Homeownership: The American Nightmare

The S&P500 dropped for the third consecutive week, this time 0.7%.  Volume crept higher, adding conviction to the price drop.  The VIX (or fear) index fell slightly, although within the week, it rose to a higher level than it did the week before.  Were it not for a strong technical bounce on Friday, the S&P would have been down between 2 and 3 percent for the week.

The economic news was horrible.  Existing home sales for July collapsed, falling 27% below June’s level.  July sales were the lowest in 15 years, and almost 26% below the July 2009 level–a time when most everyone thought they couldn’t go much lower.  The supply of existing homes spiked to 12.5 months–well above the highs reached during the depths of the recession in 2009.  New home sales also fell to their lowest level ever in July;  the supply of new homes also soared.  What does all this mean?  Home prices are about to plunge–yet again.  There is simply NO plausible reason why it will not happen.

In other economic news, durable goods orders came in well below expectations.  Initial jobless claims remained near the nosebleed 500,000 region.  Second quarter GDP was revised down to 1.6%–a horribly poor rate, but not quite as bad as was feared.  Finally, consumer sentiment also disappointed, coming in slightly below expectations. 

Technically, the S&P bounced up, as expected, on the last day of the week.  The daily charts leave some more room for this bounce to continue next week.  On the weekly charts, several very ominous patterns are clearly forming.  On is a bearish head and shoulders formation, where the January highs formed the left shoulder; the April highs created the head, and the July highs formed the right shoulder.  Over the next few weeks, if the neckline (around 1,000) gets broken to the downside, then the movement down could be dramatic, with a reasonable target between 875 and 900.

TIME magazine this week featured a cover story that is refreshingly honest, but also very disturbing.

The honesty centered around the myth, or cult of homeownership in America as some sort of religiously moral than proper thing to do.  The article describes how we’ve been brainwashed into believing that owning a home is not only good for our lifestyles and our children’s education, but also good for social community building and America itself. 

But the reality is that it was all a lie, a lie built by the housing and financing industries, and a lie expanded by the political system hellbent on pacifying an uneasy populace.

What’s most disturbing is that this myth has now led to the financial ruin of the average American family and the US government.  These families, whose real median incomes have been stagnating for decades, over-invested in housing to make up for the lost wages.  While this trick worked for 20 years, it has now exploded in the faces of these families, who now face foreclosure, ruined credit ratings, and bankruptcy.  Meanwhile the federal government, which subsidized home ownership (through mortgage tax deduction and cheap financing through Fannie Mae, Freddie Mac and FHA) has now accumulated trillions of dollars in lost revenues and outright credit losses.

But worst of all, what used to be the American Dream, turned American Nightmare, is far from over.  While TIME is helping to deprogram the public, the damage from the housing bubble has only begun.  Home prices, although down 30% from peak, are still another 30% away from the 100 year old price trendline, long-term ratios to median income and median rents.

How will we know that the worst is over?  When TIME runs a cover story–most likely in about five years–with a title that pronounces the “The Death of Homeownership”.  When every newspaper, every friend, every co-worker, and every family member tells you that buying a home is the stupidest and riskiest thing you can do with your savings, then–and only then–will it probably be a good time to buy a home again in America. 

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