C.A.R. reports sales decrease 30.1 percent in August, median price of a home in California at $576,360, up 1.6 percent from year ago
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Housing Rolling Along 2
- Thread starter Covertibility
- Start date
The Fed is tightening rules for making non-conventional mortgage loans.
This may take some excess liquidity out of the market.
http://realtytimes.com/rtcpages/20061002_riskyloans.htm
This may take some excess liquidity out of the market.
http://realtytimes.com/rtcpages/20061002_riskyloans.htm
Quote from ProfitMania:
The Fed is tightening rules for making non-conventional mortgage loans.
This may take some excess liquidity out of the market.
http://realtytimes.com/rtcpages/20061002_riskyloans.htm
It's about time!
(sorry for the late reply...)
Does any of this really matter to the bubble? When a bubble bursts, does it help much that a country is a bit more capitalistic and less closed than another with a similar bubble? Perhaps prices will fall only 75%? (vs 80% in the more closed country)
Sure, there are some differences between US and Japan, but much more similarities. I would call them both social democracies (like every major country in the western world), not free capitalistic societies.
What matters IMO is the size of a bubble. How high are house prices vs the income of the population? Are they higher now in the US than now in UK, France, Spain, or Australia? Higher than they were in 1990 Japan? I have seen very little talk about this here or anywhere else.
Quote from SteveD:
Japan is not a true free enterprise, capitalistic society as we in the US understand that term...
They have tremendous "inter-locking directories"....companies, banks, and government all tied together in a dangerous "incestuous relationships"...one segment gets in trouble....pulls everyone else down with them...
Japan is also basically a "closed society"....very little immigration or new entrepreneurs coming in with new ideas, products etc etc...
Everyone marches to the same drummer...
Does any of this really matter to the bubble? When a bubble bursts, does it help much that a country is a bit more capitalistic and less closed than another with a similar bubble? Perhaps prices will fall only 75%? (vs 80% in the more closed country)
Sure, there are some differences between US and Japan, but much more similarities. I would call them both social democracies (like every major country in the western world), not free capitalistic societies.
What matters IMO is the size of a bubble. How high are house prices vs the income of the population? Are they higher now in the US than now in UK, France, Spain, or Australia? Higher than they were in 1990 Japan? I have seen very little talk about this here or anywhere else.
Quote from moo:
What matters IMO is the size of a bubble. How high are house prices vs the income of the population? Are they higher now in the US than now in UK, France, Spain, or Australia? Higher than they were in 1990 Japan? I have seen very little talk about this here or anywhere else. [/B]
90%+ of investors look for capital gains, not cash flow...falling on deaf ears moo.
Kara Homes in Bankruptcy After Mortgage Payment Offer (Update1)
By Kathleen M. Howley and Eric Martin
Oct. 9 (Bloomberg) -- Kara Homes Inc., a luxury builder in New Jersey that sells homes triple the average U.S. house size, filed for bankruptcy after discounts of as much as $246,000 and a year of mortgage payments failed to lure buyers.
The closely held East Brunswick, New Jersey-based company sought Chapter 11 protection in U.S. Bankruptcy Court Oct. 5, saying it owes $296.84 million to lumber, concrete, electrical, plumbing and woodwork companies while holding $350.18 million in assets, primarily unsold houses and land. One property for sale is the 6,319-square-foot, five-bedroom ``Buckingham'' model with a three-car garage, listed for $1.5 million in Freehold, New Jersey.
U.S. housing demand is flagging after five record years, swelling the inventory of unsold homes. Almost half the people who sign contracts with builders are canceling before the house is finished, forcing companies to sacrifice profit margins by offering freebies to attract new buyers, according to James Hughes of Rutgers University, in the same town as Kara's headquarters.
``There could be many similar filings in markets glutted with single family homes,'' said Gerard Cassidy, managing director of bank equity research for RBC Capital Markets in Portland, Maine. ``Kara is already at the table. We expect more people to come to dinner, the question is, how many more?''
