CNNMoney.com is reporting that home builders’ confidence fell further in October, and their outlook for the future remained at a record low level, according to a recent industry survey.

The National Association of Home Builders/Wells Fargo Housing Market Index showed the overall confidence measure had dropped to 18, which is the lowest reading in the 23-years the survey has been conducted.

The report is just the latest reading to show the home building and new home sales markets to be in serious trouble. In remarks Tuesday, Treasury Secretary Henry Paulson said that the housing decline is still unfolding and he termed it the most significant current risk to our economy.

“The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth,” he warned in prepared remarks.

Our future economic growth may already be severely penalized, and our economy as a whole may be better off if home prices are more affordable. No matter how much regulators try to keep prices from falling, the market should take care of things on its own. A steep drop in housing prices would bring affordability levels somewhere back below the stratosphere and within reach of many more people who can actually afford a home with nominal loan terms: no more creative financing like negative amortization or interest only teaser rate loans.

Still, the builders’ trade group says that its members hope that they are at or near the bottom of the market.

It takes more than hope to alter reality. Perhaps the home builders’ trade group should mix up another batch of the Kool-Aid they were drinking two years ago when home sales and values were increasing with no end in sight.

Kool-Aid, Investing, Economy, Real Estate | No Comments »

CNN is reporting that a consortium of the worlds largest banks is creating a fund to back up $100B in risky (and likely underperforming) mortgage and other securities.

The fund, according to reports in the New York Times and Wall Street Journal, would be used to buy securities at risk in the current credit crunch in an effort to avoid a broader economic problem. An agreement on the fund’s framework could be announced as early as Monday, the Times reported, adding the talks were ongoing and could still result in no accord.

Back in May 2007, Federal Reserve Chairman Ben Bernanke publicly stated that the mortgage mess was contained. Since that statement was made, several major mortgage lenders and hedge funds trading mortgage backed securities have gone belly-up.

It appears that banks are taking some responsibility by preparing a fund like this. After all, these same banks made a considerable profit over the past few years from issuing and trading mortgage backed securities, so it’s only reasonable that they try to cover their tracks. On the other hand, this may just be an attempt to maintain confidence of major investors by preventing any large scale losses. It’s in the banks’ best interest to avoid any financial crisis and to keep people investing so they can earn their commission.

It is surprising that these major banks couldn’t see this coming until it was [nearly] too late. It seems that everyone involved with mortgages or real estate, even large banks, were drinking the Kool-Aid and believing the party would never end.

Financial Market, Kool-Aid, Investing | No Comments »

MSN Money is reporting (via the Financial Times) that consumers continued to spend despite a worsening in the housing market. This supports the theory of some economists who argue that a drop in the housing market won’t affect the broader economy; our economy is more dependent on job availability. As long as there are jobs, consumers will continue to spend.

One thing that must be considered is that the housing ATM (home equity lines of credit or cash-out refinancing) has effectively been shut down with the credit crunch we’ve been hearing about the past few months. That was a major driver for consumer spending on high end items like luxury cars, vacations, electronics, etc. and we are seeing evidence that that spending has slowed down. Spending on regular nonessential consumer goods still appears to be strong however.

The surprisingly strong sales by retailers last month added to signs that expenditure was holding up and that the economy was drawing strength from other sectors. Fresh inflation data also suggested prices were in check.

That last statement is interesting - inflation is in check, though earlier in the week there was report that heating a home will be more espensive this winter, on the tune of 20% more for oil users and 10% more for natural gas users.

Economy | No Comments »

MSN Money is reporting that investors are paying out to insure against a possible US stock market crash. The spread between the cost of put and call options on the S&P500 has hit its highest level since 2001, indicating that investors are taking precautions against a market decline.

A put gives the purchaser the opportunity to insure against a fall in the market and is the option but not the obligation to sell shares at a specified price and date in the future. A call gives you the right but not the obligation to buy shares, allowing the buyer to position himself in case of a market rise.

It seems that not everyone is drinking the Kool-Aid. When your own money at stake, you have to stop and think for a moment when the markets reach record highs, especially when there’s a lot of talk about economic slowdown and less consumer spending.

William Strazzullo, chief market strategist at BellCurve Trading, said the stock market stood at a crucial juncture with the Dow Jones Industrial Average and the S&P 500 both hitting new highs on Thursday.

“In spite of the talk of recession and less consumer spending, we are back at record highs,” said Mr Strazzullo. “To sit up here is bullish and the clock is ticking for shorts. Either we roll over or set the stage for a bigger push higher.”

Todd Salamone, senior vice-president at Schaeffer’s Investment Research, said: “Everyone is expecting a huge decline.”

But Mr Salamone disputed that a crash was imminent. In 2001, put options became more expensive because the market was already falling, he said, while today, hedge funds were buying large volumes of puts to protect their long positions.

A crash may or may not be imminent, and any single economic factor such as reduced consumer spending is unlikely to make a difference. It’s difficult to predict markets, however those who do stand to make a nice profit.

Investing, Economy, Stock Market | 1 Comment »