"Now for those pundits that insist that real estate is not spilling over into
the real economy, we ask the question, “Why has the Association of Home
Appliance Manufacturers’ Index posted a roughly 10% decline in shipments?” Or,
“Why is Circuit City laying off 3,400 of its best sales personnel and attempting
to hire maladroit sales people at a much reduced compensation package?”
Similarly, “Why is Citigroup cutting 15,000 financial-related jobs?” And, “Why
is GMAC stating that its Residential Capital subsidiary is going to hurt
profits?” Inquiring minds want to know such things.
Moreover, if the problems in
sub-prime mortgages are NOT spreading, why are sub-prime mortgage companies
dropping like flies, why are companies like ACC Capital closing their “call
centers,” and why are delinquencies rising not only in the Alt-A complex, but in
prime portfolios as well?”
We think the answer resides in the fact that housing
prices are falling while Mortgage Equity Withdrawals (MEW) are contracting.
Indeed, MEW has declined from $844 billion to $386 billion over the past nine
quarters as housing prices have softened and trillions of dollars of adjustable
mortgages have reset at higher interest rates. And with the continuing decline
in housing prices, combined with mushrooming adjustable rate mortgage resets, it
is difficult to envision that this situation will not continue."
“As long as the roots are not severed . . .”
Raymond James Investment Strategy, April 2, 2007