While the newspapers and pundits continue to discuss and hypothesize on whether we could go in to a recession—-we not only already IN a recession, but probably mid-way through the recession. Typically, recessions are reported after they are finished and are backwards-looking. I believe that when the capital markets froze mid-August, that they economy quickly declerated into at least 2 quarters of declining growth. It’s that simple.
 
The residential real estate market’s decline will have brought about the recession, and the residential real estate market will bring us out—as it ALWAYS does. The typical post-war recession is 10 months, and if this one started on/about August 15th, then typically it would be finished June 15th. The housing market normally picks up MID-WAY thru the recession [due to lower interest rates and the affordability] and that would be expected to be Jan 15th.
 
We have some unusual things going on now that seems to be escaping the media who loves to write about”gloom and doom”—but seems reluctant to write about the news.

Simple fact—housing inventory has now declined across the United States 4 months in a row! In some areas–the decline in inventory has been 10% or more–in only the last month.

While the Federal Reserve was keeping tight on interest rates, they were quietly expanding the money supply at a great rate–and have increased the M3 by approximately 15% in the last 12 months. This is huge— will play a great role in housing’s recovery—-and will bring a general econimc recovery sooner rather than later.

Since we operate a national real estate business, I can tell you that leads for buying have exploded since the first of the year.
 
As you all know, I have been expecting the real estate market to begin its recovery in March–led by an increase in transactions. Getting leads in January should lead to transactions in March. I also expect prices on homes to begin to turn north ahead of everyone else—either in the fall of this year, or the spring of next year at the latest. With inventory declining, and transactions expected to be picking up soon, it won’t be long until the media reports the upturn, and then people will return to the real estate market in droves [3 years of pent-up demand by people waiting until it’s “safe” to buy.] Once the inventory bulge is taken out of the market, prices will start to recover.
Classic economics–classic people investor’s psychology.
 
Bernanke’s speech sets the tone for a 3/4 % rate reduction on Jan 30th to 3.5%, and clears the way for a reduction to 3% mid-March. The 2 year treasury is now near 2.5%—so expect Fed funds to get near to the 2-2.5% range, and we could be at 2.5% at the May meeting!. I don’t think they will need to go lower because the Fed increased the money supply much earlier into the slowdown than people realize—and because/since they did—the housing market will show stronger positives this spring than people expect—which will lower the need for the Fed to lower the rates, and because I expect the decline in bond yields to be over sooner than later since the bond market will begin to see this upturn before the Fed and everyone else. Over the next 6 months you will see parts of the economy declining—and the housing market start to recover.
 
Let’s look at the housing inventory decline…

The change in the number of homes for sale at the end of December compared to a month earlier–
 
Boston - 13.3%
Chicago - 8.6%
Dallas - 8.2%
Los Angeles - 8.5%
Minneapolis - 9.8%
Orange County, CA - 10.2%
San Francisco Bay -11.3%
Seattle -10.7%
San Diego - 8.8%
Washington DC area - 8.4%
etc.
 
Fact is—-when you look at the numbers, and remember that this is the 4th consecutive month of inventory decline—the numbers are startling—-especially since all we keep hearing about are foreclosures causing inventory to swell. Maybe news reporters ought to report the REAL news on this. Once they do–the recovery will be well under way!
 
The Wall Street Journal had this to say yesterday-

“market performance is ugliest before and in the early days of a recession as investors panic about the effects of a downturn on earnings. In the three recessions between 1980-1991, stocks turned positive before the recession ended, leading to runaway gains in the months after the downturn. Stocks on the whole rose modestly during those recessions”

This leading me to believe that the worst of the downturn is probably here—and we have experienced a small up-move in stocks after the recent correction although it is way too early to call an end to the decline in equities. However, due to declining rates, expectations of large decreases coming soon, and the ease that corporate earnings will be able to beat year-over-year comparisons–especially in the financial and housing sectors—this portends a strong advance in stocks.