05 March 2010
The bounce in US housing is peaking. The median price of a new home has slid in three of the past four months. New home sales have dropped to a record low and mortgage applications for new purchases are at a 12-year low.
Given the government's efforts to prop up the market with tax credits for buyers and keep a lid on mortgage rates by buying mortgage-related securities, this is all "sobering", says John Authers in the FT.
That the market is weakening despite government support just shows that "the consumer is completely tapped out when it comes to … big ticket items", says David Rosenberg of Gluskin Sheff. The end of the homebuyers' tax credit in June and next month's expiry of the Fed's mortgage-purchase programme clearly won't help.
Meanwhile, with foreclosures at a record – 15% of all home loans were either in foreclosure or late on a payment in December – the supply surplus is set to rise even further. "The law of supply and demand" implies another 10%-15% dip in house prices, he says.
The big picture: sobering facts for stock bulls
This is a sobering reminder of how long stock investors can wait to make a real return. Only in the late 1950s did the Dow Jones Index regain its 1929 peak. The overall trend since the 1982-2000 bull market ended has been flat or down. Returns depend heavily on starting valuations.
Long-term bull runs begin when stocks are historically cheap. Unlike now, when the cyclically adjusted price/earnings ratio is above average and the market yields just 2%, half the long-term average. US investors "should remember that whenever they are tempted to get too bullish", says Buttonwood in The Economist.
