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My parents, as I have mentioned before, are in the midst of trying to sell their house. They need to sell but they are completely unrealistic about the asking price. The house has been on the market now for months with virtually no interest in it all, but they still don't seem to get it. I've tried telling my mom (gently) they need to lower the price. The house is in dire need of remodeling which only makes it less attractive. No one is bidding on this house.

My husband recently sent me this from Merrill Lynch and suggested I email it to my parents.

Good things don't always come in ‘threes'
Good morning. Three key developments took place last week that has clouded the outlook for the second half of the year. First, we saw durable goods orders slide 2.8% month-over-month in May and outside of tech, which we should add is the new bright spot in the economy (and the markets) with two months in a row of impressive near-2% gains in new orders, the declines we saw were fairly broad-based across the old economy industrials. The overall data were weak enough to compel us to take down our second quarter capex forecast to around 5.5% sequential annualized growth from 6.0%; and for the third quarter, down to 4.0% growth from our earlier 5.5% forecast. So point number one is that the capex outlook is being trimmed, at least outside the tech space.

The housing situation is going from bad to worse
Second, the housing situation is going from bad to worse and you can forget about a recovery until next year. The starkest piece of information last week was the news that the national unsold existing inventory of single-family homes and condos surged at an astounding 82% annual rate so far this year. We still can't wrap that number around our head. The overhang is now up to an 8.9 months' supply, which is the highest inventory-to-sales ratio in 15 years. By way of
comparison, the months' supply of inventory was 6.4 a year ago and 4.3 two years ago. The massive excess supply we have on our hands today is simply going to reinforce the deflationary state in the housing market, at a time when home prices on average have already declined at an annual rate of 5% in the past six months, the biggest drop we've seen since the summer of 1991, and fully three quarters of the country is now deflating (outside of Manhattan, that is). Clearing out the excess inventory is going to mean at least another 10% downside in average home prices, in our view, which is just going to reinforce the weak performance we're seeing in the homebuilders, financials and consumer discretionary space.

Housing correction spilling over into the consumer space
This brings us to the third point from last week's data flow, which is that we are finally seeing unmistakable evidence that the downturn in housing is spilling over into the consumer space. We saw on Friday that consumer spending in real terms rose less than 0.1% month-over-month in May - well below the +0.3% that was widely expected. This took the three-month trend in real consumer spending growth down to less than a 1% annual rate (from 5% at the start of the year). We wonder how many people who are still bullish on the consumer are aware of that statistic. Now that's up until May - we already know anecdotally that June auto sales look flat and chain-store sales are running a half percentage point below plan. So as we did with capex, all this new information forced us to shave our forecast for second quarter consumer spending growth to 1.9% annualized from 2.5%, which outside of Katrina, would be the weakest pace since the fourth quarter of 2002. Consumer confidence fell to a 10-month low in June and the level, believe it or not, is lower now than it was at the onset of the past two recessions in March 2001 and July 1990. What all this means for the second half of the year In terms of what all this means for the second half of the year, the consensus is at 2.8% for real GDP at an average annual rate; we are barely at 2%. That 80 basis point difference is going to make or break whether you want to have a cyclical or defensive orientation as we move into the second half of the year. With the books closed in first quarter GDP with last week's final revision, growth came in at a paltry 0.7% annual rate, and the big drag of course was the fact that we had a rare inventory liquidation. So, what has happened in the second quarter is that inventories got replenished, which is why all the manufacturing diffusion indicators, like ISM, have looked so bullish. But here's the problem. The key guts of private sector demand-consumer spending, capex, nonresidential construction and housing-collectively slowed
to a puny 1.7% annual rate in the second quarter from what was an already uninspiring 2.2% pace in the first quarter. The history of the US business cycle shows that when you get an inventory rebuild that is not accompanied with a pickup in final sales, the rebound in GDP growth ends up getting snuffed out. The last time we had an aborted inventory-led backdrop like we're seeing now was in the second half of 2002, and the best places to hide back then were in consumer staples, health care and telecom services. Only tech managed to outperform on the economy-sensitive side, and perhaps their outperformance in June was a sign of things to come.

So do I send it to them or not? They haven't listened to a word I've said so far and I'm not sure they'll start now. But maybe the opinion from a financial institution will get through.

*sigh*

Probably not.
SQT

#housing