Despite the robust recovery in many asset prices due to Ben “get to da chopper” Bernanke’s liquidity injections, housing prices remain near their lows. Ben has successfully reflated everything except the portion of the economy that actually sustains a recover – the consumer. The math behind the continued decline in housing isn’t terribly difficult to wrap your head around – consumers simply don’t have the income to support a rebound in home prices. Home prices are particularly wage sensitive. In a recent research report CreditSights says the negative ripple effect in the jobs market is not going away any time soon:
Our caution is based on our belief that the recent improvement in home sales and prices has been the result of government initiatives that will eventually end…high unemployment and continued rises in mortgage delinquencies and foreclosures will remain an overbearing problem for the sector. While there has been some optimism that the pace of job losses has decelerated since June, the loss of 263,000 jobs during September has tempered that hope.Unless the government’s economic stimulus plan starts to yield significant job formation, the macro forces of rising unemployment and mortgage delinquencies/ foreclosures will plague the housing sector once again.
We continue to see evidence that more and more (unemployment compensation) claimants will eventually exhaust all their benefits, and that any claimant that is a homeowner is likely to have trouble making mortgage payments. That would mean further pressure on delinquencies and foreclosures and eventually more home supply.
The Chinese water torture of price discovery continues….If only the government would let the market function properly without turning us into Japan.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.