Housing Bottom Is Further Away Despite Improvement In Sales

THE FINAL NUMBERS - LIGHT VOLUME AND STABLE

NEWS: The last two trading days have been on some of the lightest volume of the week and today did not give traders too much to play with. The Dow closed the session up 26 points or 0.2% after getting crushed yesterday. The S&P 500 got back 4 points from the 25-point loss yesterday. The NASDAQ did not join the rebound party and ended with a loss of 3 points or 0.2%.

THE BOTTOMLINE: With such light volume it is tough to put too much faith in the action this week. We will know much more once the majority of traders return from vacation next week. Keep in mind that September is historically a rough month for the market and that October is the month of crashes and/or bottoms, depending on if you ask a bull or a bear. The next three days before the unofficial end to summer I expect volume to continue decreasing and the markets to remain within a fairly tight trading range. That being said, this could change if Hurricane Gustav strengthens and makes its way into the Gulf of Mexico and disrupts the natural gas supply.

If the hurricane escalates to a level that affects the energy installations in the Gulf, I expect the price of natural gas to spike (up 5% today) as well as oil. From an equity viewpoint, the natural gas stocks will be the big gainers and some of them began moving today in anticipation of possible disturbances to the energy supply. The First Trust ISE Revere Natural Gas Index ETF (FCG) closed the day higher by 2.4%.

McCALLS CALL - VIEW ON THE HOUSING MARKET

NEWS: As I have always believed, the housing market is regional and will remain that way. Never in history has there been a total collapse of the housing market from coast to coast. Specific regions have been hit harder than others, but there are always pockets that hold up well during national downturns. But when will this weakness end and the next upswing begin?

THE BOTTOMLINE: I do not hold myself out to be an expert in the real estate market, but that being said, I can put some logic and economics into it and calculate my view on the future. Based on what the numbers have shown the last two days, sales have improved a bit, but at the same time inventories are also increasing. The big concern for me is the record inventory number released Monday for existing homes. What this tells me is that supply is increasing at a higher rate than demand.

Simple economics tells me that this will result in lower prices until an equilibrium is met and the demand (buyers) is equal to the supply (sellers). At this time, prices should stabilize and eventually begin to move higher again.

Adding to the bearish outlook is the fact that mortgage rates have not fallen and it is very difficult to receive a loan. Even if you want to take advantage of the falling house prices, you may not be able to due to the high lending standards. When all is said and done, the fact that inventories are increasing and it is so tough to get a loan, the end result will be lower prices in the near-term.

If you would have asked me earlier this year I would have said the real estate bottom would be occurring by the end of 2008. After what I saw this week, I believe that is an optimistic view that could be incorrect.

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