The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

26 May 2006

Housing market weakness spreading - Scott Grannis

The attached charts present the best picture to date of a housing market that is clearly deteriorating, driven down by a 120 bps increase in mortgage rates since last summer. It's encouraging that home prices are still generally flat to up somewhat, but with activity slowing rapidly I imagine that prices are likely to begin falling by year end, if not sooner. The only question now is the extent to which things deteriorate further, and how much of an impact this has on the rest of the economy. In that regard it is still the case that federal and state tax receipts are growing by record amounts, and corporate profits remain very strong. Interest rates have been driven higher largely because economic growth has proved to be much more resilient than most people thought, so while higher interest rates are taking a bite out of housing on the margin, they needn't signal slower overall economic growth going forward. The Fed has raised short-term interest rates 400 bps in the past two years, but in real terms interest rates are still only about average.

[click on images to enlarge]

In any event, all eyes are now on the housing slowdown. Whether or not it makes a significant dent in the economy will be the key thing to watch for as the summer unfolds.

Scott Grannis
Chief Economist
Western Asset Management

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