Housing ‘Freefall’ Worse Than Dot-Com Crash?

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1. Housing ‘Freefall' Worse Than Dot-Com Crash?
2. Fed Official: Inflation Target Needed
3. Savings A Shade Above All-Time Low
4. Back-to-School Sales Boost Retailers

1. Housing 'Freefall' Worse Than Dot-Com Crash?

The number of unsold homes in America is at a 10-year high, and some analysts fear that the current slowdown in the housing market could cause more damage than the dot-com bust of 2001.

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Canada's Globe and Mail cites David Rosenberg, Merrill Lynch's North American economist: "[Rosenberg] has fretted about a housing bubble for at least two years. He of course has been wrong. Prices kept rising.

"Now he looks more right than wrong and he's steadfast in his convictions. He talks about 'the recession under way in the housing sector.' Note the lack of 'potential' or 'possible' ahead of the R word," the paper says.

"Houses are the biggest store of North American wealth. If even a small fraction disappears, watch out. With cruel glee, Mr. Rosenberg points out that there have been 10 U.S. housing downturns in the past 50 years and seven of them triggered a 'full-blown recession within 24 months.' "

The UK's Guardian reports that according to official figures, the number of new homes sold in July was 22% lower than at the same point a year earlier, and prices were nearly flat - all of which is leading experts to predict that what is now a housing slowdown will devolve into a total crash.

"Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here," Paul Ashworth, chief U.S. economist at Capital Economics, told the Guardian.

Ashworth claims that since 2001, some 30% of all jobs created in the U.S. have been linked to housing - anything from work on construction to employment at a store like Home Depot. The paper says a housing decline could see businesses cut some 73,000 jobs a month in 2007.

Morgan Stanley's chief economist Stephen Roach believes that the housing slowdown - which is cutting into construction spending and robbing homeowners of ready cash from their properties - will slice about two percentage points off 2007 GDP growth, taking the United States close to recession.

The Guardian quotes Roach: "For a wealth-dependent U.S. economy, the bursting of another major asset bubble is likely to be a very big deal," he said, warning that, with U.S. fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom.

" 'A bursting of the property bubble poses equally serious risks for America's key trading partners and for the rest of an increasingly integrated global economy,' he added."

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2. Fed Official: Inflation Target Needed

Richmond Federal Reserve Bank President Jeffrey Lacker said yesterday that at the last Fed meeting on Aug. 8, he voted against the majority - in favor of another interest rate hike.

Lacker said "there is a risk of inflation becoming entrenched and that an unfolding economic slowdown might not be enough to bring inflation down quickly," according to Reuters. He voted in dissent of his peers at the Fed based on his belief that inflation could get stuck at its current level and needs to be brought down very quickly. He sees another rate rise as the way to achieve that.

"The risk of raising rates at that meeting for lower real growth was not appreciable and, moreover, I didn't think real growth moderating - as it's likely to over the next couple of quarters - was going, by itself, to bring inflation down," Lacker told Bloomberg News. "I think there is a danger of inflation becoming entrenched at the level it is now."

Last month, the Fed told Congress that it predicted inflation hovering around 2% to 2.25% in 2007 - but that is too high for most policymakers, including Fed Chairman Ben Bernanke. Lacker has said in interviews that it would be preferable for inflation to quickly slow to 1.5%, and until that happens, he feels further rate tightening is necessary.

Editor's Note:

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3. Savings A Shade Above All-Time Low

America's savings rate fell to 0.9 percent in July, the lowest reading since Hurricane Katrina struck the U.S. and the second lowest reading on record. That's the sixteenth straight month that consumers dipped into their savings to maintain spending habits.

A negative savings rate wouldn't be so alarming if the housing market weren't slumping at the same time. For months, homeowners have been cashing in equity on their homes for extra spending money. Now that home prices are sluggish and in some cases falling, that opportunity is no longer available.

And that will inevitably impact spending. "The long-awaited housing-market correction is upon us and indications are that it is not going to be quite as orderly as many, including the Fed, are predicting," Bloomberg quotes from an Aug. 25 report by economists Sheryl King and Claudia Lokody. The slump in housing "has the potential to pull consumer spending to the brink in early 2007."

Personal spending in July increased 0.8 percent, double the 0.4 percent increase in June, according to the Commerce Department's report. The spending increase came even as oil prices reached a record high, or perhaps because of it. The percentage households spent on gas and electricity costs increased 15 percent in the second quarter 2006 from the previous one, says Commerce's Bureau of Economic Analysis.

"We know some of our retailers are saying the gas prices are affecting the frequency of shopping trips for them, but we have not seen any impact on our sales," Bloomberg quotes Stephen Sanger, chief executive of General Mills Inc., in an Aug. 23 interview. "Our sales have continued to grow in this period when gas prices have gone up and we believe they'll continue to grow."

