Monday, May 9, 2011

Double Dip: Home Prices Sink Again

The Lehmann Letter (SM)

Take a look at this front-page article in today's Wall Street Journal:

It's entitled "Home Market Takes a Tumble." The chart accompanying the article illustrates a five-year drop in home prices. The rate of decline fell recently, but lately began to accelerate again. The article indicates that experts expect home prices will continue falling until 2012. The reason? Expiration of the homebuyers tax credit has dampened demand while foreclosures have boosted supply. Demand down + Supply up = Prices down.

These developments can't be good for homebuilding, and that's why this letter has doubts about the economic expansion's strength. It's not just that homebuilding is hobbled. These developments illustrate the weakness in households' balance sheets. Consumers believe they must conserve cash and limit debt. It's difficult for them to buy homes and autos under these circumstances. And it's hard to imagine a strong expansion while homebuilding and auto production remain depressed.

In addition, it's also hard to imagine a surge in inflation as home prices decline. That has not happened before.

© 2011 Michael B. Lehmann

No comments: