Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):
Housing Slowdown Takes Its Toll
Summary: Since 1975, when the Office of Federal Housing began indexing home prices, housing has never posted an annual decline. In a recent survey of 52 economists, most believe cooling in the housing market will extend into next year. Housing forecasts: Many predict no change, or even a decline, in home prices next year. The average prediction for next year was a 0.43% increase in housing prices, well below the 2.7% forecasted CPI inflation measure. The last time housing trailed inflation was in 1996. Economic forecasts: Expect modest economic growth through the middle of next year; the average GDP forecast was for an annual rate of 2.8%. Twenty-two economists said recession is the greatest threat over the next 12 months, 14 said inflation is the biggest threat, and nine chose stagflation (rising inflation and stagnant economic growth). The economists raised their forecasts for the likelihood of recession for a third straight time; the average probability was 26%. The most significant lasting implication of the Sept. 11 attacks: The rise in oil prices (26), increased vulnerability of consumer confidence (3), a reduction in talented foreign workers (3), none (5). Other survey tidbits: • Fourteen said Democratic control of both houses of Congress would have the best chance of reducing the national deficit, 14 said Republican control of both chambers, and 10 said a split Congress. • They predicted 115,000 new jobs a month will be added to nonfarm payrolls over the next year, the lowest forecast since the question was first asked in June 2005. • The unemployment rate will rise to 4.8% by November, up from the 4.7%, and to 4.9% by May 2007. • Economists forecast crude-oil prices at $66.95 a barrel by December, and $63.91 by June 2007. Some key quotes: • "The housing correction is just in its early stages now... prices will have to go lower to give demand a lift in short term." • "The most volatility will come in areas like Florida, where there are a large number of second homes and investment properties." • "Companies are taking a more conservative approach to corporate finances now... suppliers of capital [are] less willing to lend money" to unproven borrowers. • "Although the human costs of the 9/11 are incalculable, the macroeconomic costs have been remarkably small."
Comment on related stocks/ETFs: In a recent interview, Toll Brothers (NYSE:TOL) CEO attributed housing market weakness not to macroeconomic factors, but to the impact of global issues such as terrorism on the psyche of the American consumer. But looking at the Housing Affordability Index, which measures families' ability to meet mortgage requirements, Marc Gerstein suggests houses have simply become too expensive, such that even a decline in interest rates won't bolster the market. Oliver Schwindler notes that the current bubble in housing prices can not be attributed to a corresponding rise in income, nor population growth; combine this with the fact that rents have not gone up together with housing prices, and it's difficult not to conclude, as Lon Witter does, that, "housing prices [are] 30 to 50 percent too high."