海角大神

Not much action in the markets yesterday. The Dow lost 5. Gold gained 4.

So far the markets have not seemed to notice, but there are not one鈥�but two bulls in this china shop.

First, the US government is going broke.

Second, we鈥檙e at the beginning of a Great Correction.

As to the second item, here鈥檚 this update from Bloomberg:

Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.

Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6% this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a 鈥渓ong time鈥� to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.

鈥淚t鈥檚 going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,鈥� Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. 鈥淣ew home sales probably have until the fourth quarter until they start recovering.鈥�

What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment?

We don鈥檛 think there will be a recovery鈥�not in the 4th quarter鈥�not this year鈥�not next year鈥�not for 10 years.

Instead, housing prices are probably going to sink. Why? Because they鈥檙e a consumer item, not an investment. For 100 years, a house was a place to live in鈥�and housing prices more or less kept pace with inflation. Then, beginning in the mid-鈥�90s people came to see a house as 鈥渢he best investment you can make.鈥� They began buying houses as a way to make money鈥�and as a way to save for retirement. It made sense. What would you rather have, a mutual fund growing at 10% per year鈥�or a house that goes up by 10% per year? The house! Because you can live in it鈥�and show it off. So you leverage up鈥�you buy twice the house you can afford. You live better. And you make more money.

Those days are over. But, not everyone realizes it. Some wait for the housing market to 鈥榬ecover.鈥� Some may imagine that they will once again see profits from their houses. Others just hold on鈥�waiting for an up-tick so they can get out.

There are still millions of people living in houses they can鈥檛 really afford鈥�and millions of others who are 鈥渦nderwater鈥� and running out of air. That鈥檚 why the number of houses facing foreclosure rose in the last quarter of last year. And it鈥檚 why the inventory of unsold houses continues to rise.

Gradually, people are coming to see houses in a new light. Soon, they鈥檒l see them as money-pits鈥�as expensive follies鈥�and as a pain in the neck. Instead of being proud to have a McMansion鈥�they鈥檒l be embarrassed鈥�like having a car with tail fins in 1985鈥�or wearing a mullet in 2010.

Not only that, it will also be seen as a big waste of money. As the Great Correction continues, unemployment will remain at high levels鈥�savings will increase鈥�and people will want to cut expenses. Among other things, they鈥檒l want smaller, cheaper houses. They鈥檒l want to dump their suburban castles and walk away from their country palaces.

Houses will be losers.

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