Tuesday, February 26, 2008

Bad News? What Bad News?

Take a look at that diagram to the left - that's the Case-Schiller Home Price Index for December 2007.

The Case-Schiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

Notice the trend of home prices lately - straight into the toilet. Prices fell 8.9% in 2007 and 10.2% from peak prices.

In addition, foreclosures in the U.S. were up 8% in January compared to December and nearly 57% from January 2007.

Why should you care about falling home prices, increasing unsold home inventories and rising foreclosures?

Because the recession the country is either already in or is about to descend into has been driven by the bursting of the housing bubble and the more the damage from the housing market spreads outward to other sectors of the economy, the worse this recession is going to be.

Just to give you an idea how bad things are already, home prices declined nationally in 2007 for the first time since 1932. Now nobody's saying we're entering another Great Depression, but there surely are warning signs of some serious, long-term problems coming.

For example, Home Depot reported an annual loss sales decline for the first time in its history today. That's a bad sign for a country that relies upon consumer spending to power over 70% of the economy.

Here's another example: the Wall Street Journal reported today that the FDIC is bracing for an increase in bank failures as a result of the fall-out from housing market problems and the credit crunch.

And while the Federal Reserve has decided to address the problem by lowering its benchmark interest rate to near-Greenspan levels, it also is stoking a big-time inflation problem:

Feb. 26 (Bloomberg) -- Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year.


``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

Just how bad is that inflation problem?

Well, oil futures closed at a record $100.88 a barrel today. Heating oil also surged to an all-time record. Gas prices are near summer levels. Wheat is also at an all-time high and products from bread to pasta to pizza to bagels have shot up as a result. Overall, consumer food prices were up 4.9% in comparison with January 2007. With all this inflation and bad economic news, consumer confidence has hit a 17 year low this month. And the U.S. dollar has hit an all-time low against the euro on speculation that more rate cuts are coming (which means even higher inflation and higher consumer prices in the future.)

Yes, between the tanking housing market that shows no signs of turning around, the retail industry that is taking a hit as a result of slower consumer spending, the inflation problem, the slowing growth problem, job market problems, the tanking U.S. dollar and worries that some major financial institutions could be in danger of going under, times are tough.

But not for the hedge fund managers and investor class on Wall Street.

The markets rallied again for the third straight day.

Makes you wonder just what economy they're looking at.

Surely it isn't the one the average American is looking at and paying for every time they fill up their cars, pay their heating bills or mortgages, buy bagels at the deli or milk at the supermarket, or fill drug prescriptions at the pharmacy.
blog comments powered by Disqus