Why the Fed is dead wrong on US housing slump?
Sam Adelton
Oct. 7, 2006

They know it is happening. After all they created it. And now they see it and feel it happening. But why they are so wrong about its intensity?

The housing market slump has just begun. The market is far weaker than it feels. The builders are nervous like never before. Most importantly many people have started defaulting on their mortgage loans especially the investors.

Normally a bubble like this takes at least a 50% retracement in price before any bottom is over. And the Fed is already complacent that they achieved the housing market soft landing. Former Federal Reserve Chairman Alan Greenspan said the ``worst may well be over'''' for the U.S. housing industry. Greenspan, speaking at a conference in Calgary today, pointed to a ``flattening out'''' of weekly mortgage applications after they went down ``very dramatically.'''' What Mr. Greenspan forgot is that in bear market there are always counter trend rallies and those are very violent rallies.

Fed is hoping for the best. They believe that like in UK, the housing sector will have a genuine soft landing. Here is the problem. The real estate market in US in a 70 year cycle. For seventy years the market went up. Baby boomers caused it to happen. Population demographics is always behind any dramatic move in real estate market. However, the cycle down in real estate markets are normally sharp again based on demographics. Unless massive immigration reform takes place in US, the real estate market is destined to accelerate downwards for at least thirty years.

There is one more catch. If you try to evaluate the price of a commodity or real asset in terms of a currency, you can easily get fooled. You have to compare it with the age-old world currency called gold. Real estate market when priced in terms of gold has gone up for the last seventy years. Only in the last six months it has reversed direction and is falling apart. If currencies become more worthless as Governments keep printing money and gold keep rising like in last two years, you may see real estate prices holding ground against dollar. But that is a false picture. If real estate prices keep falling in comparison to gold prices, real estate market is in a slump. That is exactly what we are seeing. And one - not even Fed can hide that bear market in real estate.


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