Flooded Housing market...

[High_Fidelity]

I am interested in the current reports of a flooded housing market. Going into 06' we might be looking at losses "falling just short of recession." How true can this be?



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From what I see, this will mostly affect our S fund, which is small and medium cap stocks, as the housing market most deals with these stocks. Will this inevitably drag down the C fund with it? These numbers I am getting regarding the housing marketare seemingly blasphemous, are we this bad off? I think while a lot of this appears to be hype, there must be some truth to the matter. It also appears that our feds areplaying "jenga"with the dollar, and thatsuperficial strengthwill fall. But then again, when have they not..? I am not meaning to come across as treasonous to US markets, they currently comprise over half of my portfolio. I am just being realistic and wary, seeing my retirement so close, I need to think of these things.



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I am currently 15G 15F 15C 25S 30I. Is it perhaps time to go international? With the prosepect of such heavy losses I will no doubt be forced to attempt to dodge the proverbial "bullet." I am thinking along the lines of 20G 20F 10C and 50I.


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I am new to this board as far as posting but I have been watching and reading at work for quite some time. Does anyone have any thought on this matter and/or ideas for possible contribution allocations? In other words, where is the "Ark"

[GatorinGA]

I live in central Georgia, and from what I can tell, the whole housing bubble thing is just a locality specific issue. I build houses in this area, and have been involved int he housing market in some capacity or another since 1988. There is absolutelyno housing bubble in jeapordy of popping in middle GA. If anything, our market is under valued, and house sells are still doing great. I went TDY to Los Angeles, and have a firm understanding what the bubble is. A house that would sell for $200,000 here would sell for over $1 million there.

[neirbod]

Here in DC, we are starting to see warning signs. Houses are sitting unsold for much longer, you see "reduced price" signs for the first time in years, and I have some friends who are selling telling me that ithas becomevery hard. I don't think the bubble will "pop" here - too much demand and relatively high-paying jobs, but I do expect a substatial defaltion of maybe 10% or so. However, even that level of decline could have a big impact on how much people spend as they take out fewer home equity loans, and begin to feel less wealthy.

As for the bubble being restricted to certain localities, I agree. But keep in mind that the those areas where there is likelya bubble are also those with the highest density population, and with a proportionaly greater influence on the US economy (e.g. Boston, NYC, DC, LA, San Fran). Combine the housing situation with high consumer debt, all those ARMs, and increasing interest rates, and I do see a bad ripple effect coming soon, maybe this spring. I for one will take the saying "sell in May and go away" very seriously this year.


Dave

[Birchtree]

High-Fidelity,

I purchased a second hand Ark a few months back and have recently finished the remodel job. You would be more than welcome - it's sitting in my front yard right where my Flash Gordon rocket used to reside.

It would be wise IMHO to remember that the Euro countries comprise a bit over 60% of the I fund. If you look at current fund pricing you can spot the overvalued ones.

European corporate earnings are expected to fall as companies feel the pressure of higher interest rates from both the U.S. Federal Reserve and the European Central Bank. Europe's stock markets, which have been on a winning streak for the past year, may suffer as a result. Last week the ECB, which sets interest rates in the 12 nations that use the euro, raised its key interest rate for the first time in five years after forecasting quickening inflation and faster growth. Although the ECB raised its benchmark rate only to 2.25% from 2%, it heightened expectations that further increases may be around the corner in both Europe and the U.S.

Economists and market strategists expect the ECB to weigh in with a quarter-percentage point increase in the first quarter of 2006 and another in the second half to bring the bank's key rate to 2.75% by the end of 2006. The Dow Jones Stoxx index of 600 leading European companies is up 21% for the year.

It will be difficult for corporations to raise top-line growth with the pressure of increasing costs.

[Birchtree]

High-Fidelity,

This year European earnings and shares have benefited from the ECB's relaxed monetary policy, but U.S. shares have been hampered in part by rising rates in this country. The ECB rate hike will eventually hurt European earnings growth. Their corporate annual earnings growth might slow to 4% in 2006 from 10%, the level of current consensus estimates for 2005. In Europe the return on equity (or the common stock equity divided by net income) is 16%, which is a record, and I believe it will be hard to generate further growth from this level. But only the Shadow knows for sure.

