House of Horrors

Relentless housing horror headlines bring to mind last spring's popular scare story—the bird flu! By the way, good news! We didn't all drop dead from a bird flu pandemic. (We covered it at MarketMinder as likely being a non-event for the market—"A Pandemic of Fear.") You'd think there'd be more widespread rejoicing, but, no—and not a peep from a chastened media about inciting mass hysteria. Still, given the track record, one might assume talking heads would be more cautious about fomenting further fear.

Nothing doing! Time for summer flu season. Today it's virus known as the "housing crisis"—the housing bubble-subprime implosion one-two punch. If you stagger through life in even a semi-conscious state, you know the housing crisis is here, it's bad, and it must lead to economic and market devastation. When a market fear is as universal as this, our first step at MarketMinder is asking "Is any of this true?"

News stories squawk about dropping home prices, slowing sales, etc. Yet, looking at raw data, home prices are just a bit higher today than they were two years ago—basically flat. It's not runaway growth, but it's no crash. However, this news story says differently:

Home Prices Fall at Fastest Rate in 16 Years
By Rex Nutting, MarketWatch
https://www.marketwatch.com/news/story/home-prices-fall-fastest-rate/story.aspx?guid=%7B21D542FC%2DAC5F%2D4828%2D8B9C%2D276D04C8AC1D%7D

According to the quoted index, home prices have dropped 2.1% year-over-year. A 2.1% drop? Over a year? When the tech bubble crashed, the NASDAQ lost about 78%. That's a crash—dropping 2.1% is what we call "flat" or "irrational to fret." Further, note this index is comprised of 20 metropolitan areas—San Francisco, but not San Jose (San Jose is a bigger city!). Cleveland but not Cincinnati. Dallas but not Austin or Houston. How is this representative of the entire nation? It's not—you can disregard it.

But let's say home prices do stay flat, or even legitimately start crashing. That'd be bad, wouldn't it? How would we know? Easy—by looking at historic periods of flat or falling real estate prices, and checking what US stocks did subsequently.

We did just that at MarketMinder—graphing residential real estate price changes over the past 30 years, and noting both peaks and troughs. It turns out, stocks were always positive after periods of flat or falling real estate prices—6, 12, and even 24 months out. More surprising? Stock returns were better than their long-term average, and better even than periods of peaking real estate prices. The fact is: Falling or flat home prices do not automatically spell doom for stocks. There's no basis for this belief.

Housing prices aren't "crashing" and flat prices aren't bad for stocks—but what about subprime? Huge swaths of folks defaulting all at once has got to put a serious drag on the economy and ripple out to impact the finance sector and the entire stock market—doesn't it? We've commented here frequently on how unlikely that scenario is ("Dead Horse. Stick," and "Don't Go Blind from the Subprime"). But the following article gives further perspective on why you needn't fear a subprime fallout.

The Fed Takes Subprime Woes in Stride
By Peter Coy, Yahoo! Finance
https://biz.yahoo.com/bizwk/070628/jun2007db20070627650894.html?.v=1

Though witless homeowners ruthlessly duped by maniacal mortgage brokers and facing bankruptcy make good drama, in reality, a relatively small number of folks are in any danger. In fact, the situation is so contained and the US economy healthy enough the Fed let rates stand today, instead of lowering rates to "bailout" subprime mortgagees. If the organization charged with steering interest rates isn't concerned, you shouldn't be either. The good news in all this needless worry? The outcome won't be what most folks assume—and when that becomes clear, sentiment will improve, driving stocks still higher.

We're confident by Fall investors will disdain the "housing crisis" and claim they knew all along it was no big deal. By that time, they'll have moved onto fretting Fall's frivolous worry—the Spice Girls reunion tour being a sure sign of the Apocalypse.