Patrick Turner, general counsel for Kara, didn't return a message left on his answering machine requesting comment. The company was started in 1999 by Zudi Karagjozif, a former singer and musician. It was named to Inc. magazine's list of the 500 fastest-growing private companies in 2004 and 2005.
Incentives
Kara began advertising last year that it would pay the first year of mortgage bills for buyers -- what it called its ``On the House'' program, and said in January it would continue the offer this year. In August, Kara began advertising discounts of $20,000 to $246,000 for so-called ``spec,'' or speculative houses built without a buyer under contract, calling it its ``Home Spectacular'' program.
More than half of U.S. homebuilders, 55 percent, are offering incentives such as free mortgage payments, fireplaces, hardwood floors or garages, up from 37 percent a year earlier, said Gopal Ahluwalia, director of research at the National Association of Home Builders in Washington, citing a survey he conducted last month.
Four percent are giving away cars and another 4 percent are handing out vacations, Ahluwalia said.
``Incentives are just falling straight to the bottom line and taking away from the profits,'' said Daniel Oppenheim, a homebuilding analyst for Banc of America in New York. As a group, homebuilders will see profit ``fall by half,'' he said.
Sales of new homes in August fell 17.4 percent from the same month last year to 1.05 million at an annualized pace, up from a three-year low of 1.009 million in July, the Commerce Department reported on Sept. 27. There were 568,000 new homes for sale in August, the second-highest on record after July's 570,000.
`Coming Soon'
Kara is selling homes in 29 developments in New Jersey towns such as Edison, Monroe and Manalapan, and lists four communities as ``coming soon,'' including Heather Glen in Stafford, New Jersey, according to its Web site. Homes listed for sale are priced between $324,227 and $1.5 million.
The U.S. median price for a new house was $237,000 in August, falling 1.3 percent from $240,100 a year earlier, the government report said. That's 7.8 percent below the 2006 high of $257,000 in April, and marks the first year-over-year drop in the monthly median new-home price since 2003.
New-Home Sales Decline
Measured annually, new-home sales probably will slide to 1.07 million this year from a record 1.28 million in 2005, the biggest decline in transactions since 1990, and the median U.S. new-home price may fall for the first time since the 1991 recession, when it dropped 2.4 percent, according to Douglas Duncan, chief economist of Mortgage Bankers Association.
Profit at Toll Brothers Inc., the largest U.S. builder of luxury houses, fell 19 percent in the quarter ended July 31 from a year earlier, the first decline in four years, as revenue slid to $1.53 billion from $1.55 billion, the builder said Aug. 22. Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said Sept. 6 that profit in the quarter ended July 31 tumbled 34 percent.
Miami-based Lennar Corp. said Sept. 8 that net income in the quarter ended Aug. 31 fell 39 percent to $206.7 million. KB Home and Beazer Homes USA Inc. reduced their profit forecasts last month as demand slumps.
The Standard and Poor's Supercomposite Homebuilding Index of 16 stocks slid 29 percent this year through Oct. 6, after averaging 49 percent gains in each of the past three years. The index rose 17.02 points, or 2.8 percent, to 636.97 points at 1:15 p.m. today.
U.S. sales of new homes have dropped in seven of the past 20 years, including a three-year slide that ended in 1991.
Price Declines
Price declines are more rare. In data going back to 1963, the only new-home price decline in addition to 1991 was in 1970, when the median slid 8.6 percent to $23,400, according to the National Association of Home Builders.
Federal Reserve policy makers held the U.S. benchmark rate at 5.25 percent last month, citing their concern that declining home sales are slowing the economy.
``Moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' the Federal Reserve said in the statement on Sept. 20 that kept the rate unchanged.
Each time the Fed has stopped raising rates for more than one meeting in the past 25 years, the next move has been a cut, according to data from the Mortgage Bankers Association in Washington. Reduced rates would make some mortgages more affordable and provide some help to homebuilders, Duncan said.
