And the government programs to reverse this are simply ineffective. Even the two-thirds of the homeowners who are able to stay in their homes through some sort of government intervention end up in foreclosure anyway.
Home Buyers Missing, Renting
On the other side of the equation is demand, and sadly there is little of that going on:
- Mortgage money is still tight. One-in-four Americans have a credit score at or below 600, few people have the capital to make the 20% down payment that many lenders now require, and there is no secondary market to buy mortgages outside of Freddie Mac and Fannie Mae. Even jumbo mortgages are nearly impossible to get unless you have great credit and the 20% down payment or more that’s now often required.
- With one-fourth of all mortgage holders underwater, many people who would want to move up to a larger home simply can’t.
- With real-world unemployment high, many people can’t even think about buying a home.
- With home prices falling, sensible people are turning to renting rather than buying, so they’ll have the ability to easily leave a market if they want or need to.
We can expect this massive housing problem not to begin to clear up until home prices stabilize — something that isn’t expected to happen before late 2013 or early 2014. What does that mean for consumer spending, the economy, profits and the market?
Consumer spending is headed for stagnation and/or a fall. The latest Conference Board survey data showed a sharp drop in confidence in March — from 72 to 63.4 — and confidence is the basis of spending. It fell sharply because of worry about rising prices and stagnant incomes, according to the Conference Board.
Housing Slump to Hit Corporate Profits
As spending stalls and/or declines, corporate growth does the same, except for some big exporters. And with the stagnation or decline of corporate growth, there will be a decline in corporate profits.
While most analysts believe estimates for the S&P 500 are achievable in 2011, I believe the estimates are way too high for 2012. As the market will punish companies that miss or downgrade forecasts, a correction is in store based on a revised outlook for 2012.
The only thing that would prevent a downward move by the market, in general, is another round of quantitative easing by Bernanke and the Fed. As it is, if the economy appears to be on track in June, QE in its current form will end.
On the other hand, if the economy hits a noticeable roadblock before then, Bernanke will be able to justify more QE. And QE is key, because you can’t fight the Fed. The massive liquidity produced by the Fed has been designed to raise asset prices (something it has done), and if it continues, it’s hard for me to envisage the market falling despite problems with corporate profits.
That being said, the betting money on Wall Street believes that quantitative easing will end in June, and it probably will. Then, when the economy stalls, it will lead to a disaster.
When it becomes clear that the Fed isn’t going to immediately ride to the rescue once again, the stock market will tumble.