The Weakened Real Estate Market

By Trust Company Staff

July 2nd, 2007

The first half of 2007 has left us with a lot of nice things to discuss. The S&P 500 returned 7% through the first half, while the Nasdaq was slightly higher at 7.6%. An eight week period from April 1 to May 31 made up the majority of the gains. Since that time, the major indices have traded sideways to slightly lower. Still, the returns were strong and certainly welcome.

Most recently we have spent a lot of time discussing wildcards such as China, the Fed, and Oil. However, a very important component of long-term economic stability is the state of real estate prices. Real estate valuations have increased dramatically for many years. Recently, we have watched real estate prices moderate in some areas and decline dramatically in others. It is difficult to throw generalities at the real estate market, because it is so regional and fragmented. Still, the trend nation wide has been toward significant slowing.

Confidence among builders as reported by the National Association of Home Builders/Wells Fargo index of sentiment edged modestly lower to 28 earlier in June from a previous reading of 30. A reading below 50 signals poor conditions. The decline was attributed to the unfortunate mix of an inventory backlog combined with rising mortgage rates and tighter underwriting standards. Can the stock market continue putting up stellar numbers without a stabilizing real estate market? We feel that the real estate market needs to show signs of turning the corner before the stock market can materially make new historic highs.