By Kathleen M. Howley and Eric Martin
Oct. 9 (Bloomberg) -- Kara Homes Inc., a luxury builder in New Jersey that sells homes triple the average U.S. house size, filed for bankruptcy after discounts of as much as $246,000 and a year of mortgage payments failed to lure buyers.
The closely held East Brunswick, New Jersey-based company sought Chapter 11 protection in U.S. Bankruptcy Court Oct. 5, saying it owes $296.84 million to lumber, concrete, electrical, plumbing and woodwork companies while holding $350.18 million in assets, primarily unsold houses and land. One property for sale is the 6,319-square-foot, five-bedroom ``Buckingham'' model with a three-car garage, listed for $1.5 million in Freehold, New Jersey.
U.S. housing demand is flagging after five record years, swelling the inventory of unsold homes. Almost half the people who sign contracts with builders are canceling before the house is finished, forcing companies to sacrifice profit margins by offering freebies to attract new buyers, according to James Hughes of Rutgers University, in the same town as Kara's headquarters.
``There could be many similar filings in markets glutted with single family homes,'' said Gerard Cassidy, managing director of bank equity research for RBC Capital Markets in Portland, Maine. ``Kara is already at the table. We expect more people to come to dinner, the question is, how many more?''
Patrick Turner, general counsel for Kara, didn't return a message left on his answering machine requesting comment. The company was started in 1999 by Zudi Karagjozif, a former singer and musician. It was named to Inc. magazine's list of the 500 fastest-growing private companies in 2004 and 2005.
Incentives
Kara began advertising last year that it would pay the first year of mortgage bills for buyers -- what it called its ``On the House'' program, and said in January it would continue the offer this year. In August, Kara began advertising discounts of $20,000 to $246,000 for so-called ``spec,'' or speculative houses built without a buyer under contract, calling it its ``Home Spectacular'' program.
More than half of U.S. homebuilders, 55 percent, are offering incentives such as free mortgage payments, fireplaces, hardwood floors or garages, up from 37 percent a year earlier, said Gopal Ahluwalia, director of research at the National Association of Home Builders in Washington, citing a survey he conducted last month.
Four percent are giving away cars and another 4 percent are handing out vacations, Ahluwalia said.
``Incentives are just falling straight to the bottom line and taking away from the profits,'' said Daniel Oppenheim, a homebuilding analyst for Banc of America in New York. As a group, homebuilders will see profit ``fall by half,'' he said.
Sales of new homes in August fell 17.4 percent from the same month last year to 1.05 million at an annualized pace, up from a three-year low of 1.009 million in July, the Commerce Department reported on Sept. 27. There were 568,000 new homes for sale in August, the second-highest on record after July's 570,000.
`Coming Soon'
Kara is selling homes in 29 developments in New Jersey towns such as Edison, Monroe and Manalapan, and lists four communities as ``coming soon,'' including Heather Glen in Stafford, New Jersey, according to its Web site. Homes listed for sale are priced between $324,227 and $1.5 million.
The U.S. median price for a new house was $237,000 in August, falling 1.3 percent from $240,100 a year earlier, the government report said. That's 7.8 percent below the 2006 high of $257,000 in April, and marks the first year-over-year drop in the monthly median new-home price since 2003.
New-Home Sales Decline
Measured annually, new-home sales probably will slide to 1.07 million this year from a record 1.28 million in 2005, the biggest decline in transactions since 1990, and the median U.S. new-home price may fall for the first time since the 1991 recession, when it dropped 2.4 percent, according to Douglas Duncan, chief economist of Mortgage Bankers Association.
Profit at Toll Brothers Inc., the largest U.S. builder of luxury houses, fell 19 percent in the quarter ended July 31 from a year earlier, the first decline in four years, as revenue slid to $1.53 billion from $1.55 billion, the builder said Aug. 22. Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said Sept. 6 that profit in the quarter ended July 31 tumbled 34 percent.
