The Effects the Real Estate bubble is having on the Economy

Thomas G. Brown |

It is interesting to see the residential housing market take on some of the characteristics of the tech bubble of the 1990’s. Everyone and their cousin jumped in head first to get rich through the act of flipping houses with “shaky” financing. Adjustable Rate Mortgages (ARMS), Interest only Mortgages and a host of other creative ways to buy homes for next to nothing up front. It all seemed like a viable way to finance home that would be owned short term. But as this pool dries up not only will these folks break there preverbal necks but the damage will and is being felt throughout the economy.

Let’s look at the numbers from the National Association of Realtors to see the signs housing is slowing down by comparing October numbers from 2005 to this year are as follows, inventory in the market shot up 26% from 2,846,000 to 3,854,000. This indicates that homes are harder to unload onto the market then they where just a year ago. So those folks who purchased homes in a mad dash to millionaire status are stuck holding the bag i.e. mortgages that are only going to increase in cost while the property itself will most likely lose value. This inability to sell quickly requires owners to pay mortgages longer than anticipated for homes they have no intention of living in, eroding any potential profits day by day.

In addition the median sales price of existing homes has decreased 3.5% during the same time period of October 2005 to October 2006. The median price dropped from $229,000 to $221,000 nationally. This looks like it will only get worse in the coming months ahead as an additional $1 trillion in loans are set to readjust in 2007.

As I stated at the beginning this will effect more than just the home owners. We will see it in unemployment numbers starting with construction and in related jobs. With all this money being lost their will be less for the American Consumer to spend on goods and services. Today the number of US unemployment claims where released by the Labor Department. At 357,000 they are highest in over a year.

Let’s look at two national home builders to see what they can tell us about this situation. The nation’s largest luxury home builder Toll Brothers chart shows the RSU is trending bearish as it hovers just below 70 at 68.59 as of 11:59 am today. In addition the stock is rising but on decreasing trading volume. Leading me to believe that we are seeing a slow down in the building of new homes and the housing market in general.

.

We can also look at the seventh largest builder of home in Beazer Homes USA, Inc shown below. The volume of this stock is low and the Relative Strength Index seems to be pointing to a bearish reading that continues above 50. The price as I look at it at !:14 pm is increasing but at a relatively low volume 2.5 million.

In addition to the charts we have the CEO of Toll Brothers, Robert Toll stating on a conference call on November 7, 2006 (Bloomberg Caroline Blaum) that buyers have lost confidence in the home market.

This will also reduce spending by consumers creating a fun little cycle…….like the circular motion of water down the toilet bowl. Well the next couple of months and years shall be interesting to watch (if your into horror shows). Have a cocktail and a good Thursday.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: