Thursday, February 28, 2008

Ben Bernanke warns of bank failures

What a day in the stock market today. Ben Bernacke testified in front of Congress today and warned that some smaller banks could fail as a result of the credit/housing crisis. This can have ripple like effects when it comes to purchasing a house. Its great if you're looking. Its BAD if you are selling.

Why?? Because this will most likely result in rates going higher. A 30 year mortgage rate today is 6.05% vs. 5.47% a month ago. These are still below historical norms. I expect them to go much higher. Why?? The bond market is keeping the rates on the 10 year elevated and a new risk that has crept up in the last few weeks. INFLATION.

Oil closed at over $102.00 a barrel. If oil stays over 1$00 a barrel then this will mean $4.00 gas this summer which will put further pressure on the consumer. there is usually a 2-3 month delay for increases in oil prices to be fully priced into what you will pay at the pump. Gold was also over $970 an ounce reaching yet a new record high.

Inflation is now everywhere milk is now $4.00 a gallon. this is 30% higher then a year ago. Inflation is increasing prices everywhere. Higher oil,food, mortgage payments in combination with higher interest rates will eventually result in a massive drop in housing prices because the average american can only afford so much. If inflation continues to grow then the FED will be forced to do something that will destroy the housing market. The FED will have to raise interest rates in order to strengthen the dollar and keep inflation in check. this will be a devestating blow to anyone holding a home or building them.

The next step in this cycle:


It will be here soon so be patient. Incomes are simply not keeping up with inflation and the banks are tightening their lending. Consumers can only do so much. Many are paying two mortgages because they cannot sell their old home and have already moved into a new one.

Housing inventory is now over 10 MONTHS. This is the highest level ever since they started keeping track of inventories. Be patient fellow buyers. The price drops have just begun!!!

Tomorrow I will talk about what signs of what to look for in terms of finding a bottom.

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