Miami-based Lennar Corp. said Sept. 8 that net income in the quarter ended Aug. 31 fell 39 percent to $206.7 million. KB Home and Beazer Homes USA Inc. reduced their profit forecasts last month as demand slumps.
The Standard and Poor's Supercomposite Homebuilding Index of 16 stocks slid 29 percent this year through Oct. 6, after averaging 49 percent gains in each of the past three years. The index rose 17.02 points, or 2.8 percent, to 636.97 points at 1:15 p.m. today.
U.S. sales of new homes have dropped in seven of the past 20 years, including a three-year slide that ended in 1991.
Price Declines
Price declines are more rare. In data going back to 1963, the only new-home price decline in addition to 1991 was in 1970, when the median slid 8.6 percent to $23,400, according to the National Association of Home Builders.
Federal Reserve policy makers held the U.S. benchmark rate at 5.25 percent last month, citing their concern that declining home sales are slowing the economy.
``Moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' the Federal Reserve said in the statement on Sept. 20 that kept the rate unchanged.
Each time the Fed has stopped raising rates for more than one meeting in the past 25 years, the next move has been a cut, according to data from the Mortgage Bankers Association in Washington. Reduced rates would make some mortgages more affordable and provide some help to homebuilders, Duncan said.
When I worked for US Home employees got 10% off the price. For whatever reason, the IRS got a hard on for US Home employees and tried to make us claim that 10% as income. In my case I scrouged up enough apprasials to get me out of it but some employees didn't handle it right and had to pay taxes.
I wonder at point these inducements that are unattached to the house become income. Upgrades no but cars, vacations, mortgage payments should probably counted as income.
John
I wonder at point these inducements that are unattached to the house become income. Upgrades no but cars, vacations, mortgage payments should probably counted as income.
John
For those that think 40-50% drops are not going to happen. Here is an article form 1995 related to Southern California real Estate.
http://www.dqnews.com/AA1995OFA06.shtm
http://www.dqnews.com/AA1995OFA06.shtm
GSE Chiefs Comment On Housing Correction, ARM Resets
Oct 23
By Damian Paletta and Lavonne Kuykendall
Of DOW JONES NEWSWIRES
The top officials at U.S. mortgage-finance giants Fannie Mae (FNM) and Freddie Mac (FRE) said Monday
that the housing market was going through a sizable bumpy period and that the environment could become more
turbulent next year when interest rates reset on many loans.
Richard Syron, chairman and chief executive officer of Freddie Mac, said the housing market was experiencing
a "fairly tough correction," in remarks made to the Mortgage Bankers Association conference in Chicago.
Daniel Mudd, chief executive officer of Fannie Mae, told the conference that the payment shock accompanying
many monthly mortgage bills would have a profound impact on the housing industry next year. He said that out of
$9 trillion in mortgage debt outstanding, roughly $1 trillion will reset in 2007.
"Those resets are going to have some interesting and difficult-to-predict impacts on consumers," Mudd said.
This would affect millions of borrowers with adjustable-rate mortgages who have a fixed interest rate for the
first few years of the loan. These fixed rates reset, though, after the introductory period, and for most borrowers
these rates will begin increasing, raising monthly mortgage payments. Also, many loans require borrowers to pay
only interest for the first few years, before eventually paying both interest and principal.
This means monthly payments could jump from hundreds of dollars to thousands of dollars, Mudd said.
"Depending on how that jibes with unemployment, we could be in for an interesting year," he said.
Fannie Mae and Freddie Mac own or guarantee 40% of the mortgages in the U.S. housing market. Both
government-sponsored enterprises are emerging from major accounting scandals, and this year both Syron and
Mudd agreed to limit their growth as the companies work to rebuild internal controls.
"I don't consider Dan our biggest competitor," Syron said. "I consider the marketplace the biggest competitor.
The GSEs can be too focused on how we gain against each other. We are operating under a penalty."
