Home Stats Point Toward Possible Market Bottom
Sunday, November 30th, 2008
The biggest item in my mind on the economic front this week was not the billions of dollars allocated to Citicorp or the new asset purchase program with billions more of our money, but rather the existing and new home sales report for October. The existing home sales report on a nationwide basis showed a slow down in sales and prices but also a reduction in inventory. In California and Florida sales rose as prices have come down to a level that is starting to attract buyers. Many of those sales are for homes that are in foreclosure. The new home sales report was also weak with sales and prices falling. However, inventory fell as well from a high of 11.4 months to 10.4 months. So for both new and used homes inventory is finally beginning to fall. That needs to continue for a bottom in the stock market to be formed. Also, interest rates are poised to fall having stayed in the 6% range for a 30 year fixed for some time. I think rates will fall to 5.5% or lower in the not too distant future and that will spark a rash of refinancing and new home buying.
I think lower interest rates are a sure thing simply because the government announced another program to buy troubled mortgages and other loans directly from the banks. This should push the banks to increase credit availability and that should lower rates. With the Fed Fund rate at 1.0% and likely to be lowered, downward pressure on mortgage rates will continue.
On Wednesday, the day before turkey day, there was a rash of economic stats released and all of it bad. The market’s reaction was very mild, telling us that bad news is built in to stock prices. It’s not what is expected that is the problem it is the unexpected and we have had a number of unexpected bad news in recent months.
The market is struggling to hold the lows. That number appears to be around 8,000 on the DOW. It dropped to a close of 7,550 for one day and then bounced back above 8,000 this week. Many experts are calling a bottom. That may be true but I think it is too soon to make that call at this time. At some point we are going to have a huge bear market rally and it is going to be difficult to call that point. Bargains are everywhere and buying stocks at this point appears to make a lot of sense, but every rally recently has been followed by an immediate sell off. This action is usually associated with a bottom for the market. Bottoms are not pretty; in fact they are messy and can be protracted. We seem to be in that category at this time.
Should you be buying? Yes, but very slowly and carefully. It doesn’t hurt to have a lot of cash out of the market and a short or two, but be very quick to pull out of the shorts. I believe the market is putting in a bottom, but is it ‘the’ bottom? No one really knows. That is why housing is the key. If inventory continues to shrink, home prices will stabilize. If that happens banks will decrease their worry about a shrinking balance sheet. That will put more downward pressure on mortgage interest rates and refinancing will pick up resulting in lower monthly payments for consumers. Of course that puts money in their pocket. It might take a little time but when these things happen consumers will gain some confidence. Housing is the key and it starts with shrinking inventory and lower mortgage payments, both which seem to be happening. That is good for the stock market.
