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Will Housing Recovery Be Next To Stumble?

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    July 15, 2013

    For the last year or two, the housing industry has been in an impressive recovery from its devastating depression after the real estate and sub-prime mortgage bubbles burst in 2006.

    As its recovery has become more obvious it has had a major impact on rising consumer confidence.

    The housing and auto industries are the main driving forces of the economy (in both directions), and consumer spending accounts for 65% to 70% of the U.S. economy.

    So, keeping an eye on the housing industry is of more than a little importance.

    As we all know, the driving forces for the housing recovery began with massive stimulus efforts, including bonuses to first-time home buyers, assistance to those with underwater mortgages, etc., while home prices continued to plunge toward easier affordability, and foreclosures surged to keep the inventory of unsold homes rising.

    Once the bottom was reached and the recovery began, it was supported by low mortgage rates that continued to tumble to even lower record lows even as sales picked up impressively over the last two years.

    However, conditions seem to have changed quite quickly and significantly.

    According to the Case-Shiller Home Price Index, home prices have risen 12% over the last 12 months. Meanwhile, mortgage rates have spiked in recent months to their highest level in two years. The 30-year mortgage rate is now at 4.5%, 36% higher than the 3.3% level of last winter.

    That may not seem like much of a problem considering that both home prices and mortgage rates are still considerably lower than a few years ago.

    However, to potential home-buyers, 12% higher home prices, and a 36% higher mortgage rate than they have been looking at, makes a dramatic difference in their ability to afford a home or obtain a mortgage.

    An article on CNNMoney notes that a mortgage rate increase of 1%, combined with a 12% higher home price, increases mortgage payments by about 25% a month for a typical home-buyer.

    So not surprisingly, a survey last month by Fannie Mae showed considerably fewer people thinking now is a good time to either buy or sell a house. That’s a dramatic turndown from the survey as recently as May, when optimism hit a new survey high.

    The potential impact on home sales and construction is also being seen in four straight weeks of declines in mortgage applications.

    And in reporting their 2nd quarter earnings yesterday, both J.P. Morgan and Wells Fargo warned of mortgage problems. J.P. Morgan’s CFO warned that mortgage refinance volumes could drop by 30% to 40% in the second half of the year if mortgage rates remain at current rates or rise further.

    It does add some importance to upcoming economic reports, when we will get the first look at housing in a while, with the New Housing Starts report next Wednesday, existing home sales the following Monday, and new home sales the following Thursday.

    New stock market highs!

    Well, fractional new highs for some indexes anyway, like the Dow and S&P 500.

    With the additional spike up this week the entire correction from the previous peak in May has been recovered.


    If the DJ Transportation Avg can confirm the breakout it will be even more positive, which would have the two legs of Dow Theory in agreement.



    It would be more inspiring if European markets, which have been among the few global markets continuing to move in tandem with the U.S., had also broken their downtrend and reached previous highs.




    But maybe that will happen too.

    Unfortunately, it doesn’t do much for those concerned about the unusually extreme overbought condition above the long-term 200-day moving average to have the S&P immediately back to its previous peak before at least pulling back to retest the support at the m.a.


    But we shall see. 

    Never heard of the ‘Greenspan Put’?.

    It’s always surprising how short investors’ memories seem to be.

    So many seem to believe that the actions of the Fed under Chairman Bernanke, and Wall Street’s description of it as the market-guaranteeing ‘Bernanke Put’ is original, and have already forgotten the ‘Greenspan Put’.

    The term ‘Greenspan Put’ was coined when Fed Chairman Alan Greenspan cut interest rates dramatically in the fall of 1998 in response to economic and stock market declines in Asia, which had the U.S. market following suit, and then the collapse of giant hedge fund Long-Term Capital Management, which resulted in the U.S. market’s ‘mini-crash’ in the fall of 1998. Greenspan’s continuing easy money policies to the 1999 market top, continued to be referred to as the ‘Greenspan Put’. The term was all over the financial media, and had investors convinced that Greenspan was a magician who could keep the stock market rising regardless of what was happening in surrounding conditions, or elsewhere in the world.

    As a study by Frederick Sheehan put it:

    “It was after this surprise rate cut that the “Greenspan Put” came into common use. A put option is bought by investors to limit losses when the market falls. Now, instead of buying protection, the Greenspan Put inspired such confidence that investors piled into the market, borrowing via margin, replicating the borrowing of LTCM and other hedge funds. Around $5 trillion was lost by investors after the Greenspan Stock-Market Put failed in 2000.”

    But don’t expect Wall Street to remind you of the Greenspan put. They want you to believe such operations by the Fed are unique to Chairman Bernanke. And they sure don’t want to remind you of how unsuccessful the Greenspan put turned out to be.

    But then they also wouldn’t want to remind you that Bernanke was appointed in February, 2006, and we’ve already had one catastrophe on his watch, and it was a doozy. Does anyone really need reminding that Bernanke had no clue what was going on, in fact providing assurance that the bursting of the real estate bubble and sub-prime mortgage meltdown would not affect the overall economy, continuing to raise rates and hold them high into the 2007-2008 financial meltdown.

    To read my weekend newspaper column click hereIt’s Bernanke Versus the Four-Year Presidential Cycle!

    Subscribers to Street Smart Report: See the charts and recommendations in the subscribers’  ‘Premium Content’ area of this blog, and the new issue of the newsletter from Wednesday.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.