‘D’ word raises its ugly head

Posted on 08. Jun, 2010 by in News

William Hanley, Financial Post · Saturday, May 29, 2010

A couple who live in our Toronto condo building recently returned from Florida sporting deep tans and wide smiles. They had just bought a 1,000-square-foot condo in a nice old development in Delray Beach on the state’s east coast –for US$37,000, when the loonie was just about at par with the greenback. US$37,000! And the property taxes, always a worry in Florida with its Homestead Act penalizing out-of-staters, are only US$800 a year because they’re based on selling price. The condo fees are super-low, too. No wonder our condo neighbours believe they did well.

So, it is a wonder when properties can still be bought at 50%, 60% and even 70% off peak prices in many states that U.S. home builders and real estate types generally say they’re upbeat. After all, foreclosures continue apace, about 20% of homeowners live in properties worth less than the mortgages on them and many homes built during the boom lie empty even as new houses are being started. Meanwhile, the government’s homeowner tax-credit plan, which helped many people to buy, is coming to an end.

This is all playing out against a U.S. economy that — while the output numbers are improving — is still struggling mightily with a jobless rate that few people see declining significantly for several years. People without jobs do not buy houses –except, of course, during the subprime boom–or other big-ticket items.

Such is the malaise in the housing market that David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates in Toronto, uses the dreaded “D” word to describe it. Rosenberg, noted for his early warnings about the financial crisis, told clients recently that the United States itself is “still in the throes of a modern-day depression.”

One of his themes in remaining cautious about the U.S. recovery and what it ultimately might mean for the markets has been another “D” word: deflationary pressures. Those concerns were further borne out when Washington reported the consumer price index actually edged lower in April, with inflation nowhere to be seen. While that is good news for bond prices, it’s one more sign of an economy struggling to find real traction.

Add tumbling commodity prices, worries over China and the perilous state of affairs in Euroland to the housing and employment problems and another “D” word is again being uttered– “dip,” as in “double dip.”

That term is used to describe the return of the recession as economic output falls into negative territory a second time. While only a few observers are predicting a double dip, that it is once again being mentioned weighs further on market sentiment.

It is said the markets climb a wall of worry. That wall is growing by the week. Market volatility itself has been growing and by mid-week, the S&P 500 index was off more than 10% from the spring highs. Yes, the indexes did bounce back, but that roller-coaster action merely underlines the uncertainty.

Indeed, this may well turn out to be the summer of our discontent, from the streets of Athens to the canyons of Wall Street.

Such an uncertain landscape has prompted some investors to heed the old technical analysis adage “sell in May and go away.” While profits mostly continue to beat analysts’ expectations, giving individual stocks a boost, the underlying market is increasingly under pressure as doubts about any number of things grow. Moreover, earnings growth will be more difficult to come by over the coming quarters because year-earlier profit levels will be higher and harder to beat.

The good news is you, like our neighbours, will still be able to buy vacation properties in Florida, Arizona and elsewhere at low prices with money borrowed at low rates. But as long as that is good news for buyers, it will be bad news for the economy.

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