Would take over three years to achieve price stabilityThere will not be any recovery in the economy until the housing collapse abates. There will be no housing market recovery until the massive number of homes on the market lowers. There will be no stabilization of home inventories until the economy recovers.
The problem is that prices do not begin to stabilize until we break below eight months’ supply – and they tend to deflate 3% per quarter until that happens. So as impressive as it is that the builders have taken single-family starts below underlying sales, their efforts are just not sufficient to prevent real estate prices from falling further. In fact, even if the builders were to declare a moratorium immediately – that is taking starts to ZERO – demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market.
A lethal deflationary combination
The combination of a 10% savings rate and 10% unemployment rate is a lethal deflationary combination that the Obama dream team of economists seems prepared to fight hard against, and we wish them good luck, but we think we are in for another year of very weak economic growth that warrants a focus on safe income wherever you can get it, and a focus on high-quality assets and defensive sectors in the equity market.
S&P 500 will hit new lows, in our view
We remain of the view that the risk of earnings disappointments will take the S&P 500 to new lows before the bear market runs its course. Based on the outlook for corporate profits and the typical trough P/E multiple that characterized recession bear markets, it would not surprise us to see the S&P 500 gravitate in a 475-650 range for an extended period of time.
We're trapped in a spiral. This is just the eye of the hurricane.
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