Increasing costs also will be a drag on profits. In recent years, corporations have increased capital spending and have borrowed money at low rates, and they now will have a harder time meeting debt obligations as interest rates rise. What has been driving and maintaining European profits is not the European consumer - it has been the global economic growth, which is dictated by the Fed.

Just in case you think I'm bearish on the I fund - I'm not. I own a similar fund and plan to hold my position but I would not jump in big time with new money at these valuation levels - rather I would concentrate on a dollar cost averaging strategy. There are market experts who say Europe will continue its solid earnings growth. They see European earnings growth going up 10% befoe the rate hike, and still see them going up 10% after the rate hike. This rate hike is not a big deal for the market. This is probably more than you asked for, sorry. Take care.

Dennis-perma bull #2

[Dave M]

Key West is a 'destination.' That means upward pressure on housing prices is not likely to decline. At most, priceswill level off. This happened here in 2000 - 2001.

Hi-Fi, it is ironic you should say "flooded." Our town was flooded by three feet of salt water byWilma. About half the homes were affected. The effect on the housing market has been to increase the supply due to the people who can no longerafford to remain, either fromlack of funds for repairs or a sudden desire to experience all four seasons. A lot of people are going north.

As these owners are cycled out and new owners are cycled in, the market will adjust. I expect prices will stabilize for a while, say six months to a year. It may be that homes which emerged unscathed from the storms will be at a premium, thus averaging out those that were damaged. Certainly homes that are not elevated and hence were flooded will sell slowly.

Data from the local MLS suggest that prices in my neighborhood may have peaked in May '05. That would cap a 5-year runup which averaged $6,500 per month, $79,000 per year, 30% per year compounded. It is now cheaper to rent than to own.

Dave

[oldschool]

hmm, big article in Business Week on stalling housing market in what was one of the fastest appreciating areas in the country - Loudon county just west of Washington DC. Volume of sales down in October, number of listings up. They cite similar figures for a number of other major urban areas. Given this "news" maybe Fed won't focus on the a bit higher than expected sales numbers that came out today, and thus we're still on track for only one more interest rate bump. The article suggests housing markets in a number of areas have resale listing up by a third in recent months... This has probably been discussed somewhere in other postings, but seems current....

[trike]

Remember, the C-Fund includes 0.6% REIT (Real Estate Investment Trust), while the S-Fund includes 7.8% REITs.The major homebuilders are still optimistic for 2006, but a slowdown seems likely at the moment. In some local markets, especially those affected by lay-offs (Detroit and SE cities with GM & Ford plants closing....), real estate has tough days ahead. A worst case scenario could have a serious impact in other sectors, such as construction, mortgage brokers and home improvement stores, and could cause further layoffs. I have read that in "bubble markets," like here in NW florida, aka Hurricane Alley, the number of RE agents has tripled or more. If the market goes into a stall, expect more people fighting for jobs.My opinion is that some markets have been driven by much speculation recently, from overseas and boomers nearing retirement. If you recently bought a house to live in, and have some job security, you should be fine. Hopefully, when the equities markets take off in 06, and are once again recognized as a solid investment (vice RE), we will also see money flow from real estate into equities.

[oldschool]

Trike, agree with all you say. And....C has some builders, many financials, with earnings tied to housing market directly/indirectly....so maybe there's some substantial risk for C if widespread housing issues threaten....

[rokid]

Don't you think those "bubble"concerns arealready priced into the market?

On the other hand, there should be a lot of construction activity on the Gulf Coastin the coming years - unless they change the rules on federal flood insurance.

[trike]

Thats an excellent question. I think to some extent it may be priced in, but again its primarily regional and highly dependent on the job market.NW Florida should be fairly safe (except from hurricanes) because the preponderance of employment is military. BRAC is slightly benefitting the local area (Eglin AFB, Hurlburt Field) so there is little threat from job losses. Unfortunately, since Ivan hit 9/04, there was a short term shortage in housing and prices quickly became unaffordable. Presently, inventory of unsold homes is fairly high and prices have come down in many cases. Our local bubble is due to hurricane damage and the constant threat of future hurricanes.Basic Allowance for Housing for 2006 came out the other day, up $125 for an E-5 from $704 to $829, and that is still inadequate.