Tuesday, June 26, 2007

tick..... tick... BOOM!

Market Ticker
Initial household formation is down 70% from last year! This was a big surprise - and not of the good kind. You generally don't see that in a "strong economy." So is the economy really strong or is this an anomaly? Hmmmm.... and by the way, household formation collapsing makes getting rid of the inventory overhang much harder! Why do I think the truth is that the economics aren't as strong as we've been led to believe, and the Household Formation number is the more accurate indication? Oh, by the way, that's a leading indicator, unlike so many of the lagging ones that Bulls like to cite.

So what does the negative "household formation" number mean? Simple - this is 20-somethings and 30-somethings moving back in with Mom and Dad and/or taking roommates. Why? Do you really need someone to explain this one to you?
Its called hitting the economic wall - that is, going broke.

In even more ominous news, a Businessweek article suggested that people are now preferring to pay credit cards over mortgages. This is something that the Realty industry has said would "never happen" - in other words, that people would "guard their house" no matter what. Uh, no. See, people are a bit smarter - and more rational - than Realtors!

"The significance? One explanation could be that many recent
subprime homebuyers simply aren't that worried about losing their homes because they don't have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. "People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to
paycheck," says Oliai."

A 70% decrease in initial household formation is an interesting stat.
Things like this that get little attention sometimes can yield a wealth of information. The article goes on to lay out what this number represents. Taken together with the recent Bear Stearns news and housing market figures, the whole picture begins suddenly to look more ominous.

I recommend reading the complete article. There-in is speculation that some major events will play out within the next two weeks concerning equity markets. It will be interesting to see if he is right. If I were a betting man, I wouldn’t bet against it.


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