Mudd quickly followed up on Syron's point.
"Dick, if you have been in a penalty box, I have been in...," Mudd said, before the rest of his comment was cut
off by laughter from many audience members familiar with both companies' predicaments.
Oct 23
By Damian Paletta and Lavonne Kuykendall
Of DOW JONES NEWSWIRES
The top officials at U.S. mortgage-finance giants Fannie Mae (FNM) and Freddie Mac (FRE) said Monday
that the housing market was going through a sizable bumpy period and that the environment could become more
turbulent next year when interest rates reset on many loans.
Richard Syron, chairman and chief executive officer of Freddie Mac, said the housing market was experiencing
a "fairly tough correction," in remarks made to the Mortgage Bankers Association conference in Chicago.
Daniel Mudd, chief executive officer of Fannie Mae, told the conference that the payment shock accompanying
many monthly mortgage bills would have a profound impact on the housing industry next year. He said that out of
$9 trillion in mortgage debt outstanding, roughly $1 trillion will reset in 2007.
"Those resets are going to have some interesting and difficult-to-predict impacts on consumers," Mudd said.
This would affect millions of borrowers with adjustable-rate mortgages who have a fixed interest rate for the
first few years of the loan. These fixed rates reset, though, after the introductory period, and for most borrowers
these rates will begin increasing, raising monthly mortgage payments. Also, many loans require borrowers to pay
only interest for the first few years, before eventually paying both interest and principal.
This means monthly payments could jump from hundreds of dollars to thousands of dollars, Mudd said.
"Depending on how that jibes with unemployment, we could be in for an interesting year," he said.
Fannie Mae and Freddie Mac own or guarantee 40% of the mortgages in the U.S. housing market. Both
government-sponsored enterprises are emerging from major accounting scandals, and this year both Syron and
Mudd agreed to limit their growth as the companies work to rebuild internal controls.
"I don't consider Dan our biggest competitor," Syron said. "I consider the marketplace the biggest competitor.
The GSEs can be too focused on how we gain against each other. We are operating under a penalty."
Mudd quickly followed up on Syron's point.
"Dick, if you have been in a penalty box, I have been in...," Mudd said, before the rest of his comment was cut
off by laughter from many audience members familiar with both companies' predicaments.
***I'm seeing anecdotal evidence that we're nearing the end of the "correction". I think it has already started with the smaller houses, and will slowly work its way up to the bigger houses...
The Economy's Housing Problem
Source: Business Week
Publication date: October 30, 2006
Anyone trying to judge the state of the housing sector could be excused for feeling a bit befuddled. On Oct. 20, Goldman Sachs (GS) issued a report suggesting the worst of the housing downturn could be over, and former Federal Reserve Chairman Alan Greenspan reiterated remarks of his own to a similar effect on Oct. 26 [see BusinessWeek.com, 10/23/06, "Is Housing Out of the Woods?"]. Encouraging words, to say the least.
But while analysts and economic eminences see a trough, data reports point to more gloom ahead. In the third quarter, the biggest drop in homebuilding investment since 1991 slowed economic growth to its worst pace in more than three years, an Oct. 27 report showed. New home sales rose in September, but the median price of a new home fell by nearly 10% in the biggest one-year drop since 1970, according to the Census Bureau on Oct. 26 [see BusinessWeek.com, 10/27/06, "The Housing Fire Sale"]. And on Oct. 25, the release of September existing home sales slightly missed Wall Street expectations.
It's enough to leave homeowners across the country understandably perplexed [see BusinessWeek, 11/6/06, "Boom! Bust! Boom?"]. Should they believe the ex-Fed "Maestro," or the numbers? While the housing slowdown may not wind up crippling the economy the way some pundits feared, many analysts say its effects aren't finished just yet.
How Long a Slump? "The velocity of the slowdown [in housing] is going to moderate," says Jeff Kleintop, chief investment strategist at PNC Wealth Management (PNC). "But we are still a number of quarters away from a true bottom."
