Boom2Bust.com

Another Kind Of Independence

Benjamin Franklin said, “An investment in knowledge always pays the best interest.” I’ve always been a big believer in this mindset. As Editor for Boom2Bust, I try to argue my point that a U.S. financial crash is coming by incorporating as much evidence as possible into the posts while keeping them easy to understand. I’ve visited other financial commentary websites and found that a lot of them are either way too opinionated, lacking real substance, or are way too technical, leaving me confused as to what the author is trying to say. They also seem to be long-winded, which is a problem if you are like me and always on the run. The approach at Boom2Bust is to keep the posts short but sweet, getting directly to the point. Amen.

As one of our Founding Fathers, Benjamin Franklin understood the value of keeping things simple. If you have the time this Fourth of July, I highly recommend you read Franklin’s “The Way To Wealth.” You can access this as a webpage (thanks to Florida Gulf Coast University) or .pdf file (thanks to The Benjamin Franklin Institute of Global Education). As you read Franklin’s manuscript, you’ll see his ideas concerning financial independence are just as valid today as they were in his time. Unfortunately, you’ll also notice how similar Colonial America is to our society when it comes to mismanaging our finances and our lives.

Boom2Bust’s posts will resume on Monday, July 9.

Have a great Fourth of July, and God Bless America.

Pending Home Sales Plummet To 6-Year Low

The National Association of Realtors reported today that its index of pending home sales, which reflects homes under contract, sank to 97.7 in May from 101.2 in April. The latest reading dropped 13.3% year-over-year, and is the weakest since September 2001, the lowest on record. The NAR created the index in 2001 as a forecasting tool for previously-owned home sales, instead of relying on the group’s existing home sales report, which charts sales at the time of closing. The pending home sales index tracks when a sales agreement is signed, generally 1 to 2 months ahead of closing.

The sharp drop surprised the financial markets as economists polled by Reuters had forecast the May index would rise by 0.2%. The NAR said that pending home sales rose in the West and Northeast, but fell in the South and Midwest. The drop in pending sales comes on the heels of a report from the Association last week that showed actual sales of existing homes also fell in May to their lowest level in 4 years, and the median home price dropped for a record 10th consecutive month. This comes at a time when the glut of homes on the market hit a 15-year high in May.

NAR economist Lawrence Yun sees some upside, despite the latest news. In the Wall Street Journal earlier today Mr. Yun said demand may be building, as “Mortgage purchase applications are trending up, with some of the rise due to buyers reapplying for alternatives to subprime financing.” Yun predicted, “Nonetheless, home sales should stay close to present levels in the months ahead given an accumulating pent-up demand.” Doubts persist, however, about a near-term housing rebound. Kevin Flanagan, a fixed income strategist for global wealth management with Morgan Stanley, told Reuters today after the NAR report that, “I do not see a bottoming in the housing market. There is not a light at the end of the tunnel.” Ian Shepherdson, chief U.S. economist for High Frequency Economics, talked about the latest pending home sales index reading in MarketWatch this morning and stated bluntly, “This is horrendous. These numbers give the lie to the idea that any sort of recovery, or even stabilization, is underway in the housing market. In fact, it continues to deteriorate, rapidly.”

Paulson Weighs In On Housing

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

There have been a number of stories in the news lately pointing to the end of the U.S. housing slowdown. Newshounds and regular readers of Boom2Bust.com might recall some of the more recent ones:

I have a pretty good idea that realtors and others dependent on a healthy U.S. residential real estate market are welcoming such statements. Maybe they’ll back off of real estate columnist Mary Umberger, who said yesterday in the Chicago Tribune that, “Real estate agents complain to me that every time there’s a news story about declining home sales, consumers send up a collective screech and run to the sidelines, further suppressing the marketplace.” Umberger talked about the Coldwell Banker and Boston Consulting Group surveys and had this to say:

“Obviously, one might point out that a real estate company has a vested interest in promoting positive attitudes about the market, but I’m inclined to believe that both studies do reflect Americans’ conviction that real estate — that is, their real estate – won’t let them down. It’s not unlike the way that every parent of every toddler thinks their little darling is a genius. And it’s why sellers in the last year or so have clung so hard to asking prices that are way too high.”

While wishful thinkers refuse to lower asking prices, the inventory of unsold homes continues to grow. As prices inevitably fall, so will consumer spending (no more housing ATM) and eventually, the financial markets.

Surprise, Mr. Paulson!