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“For Sale” Signs Will Trip Crash

By: Rick Ackerman, Rick's Picks

-- Posted Tuesday, 1 August 2006 | Digg This ArticleDigg It! | Source:

Rick’s Picks

Tuesday, August 1, 2006

For investors who’d rather be smart than lucky 

A silent crash is taking shape in the real estate sector, evinced by the growing number of “for sale” signs popping up on lawns across the U.S.  Even the staid New York Times has noticed, as this front-page headline in weekend editions attests:  “Housing Slows, Taking Big Toll on the Economy // Economic Growth Cools // Builders Are Holding Off on Construction – Buyers Grow Wary.”

Although prices have yet to sink, except in such formerly white-hot markets as Miami and Las Vegas, the mushrooming inventory of unsold homes nationally implies that a broad and precipitous decline is gathering strength. For the time being, though, we can expect a growing number of homes to sit on the market for longer and longer until either of two things happens: sellers lower their prices, or buyers raise their bids.

Can you guess which is more likely to occur in an environment of rising interest rates and a softening U.S. economy?  The softening is already so pronounced as to be reflected in the ginned-up, ludicrously bullish numbers published each month by the Federal government. Just last week we got word from the Commerce Department that GDP growth had slowed to 2.5 percent this spring, down from 5.6 percent in the first quarter. Permabulls, economists and a legion of delusional pundits have seized on this news as evidence of a “more sustainable” level of growth and of an economy coasting toward a soft landing. But if that’s what the abrupt slowdown truly implies, then a few bloody fingernails found on an upper sill of an office tower should be taken as evidence that whoever left them there succeeded in braking the fall.

‘Lawn Indicator’

Of course, few will believe that real estate prices could crash until there is heard, so to speak, the horrifying sound of something going splat on the sidewalk. Sellers are going to hang tough until the splat comes, looking to reap their price or something close to it. Actually, it won’t be a splat that causes sellers to panic, but rather a certain, unpredictable threshold at which “for sale” signs on neighbors’ lawns become sufficiently numerous to induce a cold sweat.

Meanwhile, don’t count me among the few bears, such as Sir John Templeton, who think a collapse in real estate prices is about to usher in the Second Great Depression. I’m convinced it will take only a three-to-five percent downtick in homes values to do that. Imagine tens of millions of homeowners paying off six percent loans on collateral that has fallen in value by two or three percent a year.

No, it won’t take a real estate collapse to bring back 1930s-style deflation, only a relatively small softening in prices. We dare not even ponder how much worse it will be, and how much quicker insolvency will come, for the millions of other borrowers who are already struggling to pay interest on ARMs now approaching 10 percent that were bestowed as a result of wildly optimistic appraisals.


Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. 

-- Posted Tuesday, 1 August 2006 | Digg This Article | Source:


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