Do Continuing Woes in the Housing Market Mean a Correction Is Coming?

Many investors remember the panic in financial markets that occurred in late 2008 as it appeared that financial markets were about to collapse. And they remember the role that mortgage-backed securities played in those fears, as securities that had been AAA-rated were found to be anything but. However, the collapse of the housing market didn’t take everyone by surprise, as signs of a bubble and subsequent weakness had been visible for years. Now that the US housing market is showing new signs of weakness, should investors worry that another housing collapse is just around the corner?

The US housing market has just seen its third straight month of declining existing home sales, a worrying sign at a time of year that normally is an active one for the real estate market. The decline is driven in part by rising prices, which are 5% higher now than they were a year ago, as well as rising mortgage rates that combined with the higher prices are making it more and more difficult for many American households to afford a house.

Remember that we saw much of the same in the summer of 2006, as existing home sales began to decline month after month even as prices remained high. But while many economists and market observers warned of the housing bubble’s existence and eventual collapse, many more argued either that there wasn’t a bubble or that its collapse was not imminent. As we found out in 2007 and 2008, however, that faith in the housing market was horrendously misplaced.

If the housing market situation in the United States today continues to worsen, the real question for investors is how long they have to protect their assets before the next crisis is upon us. While the US housing market began to decline in 2006, it didn’t really get bad until late 2007, although stock markets still continued growing strong and peaked in October 2007. The worst part of the crisis didn’t occur until October 2008, well over two years after the first signs of weakness. Will investors have that much time to prepare today?

Stock markets seem to have already peaked, with the Dow likely not about to reach all-time highs again anytime soon. That may mean that we’re further along the path towards the next downturn than many people think or expect. Investors who don’t do the hard work of protecting their assets today will kick themselves when they start seeing losses to their portfolios once the downturn comes.