Housing Bottom: Lead to Double-Dip Recession?

Ian Wyatt — Thu, 28 May 2009 16:13:00 GMT

May 28, 2009

*****A Bottom for Housing

*****Double-Dip Recession

*****19% on BlackRock, Inc (NYSE:BLK)

Fellow Investor,

Yesterday, it was reported that median home prices fell to $209,700 from $246,400 in April 2008. That’s a steep year-over-year correction, even though prices were up from March 2009.

Today, we hear that that new home sales posted a gain, though not as big as expected.

The housing market is bottoming. How long will the bottoming process take? Common sense would say it will take a while, probably a couple years, to work off the inventory and get current delinquent loans back on track.

Persistently high unemployment rates will not help speed the recovery in housing. But at least we’re seeing signs that the housing market is stabilizing. We should expect to see swings in the data, one good month could easily be followed by a bad month. It will be interesting to see how much the stock market moves on housing data going forward. I would suspect that only extreme readings would move stocks significantly.

*****The Mortgage Bankers Association reported that 9% of mortgages are delinquent. Throw in mortgage holders that are in foreclosure and it’s 12%. That’s a huge percentage. It’s also the highest since data was tracked, starting in 1972.

It’s easy to see why the numbers are so ugly – as the unemployment rate rises, fewer can afford their mortgages. And in some areas of the country the unemployed can’t move to find a job because they can’t sell their home. So it’s no wonder that more and more economists expect a “double-dip” of recession.

74 percent of economists responding to a National Association for Business Economics survey believe the U.S. economy will grow in the 3^rd Quarter. But the growth won’t be strong or lasting.

A growing number of economists, including Dr. “Doom” Nouriel Roubini, believe it’s likely that the U.S. economy will go back into recession in the second half of 2010, when government stimulus wears off.

*****The economic recovery is facing two major speed bumps – rising energy prices and rising interest rates. As the economy recovers, energy prices will rise, soaking up excess household funds and leaving less for discretionary spending. We’ve seen oil prices practically double so far this year and OPEC has announced that it feels that RIGHT NOW oil should be valued at $80 a barrel: meaning another 27% from today’s $63. That’s going to hurt at the pump even more. Here at the Washington, D.C. offices we’re already up 40% since December with a regional average of about $2.39.

As the government continuer to sell Treasury bonds to fund the budget shortfall (over $1 trillion for 2009, and counting) and pay for stimulus initiatives, bond yields will rise, making it more expensive for consumers to get a loan. That will affect the market for big-ticket items like cars and new appliances, not to mention homes.

*****All this will have important consequences for your investments for the foreseeable future. First and foremost, it will be important to follow sector trends. Energy will remain strong, but sectors like retail, housing and consumer goods will probably remain volatile. There will be some quick, isolated opportunities here and there in those sectors, but the broader trend is not positive.

Also, risk management will be critical to success. Investors should have exit strategies in place for their investments. This is not a time to be thinking “buy and hold.” Rather, if you have gains, don’t be afraid to take the money and run.

*****Speaking of taking your money…just this morning I advised my Top Stock Insights advisory service members to take their 19% gains on BlackRock, Inc. (NYSE:BLK) today. BlackRock was my feature recommendation for profiting from the Treasury’s Public-Private Investment Program (PPIP) to remove toxic assets from banks’ balance sheet.

Several important aspects of the plan have been removed, and I suspect Treasury Secretary Geithner will abandon it altogether soon. The PPIP is simply not going to work, and for many of the reasons I’ve stated here in Daily Profit.

First and foremost, banks simply don’t want to sell. And Geithner blew his opportunity to gain some leverage over the banks through his “stress tests.” And all the bailout money didn’t exactly convince banks they were in danger of failure and needed to sell.

At least Top Stock Insights readers managed to turn a profit on Geithner’s failed plan. Now, we’re setting our sights on India. The recent election there has set the stage for massive economic reform and jumpstart to growth.

Despite a huge jump for Indian stocks in the wake of the election results, not many investors are considering India right now. But I think that gives us a distinct advantage as India could be one of the great growth stories this year and going into the next several years. If you’re interested, you can find out how to get my Special Report 3 India Stocks Set to Soar in 2009 by clicking HERE.

That’s it for today; I’ll talk to you tomorrow. As always, you can drop me a line at editorial@247investor.com

Ian Wyatt

Editor

Daily Profit

Daily Profit : Treasury Bonds, PPIP

Housing Bottom: Lead to Double-Dip Recession?