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Housing Optimism Is a House of Cards


Foreclosures, deflation putting pressure on industry's balance sheet.

The bottom line is that home prices continue to deflate. This is pressure on the household sector's balance sheet from declining home valuations. Inventories of new housing are running closer to a 12-month supply.

I don't believe an economic recovery can begin without a housing recovery, which can't begin until housing deflation stops. And, I believe that will require new-home inventories falling to or through an 8-month supply. That suggests downward pressure on new construction, if inventory liquidation is to be achieved.

I continue to believe that a sustained recovery in real economic activity won't eventuate until late 2010, around the November off-presidential elections.

The coming week's indicator expectations include the Tuesday. April 7 report on consumer credit in February. While likely up slightly less than $1 billion, it would suggest annual growth under 1%, down from 1.5% in January, and 5.8% at the fall '07 peak.

Consumer deleveraging will persist in earnest, the strongest headwind to a sustained recovery. The consensus has a decline of $1.3 billion in consumer credit envisioned. Wednesday, April 8, reveals February wholesale inventories, which likely fell at least 0.6% - a slightly-faster-than-consensus decline. But, with sales plummeting, the inventory/sales ratio likely rose from January, which had the highest wholesale I/S ratio in 7 years.

The Federal Open Market Committee (FOMC) minutes may give us the first official evidence about quantitative easing. Thursday, April 9, likely reveals a February trade deficit between $36 and $37 billion, in line with consensus. The bottom line is declining US and global trade activity in February. March import prices likely rose 1.1% -- the first jump since July --due to energy.

My view is a somewhat faster rise in import prices than the consensus sees. On Friday, April 10, the March federal budget deficit is pegged by the consensus at $150 billion. My estimate is higher, a $180 billion Red Sea. The deficit will approach $1.5 trillion in 2009. I wish I could hear what Everett McKinley Dirksen would say.

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