision to trade up in houses, the effect is to lower supply. I think this creates a floor to how far home prices can fall in general. Maybe not so much in a given area, particularly those where investor speculation was rampant, but nationwide. This is why I'm not terribly bearish on housing, and why I don't think housing will compel the Fed to cut rates early in 2007.

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