The Flipside of my Argument Against a Housing Rally

by Justin Weinger on August 16, 2007

Okay, so I sat down and thought more about what I wrote yesterday. After some careful consideration, I still think the housing market is in for some trouble, but I think that the light at the end of the tunnel might actually be closer than what I initially thought.

First off, I think it’s important to state what type of investor I am; I think that might give a little bit of insight as to how I think about investments and markets. Obviously, there are a million different ways to invest and none of the ways seem to be particularly right or wrong – unless you invest like Warren Buffet or Peter Lynch because then you’d almost always be right.

Anyway, I like to look at myself as the anti-trend investor. As a market’s climb becomes more pronounced and the number of people talking about how great things are increases, the more bearish I become. Conversely, as a market’s fall become more pronounced and the number of people talking about how terrible things have become increases, the more bullish I become.

So, let’s look at the latest data regarding the housing market. Yesterday, the National Associate of Realtors released data showing the number of houses sold in the past month is way down over where we were last year, so much so that they’ve revised their forecast for the number of homes sold during 2007 downward – again.

Today, there were two interesting tidbits put out there: 1) the data showing housing starts is down for the sixth straight month and is at its lowest level in a decade and 2) Countrywide Financial (the country’s largest mortgage lender) has had to draw upon its $11.5 billion line of credit to cover operations. Of course, this sent the stock market into another day of sell mode, although it did rebound nicely to close the day.

Anyway, what I think all of this means is that the Fed’s hand is going to be forced in the near future. With the prospect of the country’s largest home mortgage lender having to possibly file for bankruptcy (a claim the CEO of Countrywide has vehemently denied), all three major indices in a major correction mode (not sure if they’ve reached the 10% threshold yet, but they’re close) and the fact that the American credit mess has now become a major hiccup in the world economy, I think that Bernanke and the Fed will start lowering interest rates this September – maybe even by a full half percent.

Obviously, this will add some liquidity to the credit market and should spark a slight rally in both the stock and housing markets. Whether these rallies will be able to be sustained is yet to be seen, but I believe that this will cause most housing markets to find their footing. We probably won’t see much of a spike in prices, but at least the lower rates will entice people who had been waiting on the sidelines to get into the market and buy.

The only thing that worries me is that if the rates drop, the housing market will be come saturated with people trying to get out of their homes right away, just in case this plateau or moderate turn around is only temporary. If this were to happen, while more homes would be sold, prices would probably continue to slip as housing inventory increased.

So, I guess this is the counter argument to what I had to say yesterday. While I still lean towards the pessimistic side, I’m hopeful that there will soon be some stabilizing forces in the markets.

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