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The Worst is Over for Housing? Don't count on it.
Dear American Capitalist Readers,
Once housing realities set in yesterday, that 100+ point run was all over. Yep, the major indices gave up major early day gains after the Fed minutes showed concern over the severe housing sector pullback. In their minutes, according to ABC News, Fed policymakers said “economic growth had slowed over the course of 2006, partly reflecting a ‘substantial cooling’ of the housing market.”
That “substantial cooling” statement was all it took to sink the market because it goes beyond previous Fed assessments and may indicate a steeper slump in housing. But what could really nail the economy is further housing weakness, which is a real possibility. And that’s not good, since any signs of further housing weakness could begin to spill into other areas of the economy, such as consumer spending.
For weeks, I’ve heard about this mythical bottoming of the treacherous housing market, but given Lennar Corporation’s perspective and the latest Fed pessimism, that bottom is more fiction that fact. Here’s a major homebuilder player saying, it has “not yet seen tangible evidence of a market recovery,” according to CNNMoney.com. Do you really need more evidence of a significant slowdown?
It’s so bad, says the company, that it now expects to earn between 70 and 75 cents in its Q4 as compared to EPS expectations of $1.07. That follows the September earnings warning when it said it’d earn $1 to $1.30 rather than $1.60. Even worse, though new home sales showed stronger-than-expected sales growth and a gain in November media prices, homebuilders are still struggling to stay above water.
Pulte, Centex and Toll Brothers have issued earnings guidance below guidance. And the Street is still looking for an EPS decline at the likes of KB Home and DR Horton. And so it seems the very market that served as the pillar of strength following the 9/11 attacks may now continue its breakdown well into 2007. While that may mean we’ll see a rise in unemployment, there’s still hope for the much talked about “soft landing.”
But let’s be realistic here. As soon as oil prices surge or we see further housing decay, we’re in store for quite a bumpy ride. Be cautious in this new year. Housing may have strengthened us economically in the past, but it may also do us great harm sooner than we think.
Have a profitable day.
Ian L. Cooper, Editor, Death Cross Trader
