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The end of the real estate boom
December 25, 2005

The US economic expansion probably would have ended somewhere in the mid-1990s were it not for the influx of foreign capital due to numerous currency crises during that decade. The general stock market had already run out of steam by 1999 and by 2001 it looked like the market might collapse, dragging the US economy with it. Aggressive interest rates reductions prevented a collapse by fueling a real estate boom that kept both the stock market and the economy on life support. But now it seems that even the real estate market can take no more. Earlier this month we learned that the inventory of homes for sale had reached the highest level in 19 years, and housing affordability was at a 14-year low. This week there is yet another article in the Wall Street Journal about housing affordability.

According to a study prepared by Moody’s Economy.com for the Wall Street Journal, housing affordability fell almost 9% in the third quarter from a year ago. In some markets, affordability declined by more than 20%. On a percentage basis you have to go back 25 years to find a decline in affordability as significant as this.

Earlier I read that there is not one county in the entire United States where a person working full time, earning minimum wages, can afford to rent a one-bedroom apartment. But it is not only lower income families that are having accommodation problems: even middle to upper income families find it difficult to move up. In some areas of the country, such as New York, Los Angeles, San Diego, San Francisco and Miami, affordability has declined to levels not seen since the ‘80s.

According to the Mortgage Bankers Association, mortgage applications are at their lowest level in almost a year. Also, home ownership has started declining from the record 69.4% reached in the second quarter of 2004 and now stands at 68.7%. It may not be a large decline, yet, but it certainly signals the effect that rising house prices and rising mortgage rates are having on homebuyers.

I do not believe this is a trivial matter, which is why I have dedicated so much time to writing about the real estate market. As the real estate market goes, so goes the economy and the stock market. The only thing that could keep the US on life support a little longer is another round of interest rate reductions, but this time it could hurt the dollar, and that would mean higher gasoline prices again, so it’s a double-edged sword.

This, however, is the season to be merry, happy and thankful. I am thankful that I do not have Ben Bernanke’s job.

Happy Holidays,
Paul van Eeden

P.S. I will be taking some time off and so there will not be another commentary until January 6th.

P.P.S. I may in future stop publishing these commentaries on Kitco so if you enjoy reading them I suggest you go to my website at http://www.paulvaneeden.com/commentary.php and register to get them by email. Rest assured that I do not sell or rent any of my subscribers’ email addresses.

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.



Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.


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