Housing Prices Continue Slide, Bad Sign for Markets

Feb.26.09 | About: iShares U.S. (IYR)

The National Association of Realtors reported that sales of existing homes fell 5.3% in January, to an annual rate of 4.49 million units, from a 4.74 million rate in December. It was the weakest showing since July 1997. About 45% of total sales involve distressed property transactions, including foreclosures.

The median sales price tumbled to $170,300 from $199,800 a year earlier and $175,700 in December 2008.

I think house prices are the single most important metric to follow in determining when equity prices are likely to rebound or whether they continue to fall. This is more important than unit sales though both are tightly correlated. The 3% erosion from December is troubling and indicates that more downward pressure on equities is in the cards. Although I am bullish on certain stocks like Oracle (NASDAQ:ORCL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL), I am negative on the prospects of the overall market because house prices continue to tumble.

Nouriel Roubini thinks house prices will continue to fall by about 15-20% in 2009.

My belief is that if we stabilize the housing market then capital market stability will follow. Until then I am extremely cautious and fearful as to what lies ahead although I believe one can make money with careful stock selection based on rigorous fundamental research.