FNC
Charles Payne
There is an old saying that a man’s home is his castle. Well, it better be a fortified castle in terms of valuation as there is an assault on the housing market that will shake the foundation of the American dream. And just where is this assault on housing coming from? Who are the modern-day Goths and Visigoths, determined rip our dream apart? The answer is Alan Greenspan and his tribe, otherwise known as the Federal Reserve. Actually, the Fed has complex plans for the economy, and hurting the housing market is just a side effect. The reality is that the folks who govern the supply of money think Americans are spending too much and that’s going to lead to higher prices, which translates into inflation. So Alan Greenspan has been asking us to brace ourselves for a decline in the value of our homes that he predicts will happen, because he has the power to make it happen.

Tune in this weekend to our Business Block, Saturday beginning at 10am ET, for more with Charles Payne and the entire FNC business team.

This week in a speech to the American Bankers Association the Fed chairman took much deserved credit for the role of lower interest rates as the spark for what has been the most magnificent housing boom in several generations. Greenspan also went on to spend the rest of his speech warning against asset inflation and the inevitable derailing of the housing market. The speech concluded with an attempt at bedside manner, when we were told that most homeowners had a sizable equity cushion to absorb the blow of potential decline in housing prices. In other words, there could be a so-called soft landing. Let’s face it, nobody buys a home with the hopes of one day enjoying a soft landing, we want our homes to appreciate in value, not tumble because the Fed believes we’re going to be irresponsible with our money.

Of course price fluctuation is part of any investment, and housing isn’t immune. After all, it has been on an incredible run and is due for a pause. This isn’t a notion lost on homeowners itching to cash in on the boom. For Sale signs planted in lawns have become as ubiquitous as mailboxes in front of homes. According to the National Association of Realtors, in August the inventory of existing homes for sale swelled to 2.9 million, an amount equal to 4.7 months of the current rate of purchases. This is a ton of supply, and the month supply ratio hasn’t been this high since 2002. Similar statistics came out of the U.S. Census Bureau, which monitors new home sales data. In part due to a sharp decline in the pace of buying, new homes monthly supply swelled to 4.7 months in August from just 4.1 months in July. At the end of the day, even if one slept through economics 101, one should understand the implications of greater supply on value.

Speaking of value, the rate of value increases in homes is coming to a crawl. From March to June the average price of an existing home increased 2.5% each month; since then the price has only edge up 0.4% each month. The average price of a new home actually peaked at $289,600 in October 2004. In August the average price was $283,400. Homebuilders always take issue with government data, but most admit that their average sales price for homes will flatten or even decline going forward. Even if you never took economics 101 you understand what happens when the general perception becomes that homes values are retreating. There will be some panic and increased selling. All of this spells difficulty for housing in the months to come, a situation that would be better left to resolve itself without an assault from the Federal Reserve.

The casualties of this inevitable moment will be folks with flimsy mortgage arrangements that could see their monthly payments surge as interest rates continue to march higher. The rest of the homeowner class will have to get used to the idea that their wealth is going to take a hit and hope that the cushion lives up to the hype.

Tune in this weekend to our Business Block, Saturday beginning at 10am ET, for more with Charles Payne and the entire FNC business team.

Charles Payne is the founder and CEO of www.wstreet.com and appears regularly on FNC's Cost of Freedom Business Block.

Charles Payne is the host of Making Money with Charles Payne (weekdays 6-7 PM/ET).