Incomes rose 0.5 percent in July. And disposable income, income after taxes, increased 0.7 percent that month, the most since January, leaving the possibility open that rising incomes will offset personal spending.

"I don't see consumers becoming a tremendous source for growth, but neither do I see them as a big drag," says Richard DeKaser, chief economist at National City Corp, to Bloomberg News.

Another good sign for the economy: The Fed's favorite inflation indicator, the personal consumption expenditures index excluding food and energy, rose just 0.1 percent in July. The overall PCE price index increased 0.3 percent in July, up from 0.1 percent in June.

"Inflationary pressures could yet prompt the Federal Reserve to raise interest rates further, but this month's data have not provided the trigger," Patrick Newport, an economist at Global Insight in Lexington, Massachusetts, said before the report.

Stay tuned.

Editor's Note:

Housing prices nationwide could fall by as much as 40% over the next few years, eating into equity and squeezing consumers. Discover the five ways to protect yourself and profit from the coming real estate crisis. Go here now.

4. Back-to-School Sales Boost Retailers

Shoppers persevered at the nation's stores and malls in August, buying skinny jeans and other back-to-school fashions and giving many retailers solid sales gains for the month. The outlook for the rest of the year nonetheless remained unclear amid higher energy costs and interest rates and a deteriorating housing market.

As merchants reported their results Thursday, the early winners included Nordstrom Inc., Limited Brands Inc., as well as teen retailers Bebe Stores Inc. and Wet Seal Inc.

"The early signs are that back-to-school is doing better than expected," said Jharonne Martis, an analyst at Thomson Financial. "Parents have budgeted for back-to-school. There is no stopping the consumer."

According to Thomson Financial, of the 21 retailers that have reported same-store results so far, 11 beat estimates, while 10 missed. Same-store sales are sales at stores open at least a year and are considered a key measure of a retailer's health.

The solid performance in August -- a time when stores aim to do the bulk of their back-to-school business -- is comforting as many analysts expect a consumer spending slowdown in the second half; their concerns were heightened after June's sales stalled but business rebounded in July, helped by clearance sales of summer goods. After a slow start, business in August gained momentum even as concerns increased about the consumer's resilience.

Last week, the Commerce Department reported that sales of new homes dropped in July by the largest amount since February while the inventory of unsold homes climbed to a record high. And according to the latest snapshot of the job market, hiring slowed in July as employers added just 113,000 jobs. That pushed the unemployment rate to a five-month high of 4.8 percent and provided more evidence that companies are growing more cautious amid high energy prices, though they have retreated recently.

Such bad news about the economy, particularly the job market, weighed on consumers in August, causing their confidence to tumble even more than expected to its lowest level in nine months, according to the New York-based Conference Board.

Nordstrom said its same-store sales rose 7.1 percent; analysts polled by Thomson Financial expected a 3.3 percent gain.

Limited had a 9 percent gain in same-store sales, better than the 6.2 percent estimate from analysts.

Teen retailers generally had a good performance. Bebe had a 12.5 percent gain in same-store sales, better than the 11.4 percent analysts projected.

Wet Seal, which operates stores under both Wet Seal and Arden B., had a 8.7 percent gain in same-store sales in August, better than the 7.0 percent forecast.

"At the Wet Seal division, our back-to-school season sales performance is strong and we are seeing sales increases in every significant product category," said Joel Waller, chief executive officer of Wet Seal, in a statement.

But teen retailer Pacific Sunwear of California Inc. struggled with a 9.4 percent drop in same-store sales, worse than the 4.6 percent decline Wall Street estimated.

On Wednesday, Costco Wholesale Corp. reported a 5 percent increase in same-store sales, missing the 5.7 percent estimate. The wholesale club operator issued the sales report as it warned that fourth-quarter profit would be below analysts' estimates, as sales on items like jewelry and furniture slowed and the company struggled with higher gas prices.

American Eagle Outfitters Inc. reported an 11 percent gain in same-store sales in August, better than the 9.1 percent estimate from analysts.

Hot Topic Inc. suffered a 6 percent drop in same-store sales, worse than the 5.7 percent analysts expected.

Editor's Note:

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Editor's Notes:

Bernanke's blunder could be the biggest opportunity of the last decade for savvy investors. Go here now.
Find out how to hedge your assets from the coming housing bust. Go here now.
Housing prices nationwide could fall by as much as 40% over the next few years, eating into equity and squeezing consumers. Discover the five ways to protect yourself and profit from the coming real estate crisis. Go here now.
Beat the S&P every time. Learn how to invest in sectors the smart way. Go here now.
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