Market Still Reeling over the Real Estate Fallout

NY Times Persistent Fear Drives Stocks Down response and comment

Rampant speculation never plays out like anyone expects. The latest real estate bubble will again rewrite history as for the first time in US history Median US home prices will actually decline. The equity markets are again reacting to the liquidity crisis and they should. The Wall Street cockroach theory holds where there is one roach there is thousands. Meaning where there is one problem there is a many more. Liquidity is just the first domino to fall. There is going to a seemingly be a never ending sting of accounting write offs and revised income statements. Speculative loans will have to immediately hit the bottom lines of every financial company.

Meanwhile the Fed continues to cling to every shred of positive news. Caught in the headlights with a fairly new chairman it is unlikely that they can do much. Investors are clamoring for an interest rate cut but the Fed rarely has knee jerk reactions. If they lower rates too soon there is nothing in the arsenal to react with if an even larger problem erupts. Wall Street usually over reacts to bad news and this situation is sure to play out the same way. Bad news and over selling and gloom and doom. As the real news leaks out on earnings it is likely that the market will quickly rebound. Sure they are jittery right now but things will improve.

Improvement is not what the real estate market is not likely to see for some time. Look for values to drop significantly as the higher end of the market is affected by reduced liquidity and stricter loan approvals. Still many are still in a good position especially if they moved up during the boom or sat tight. I do not know how many are in this group but home values increased so dramatically during the boom that even a significant drop will do nothing but hit their net worth.

The real problem is that no one knows how damaging the drop will be to consumer confidence and retail sales. This is the real kicker. Chances are there is a drop for some time probably into the end of the year and then rebound. The economy was being fueled by the housing market during the early 2000's however the economy is again healthy enough to withstand this latest challenge. There is not going to be any more easy money in the real estate market for quite some time. Liquid investors should be able pick up some good values at the right time. That time has not arrived.