INVESTING: Housing slowdown puts some homeowners in peril

You want to build your house on a strong foundation. It worked for the third little pig that resisted all the efforts of the big bad wolf. It’s also going to work for savvy consumers who avoid too much debt and build decent equity in their homes. For everyone else, though, the foundation might feel as if it is shaking a bit.

A slew of recent data on the housing industry seems to confirm what the housing stocks have been saying since August; the market is past its peak and is on the downswing.

As a group, housing stocks topped in August, and have struggled since. Some changes in bankruptcy law, including higher minimum-payment provisions from credit card companies, haven’t helped. Nor has an uptick in 30-year mortgages, which are now above 6.5 percent and rising.

I have never understood average Americans. They spend too much, they eat too much, and they focus on stuff I just don’t get.

Apparently, they don’t worry too much about these detrimental behaviors because they think they can take a pill to get rid of their fat, and they can rely on the government to take care of their bad spending habits.

Well, it’s harder to declare bankruptcy now and people with credit-card balances have to pay higher monthly minimums. The first sector of our economy to suffer from this is housing.

New-home sales fell 10.5 percent in February, the largest decline in nine years. The median price of a home in America dropped from $243,000 in October to $230,000 in February. That 5.3-percent haircut in a few months is a chunk, considering these are houses and not stocks.

A study by First American Real Estate Solutions states that 29 percent of every mortgage taken out in 2005 is already underwater. Twenty-nine percent! That’s insane. And it’s going to get worse because a slew of adjustable mortgages will rise this year, causing more people to get upside down.

The housing industry has grown a lot over the last five years. People left their day jobs to become developers. Mortgage brokers seemed to grow on trees. We are now dangerously leveraged in this area, and we are going to feel pain as it slows down. Some slightly extended individuals in our country will have to ratchet down their lifestyles a little. And on the margin, that could be just the thing to blow the straw house down.

About this time last year, I wrote a few times that the Dow Jones industrial average could hit a new all-time high before the end of this bull market. As of now, the Dow is only 4.5 percent from that milestone, and I think it can happen by the end of the second quarter.

Conditions are slowly weakening, however. Even if the Dow hits that high, it may fall back soon thereafter.