Saturday, May 10, 2008

A long way to go

Over the last week, we have seen people cheerleading the stock market and the housing market. But I still feel like there is a long way before both bottom out.

Recently, we had Sam Stovall calling for a market bottom. Here is the quote from

“We're of the opinion that the market has likely seen the worst,” says Standard & Poor’s Chief Investment Strategist Sam Stovall, who studied market behavior in and around the 11 recessions since 1945. On average, the S&P 500 declined a combined 25.9 percent ahead of and during the recession.

As I have said before, there is a long way to go before we can call the credit crisis over. The market has been concentrating on the worst case scenario. Now, the worst case scenario seems unlikely. But that doesn't mean everything is great. The market will look at the economy and soon see inflation and stagnant economy. The consumers have been tapped out. With gas prices so high, the checks will go directly to arab countries. So there will be hardly any stimulus from the tax rebate.

As for the housing, people keep calling the bottom. But most people have been calling a bottom for a long time. People are claiming low interest rates and better affordability. While it's true that mortgage rates are low, the true affordability is total mortgage (House price plus interest rate) compared to income. While homes are more affordable, there is still a long way to go before you can buy a house with a median income.

Another problem with the housing is the inventory. Foreclosures are still adding to already high inventory. I expect foreclosures to be increasing, not decreasing. With economy slowing, there will be more layoffs. As such, it's going to add to the foreclosures. And also, there are more resets still coming.

With all these issues, housing is not going to recover until 2010. So it's a long way to go before we can call a bottom.

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