Consumer Sentiment Hits a 28 Year Low/Foreclosures soar

Sometimes I feel like Bill Murray in the movie Groundhog Day when it comes to giving everyone updates on consumer sentiment and rising foreclosures. Consumer sentiment hit a 28 year low of 56.7 which was down from the previous month according to the University of Michigan Survey.


So why are consumers feeling so bad?

Here is a great graph from Calculated Risk that shows the amount of equity that was extracted from homes over the last 18 years. Look at the amazing amount of wealth that was spent during the "golden housing bubble" years of 2002-2006. This is how consumers were affording that Hummer and 58" plasma TV!!

As you can see, now that home prices are free falling, the housing ATM card that came from home equity loans has been shut off. Banks have ZERO desire to do home equity loans now that housing prices are free falling and foreclosures are soaring.

Note in the right hand column that at the peak, these home equity extractions accounted for almost 10% of disposable income. That number is now down to about 2% which is close to where it was during the last bursting housing bubble in the early '90's. The bottom line here is the consumer has been cut off from equity extractions.

That's a big hit to the wallet of the consumer on top of soaring gas and food prices.

I think this will end up being well below the 1990's lows of 1% because this housing bubble was so much more severe than the 1990/91 bubble. A % close to zero is not out of the question.

This is why touching any company that is sensitive to discretionary spending is suicidal. The consumer is 70% of the economy!

I have to admit guys and gals. When I see the impact of the housing bubble on the consumer combined with soaring inflation, I start to get sick to my stomach because I just don't see how we get out of this without a major major recession.

Foreclosures rise 48% in May

Foreclosures continue to soar rising 48% in May versus last year and up 7% from last month.

Here is the foreclosure data from Bloomberg:

Some highlights:

"June 13 (Bloomberg) -- Bank repossessions more than doubled in May and foreclosure filings rose 48 percent from a year earlier as previously foreclosed properties dragged down housing prices, trapping borrowers in mortgages they couldn't afford, RealtyTrac Inc. said in a report today.

Foreclosures add to inventory and crowd out regular sales, Michelle Meyer and Ethan Harris, economists at Lehman Brothers Holdings Inc. in New York, wrote in a report yesterday. Foreclosures will account for 30 percent of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, they said. They estimate foreclosed properties, which typically sell for about 20 percent less than other homes, will depress home prices nationally by 6 percent."

My Take:

Gee, should we be surprised at these foreclosure numbers? The one thing that stood out to me was the fact that 30% of all home sales are foreclosures. 1 out of 3. Amazing. I still think its way too early to be buying these by the way. Can you say "catching a falling knife".

Realty Trac said on CNBC this morning that there are about 700,000 foreclosed homes for sale right now and they expect that number to rise to 1 million by the end of the year. That's only going to push prices further down folks!

Its supply and demand people. Stay away from these foreclosures! Inventories continue to rise which will mean much cheaper prices down the road. We are very early into the foreclosure cycle. Let these suckers buy at a 20% discount. You will be getting them for 40% off in a year or two.

Bottom Line

The market is up today but its not an impressive move. New lows outnumbered new highs in the market by 3-1. We have a Lehman led relief rally in the financials. This has no legs and I wouldn't be surprised to see this rally fade going into the weekend.

Enjoy your Friday