Tuesday started promising on Wall Street, as the National Association of Realtors (NAR) announced a potential for an upswing in the US housing market, possibly in late 2008.  They expressed the possibility of market stabilization.  However, they also said pending home sales dropped 2.6% in November.

While the market was seemingly encouraged by a positive implication for the medium-term future of existing homes, it quickly changed direction following devastating news from Countrywide Financial and KB Home, a large home builder.  Many are suggesting that Countrywide may be on the verge of bankruptcy following poor profit numbers.  Countrywide has denied these reports.  KB had an extremely poor fourth quarter showing and gave a dark outlook on the housing market by stating they see no signs of stabilization.

Additionally, government-sponsored Fannie Mae predicted a down housing market until at least 2010.  Perhaps the most impacting voice on the day was President Bush’s, when he indicated concern over the housing and mortgage markets and shared his belief that it will take some time for the markets to head in the right direction.

All the negative news sent stocks spiraling downward following a good start to morning trade.  Many economists had hoped somewhat flat numbers in housing and foreclosures, in November, was an indication of possible stabilization.  Unfortunately, the overwhelmingly negatively outlook from several strong sources dispelled much of the market’s hope.

Although the huge losses by leading home builders and financial companies’ paints a grim picture, the NAR suggested an upswing in existing home sales could begin as early as spring or summer of this year.  It is likely that improvement in existing home sales would be necessary for increased interest in new construction.  Investors and interested home builders will want to see a renewed interest from the demand side of the housing market before developing new construction.  Many aggressive developers and builders are still sitting on unwanted properties hoping to recoup losses at some point.

If sales of existing homes do pick up later this year, the potential for renewed building interest is greater.  Consistently positive data for several months should give investors encouragement.  Although some are hoping for a dramatic turnaround, the market may be better off in the long-term from stabilization and healthy move up.  This will be the likely turn of events as the markets would move with cautious optimism once signs of recovery grow.

Big losses by Countrywide and other mortgage lenders is concerning to housing bulls.  Strong financing is a necessity for improved home value.  Without the ability to borrow money with favorable terms and rates, it is difficult for prospective buyers and interested investors to take on debt and make strong offers for land and homes.  This is why many are expecting the Fed to continue to lower the Fed fund rate, giving borrowers greater financing leverage.

Even with favorable borrowing terms, buyers need access to capital.  With several retailers already reporting poor fourth-quarter numbers, businesses and stock holders may not have capital to invest in new development.  Consumer confidence is also an important factor in improved housing.  If consumers lack confidence in the economy and financial markets, they are much less likely to take on the risk of home building or buying.  With many more earnings reports still due over the next few weeks, a continued poor showing could weaken consumer confidence, which has held up relatively well considering the housing and mortgage slumps.

Market Recap

In Monday trade, US equities were fairly flat, with the Dow closing up 27 points to finish at 12,827, following Friday’s sharp sell off.  The NASDAQ and S & P were little changed as well.  Little big news affected the market.  Circuit City announced lower sales in December, a negative sign for holiday retail sales.  Tuesday kicked off strong on Wall Street on the back of rate cut hopes.  The excitement was short-lived, as the market moved quickly lower in the afternoon.  The Dow closed down 238 points to 12,589, while the NASDAQ dropped 59 points to 2440.  While the National Association of Realtors suggested a potential housing marketing upturn in late 2008, KB Home, a large home builder reported large fourth-quarter losses and a downward outlook on the housing future.  Additionally, the Bush Administration expressed continued concern over loan defaults.

Neil Kokemuller
Tuesday, January 8, 2008
7:54 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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