The cooling housing market has already taken a slice out of the economy. Gross domestic product [GDP] expanded at a pace of 1.6% in the third quarter, down from a 2.6% pace in the second quarter, according to the Commerce Dept.'s advance report. Residential investment tumbled at a 17.4% one-year pace from a year earlier, trimming 1.1% from GDP growth. Fed Chairman Ben Bernanke has predicted softening housing would probably subtract 1% from economic expansion in the second half of 2006, and possibly 2007.
Experts are divided over how long the housing weakness will continue and what its effect will be on the overall economy. Troubled homebuilder stocks like D.R. Horton (DHI), Lennar (LEN), Pulte Homes (PHM), and KB Home (KBH) have perked up since their midsummer lows. As for the decline in new home sale prices, "it remains to be seen" what this development implies for consumer spending, according to Thomas Stolper, global markets economist at Goldman Sachs. "The market for now seems to be giving greater attention to the boost to real disposable income from falling gas prices," Stolper says in an Oct. 27 note to clients.
Impact Could Be Wide Some analysts expect economic growth to start increasing again, until the Fed is forced to raise interest rates yet again sometime next year to rein in inflation. "After the housing construction adjustment has worked through, we look for growth to rise back above potential," says John Ryding, chief U.S. economist at Bear Stearns, in an Oct. 27 dispatch.
On the downside, a drop in mortgage applications for new home purchases may illustrate the depth of the housing decline. Mortgage applications were down 16% from the start of the year through the week ended Oct. 20, observes David Rosenberg, North American economist at Merrill Lynch (MER). "In stock market parlance, if the Dow were down that much, it would barely be above the 9,000 mark right now," Rosenberg says in an Oct. 25 research report. The Fed and the Street will likely have to lower their estimates for fourth-quarter GDP growth, he adds in an Oct. 27 note.
Real-estate softness could have potentially wide-ranging effects on the economy. "A seemingly minor dislocation originating in the housing sector, such as a higher rate of foreclosures, might cascade through the rest of the economy in unforeseen ways -- for example, in a collapse in bank earnings or a hiccup in the huge market for securities that back residential mortgages," observes Jeffrey Knight, chief investment officer of global asset allocation at Putnam Investments (MMC), in his most recent market outlook.
Enduring Slowdown Still, outside of housing, other economic factors are looking up, most analysts say. A drop in oil prices and the stock market's rally to all-time highs have boosted consumer confidence, suggesting stronger retail sales in the fourth quarter than in the third quarter, according to Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
The housing drop-off could signal investing opportunities elsewhere. Shares of drugmakers like Johnson & Johnson (JNJ) or Pfizer (PFE) might be among the downturn's unwitting beneficiaries, historical patterns suggest. The relative return of pharmaceutical stocks is "extremely negative correlated to housing activity," notes Jack Ablin, chief investment officer at Harris Bank.
In any event, homebuilder stocks skidded in afternoon trading on Oct. 27, and the broader stock market retreated following four consecutive record finishes for the Dow Jones industrial average. The housing slowdown might not derail equity investors' gains, but it's probably still too early to declare the downturn defeated.
The Economy's Housing Problem
Source: Business Week
Publication date: October 30, 2006
Anyone trying to judge the state of the housing sector could be excused for feeling a bit befuddled. On Oct. 20, Goldman Sachs (GS) issued a report suggesting the worst of the housing downturn could be over, and former Federal Reserve Chairman Alan Greenspan reiterated remarks of his own to a similar effect on Oct. 26 [see BusinessWeek.com, 10/23/06, "Is Housing Out of the Woods?"]. Encouraging words, to say the least.
But while analysts and economic eminences see a trough, data reports point to more gloom ahead. In the third quarter, the biggest drop in homebuilding investment since 1991 slowed economic growth to its worst pace in more than three years, an Oct. 27 report showed. New home sales rose in September, but the median price of a new home fell by nearly 10% in the biggest one-year drop since 1970, according to the Census Bureau on Oct. 26 [see BusinessWeek.com, 10/27/06, "The Housing Fire Sale"]. And on Oct. 25, the release of September existing home sales slightly missed Wall Street expectations.
It's enough to leave homeowners across the country understandably perplexed [see BusinessWeek, 11/6/06, "Boom! Bust! Boom?"]. Should they believe the ex-Fed "Maestro," or the numbers? While the housing slowdown may not wind up crippling the economy the way some pundits feared, many analysts say its effects aren't finished just yet.
How Long a Slump? "The velocity of the slowdown [in housing] is going to moderate," says Jeff Kleintop, chief investment strategist at PNC Wealth Management (PNC). "But we are still a number of quarters away from a true bottom."
The cooling housing market has already taken a slice out of the economy. Gross domestic product [GDP] expanded at a pace of 1.6% in the third quarter, down from a 2.6% pace in the second quarter, according to the Commerce Dept.'s advance report. Residential investment tumbled at a 17.4% one-year pace from a year earlier, trimming 1.1% from GDP growth. Fed Chairman Ben Bernanke has predicted softening housing would probably subtract 1% from economic expansion in the second half of 2006, and possibly 2007.
Experts are divided over how long the housing weakness will continue and what its effect will be on the overall economy. Troubled homebuilder stocks like D.R. Horton (DHI), Lennar (LEN), Pulte Homes (PHM), and KB Home (KBH) have perked up since their midsummer lows. As for the decline in new home sale prices, "it remains to be seen" what this development implies for consumer spending, according to Thomas Stolper, global markets economist at Goldman Sachs. "The market for now seems to be giving greater attention to the boost to real disposable income from falling gas prices," Stolper says in an Oct. 27 note to clients.
Impact Could Be Wide Some analysts expect economic growth to start increasing again, until the Fed is forced to raise interest rates yet again sometime next year to rein in inflation. "After the housing construction adjustment has worked through, we look for growth to rise back above potential," says John Ryding, chief U.S. economist at Bear Stearns, in an Oct. 27 dispatch.
On the downside, a drop in mortgage applications for new home purchases may illustrate the depth of the housing decline. Mortgage applications were down 16% from the start of the year through the week ended Oct. 20, observes David Rosenberg, North American economist at Merrill Lynch (MER). "In stock market parlance, if the Dow were down that much, it would barely be above the 9,000 mark right now," Rosenberg says in an Oct. 25 research report. The Fed and the Street will likely have to lower their estimates for fourth-quarter GDP growth, he adds in an Oct. 27 note.
Real-estate softness could have potentially wide-ranging effects on the economy. "A seemingly minor dislocation originating in the housing sector, such as a higher rate of foreclosures, might cascade through the rest of the economy in unforeseen ways -- for example, in a collapse in bank earnings or a hiccup in the huge market for securities that back residential mortgages," observes Jeffrey Knight, chief investment officer of global asset allocation at Putnam Investments (MMC), in his most recent market outlook.
Enduring Slowdown Still, outside of housing, other economic factors are looking up, most analysts say. A drop in oil prices and the stock market's rally to all-time highs have boosted consumer confidence, suggesting stronger retail sales in the fourth quarter than in the third quarter, according to Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
The housing drop-off could signal investing opportunities elsewhere. Shares of drugmakers like Johnson & Johnson (JNJ) or Pfizer (PFE) might be among the downturn's unwitting beneficiaries, historical patterns suggest. The relative return of pharmaceutical stocks is "extremely negative correlated to housing activity," notes Jack Ablin, chief investment officer at Harris Bank.
In any event, homebuilder stocks skidded in afternoon trading on Oct. 27, and the broader stock market retreated following four consecutive record finishes for the Dow Jones industrial average. The housing slowdown might not derail equity investors' gains, but it's probably still too early to declare the downturn defeated.