 Suddenly,
It's a Bleak Midwinter for Housing & Lending
Susan C. Walker
Elliott
Wave International
Jan 9, 2008
In the bleak midwinter,
Frosty wind made moan,
Earth stood hard as iron,
Water like a stone...
(From "A Christmas Carol" by Christina Rossetti)
Shawn Colvin sings a beautiful
song based on this poem by Christina Rossetti, reminding us of
the bleakness of midwinter. That is exactly where the housing
market seems to be now - facing its very own bleak midwinter
of falling prices, rising mortgage rates and growing inventories.
The latest report of the S&P/Case-Shiller
home price index shows that the price of houses fell 6.7% in
October, year over year. That is the largest year-to-year decline
drop since April 1991. Think of it - if you had bought a home
for $300,000 in October 2006, it is now worth about $280,000.
And suppose you just got a new job and need to move? You are
going to have trouble selling it at that price, too, thanks to
so many foreclosed homes on the market. One realtor in Phoenix
explained to a Wall Street Journal reporter that local
residents are now competing with foreclosed homes selling for
$50,000 to $100,000 less than other houses on the market. "The
sellers now are having to reduce their prices by 20% to 30% to
compete," she says. (Wall Street Journal, "Pace
of Decline in Home Prices Sets a Record," 12/27/07)
At a meeting of the New York
Society of Security Analysts on January 7, U.S. Treasury Secretary
Hank Paulson said this about the U.S. economy: "We will
likely have further indications of slower growth in the weeks
and months ahead.''
Paulson and central bankers
at the U.S. Federal Reserve recognize that they, too, face their
own bleak financial midwinter. It's not just the mayhem brought
on by the subprime mortgage debacle, the implosion of the housing
market and the ensuing credit crunch; nor is it that the U.S.
economy lurches toward a recession and hard times.
No, it is something bigger
than that. Public opinion or social mood, as we call it here
at Elliott Wave International, has shifted from positive to negative.
When that happens, financial heroes find themselves falling from
their pedestals onto frozen earth hard as iron.
Exhibit A - The headline of a recent article
on Bloomberg: "Paulson Gets Diminishing Return with Bush,
Like Powell, O'Neill" and the lead: "Henry Paulson
escaped the Nixon White House with his reputation enhanced. He
won't be so lucky this time around."
Exhibit B - The lead from a recent column by
David Ignatius in the Washington Post:
"When airport rescue
crews are worried that a damaged plane may have a crash landing,
they sometimes spread the runway with foam to reduce the probability
of fire on impact. That's what the Federal Reserve and other
central banks are doing in pumping liquidity into severely damaged
financial markets. Make no mistake: The central bankers' announcement
Wednesday of a new coordinated effort to pump cash into the global
financial system is a sign of their nervousness..."
Nervousness is in the air now.
Investors are anxious about the markets; everyone is worried
about the housing market. Our Elliott
Wave Financial Forecast December issue explains how housing
starts (and stops) are intimately tied to recessions: "One
key indicator of success in pre-dating economic downturns is
housing starts, which are approaching the 1-million-a-month level
that has preceded all recessions of the last 40 years."
And the Fed is nervous, too.
So much so that it announced a credit giveaway with four other
major central banks (the Bank of Canada, the Bank of England,
the European Central Bank and the Swiss National Bank) in mid-December
to try to bolster the financial system and the banks that keep
it humming. The Fed reports that banks have been stepping up
to its auction window each week to purchase $20 billion. Unfortunately
for the banks, most of this "liquidity" isn't that
liquid. It has to be paid back within 30 days, with interest
of about 4.65%.
| Editor's
note: Elliott Wave
International has agreed to make available to our readers a 2-1/2-page
excerpt from Bob Prechter's Elliott
Wave Theorist in which he describes exactly how the Fed's
latest effort to shore up banks' balance sheets has become "High
Noon for the Fed's Credibility." Click
here to read the Theorist excerpt. |
Just how bleak is the future
for central bankers if this recently implemented plan doesn't
work? Bob Prechter explains in his just-published Theorist:
"Nevertheless, this
is probably the single most important central-bank pronouncement
yet. But it is not significant for the reasons people think.
By far most people take such pronouncements at face value, presume
that what the authorities promise will happen and reason from
there. But the tremendous significance of this seismic engagement
of the monetary jawbone is that if this announcement fails to
restore confidence, central bankers' credibility will evaporate.
"At least that's the
way historians will play it. But of course, the true causality,
as elucidated by socionomics, is that an evaporation of confidence
will make the central bankers' plans fail. The outcome is predicated
on psychology."
The "socionomics"
Prechter refers to is a new social science he has introduced
that studies how humans behave in groups within contexts of uncertainty
- where fluctuations in social mood motivate social actions.
It explains that rather than an event happening that affects
social mood (for example, falling home prices make people feel
bad), what really happens is that social mood changes first from
positive to negative and then lousy things happen (for example,
unhappy people make home prices fall). If you can adopt this
point of view, then you can see that, in poetic terms, we are
fast approaching a bleak midwinter for the economy and the financial
markets.
written Jan 7, 2008
Susan C. Walker
Susan C.
Walker
writes for Elliott
Wave International a market forecasting and technical analysis
company. She
has been an associate editor with Inc. magazine, a newspaper
writer and editor, an investor relations executive and a speechwriter
for the Federal Reserve Bank of Atlanta.
321gold Ltd
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