New Home Sales Plunge 8.3%
The US Commerce Department estimated Thursday that sales of new homes plunge 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000.
In addition, the new home sales housing report stated that the median sales price of new homes was down 7.5% in the past year, the biggest drop in 37 years. Clearly the US housing market is in a world of trouble.
The worse is probably yet to come. About 2,500,000 subprime mortgages are going to be reset from now until next August. Many borrowers are going to be faced with disastrous increases in monthly payments as interest rates on their mortgages are adjusted sharply higher.
Many borrowers don’t even realize that most mortgage reset rates are based on the LIBOR rate, not the US discount rate, federal funds, or prime rate. LIBOR is a more volatile rate and has recently sharply increased as additional risk premium is build into the rate due to market uncertainly.
Given conditions as they are today the reset interest rates could be more than ten percent. This will be a major blow to anyone faced with mortgage payments that may well double from initial levels.
In other developments today crude oil surged to 82.88 a barrel, up 2.58 Dollars a barrel on the day. And yet the stock market managed to close about 34 points higher at 13,912.94. And how is this? Is the stock market really that strong in the face of bad news.
Well, I expect that the reasoning is very short term oriented. The thought is that the Federal Reserve will have to further reduce interest rates to counter act a flood of negative developments that are in the news. However, it strikes me as a good time to sell stocks as the bad news is likely to become even worse and soon.
The odds of the US and world economies moving into a deep recession, perhaps a very deep recession, seem to be growing. To me it makes sense to sell stocks now while the Dow is still near all time highs.
