In an interview earlier today, former Federal Reserve Chairman Alan Greenspan said the global credit crunch is not over. "We're not by any means out of the woods."
In regard to the deteriorating housing market and the future direction of the U.S. economy, Greenspan said, "Here we've got a major issue, which is not resolved and in many respects probably more important than the existing credit crunch, and that's the huge overhang of newly constructed homes in the United States. And, as a consequence, we've seen a number of American homebuilders start to go through significant fire sales to get rid of their inventories at very substantial discounts."
A significant part of U.S. consumption is based on increasing home values, Greenspan said, financed by mortgage debt.
Exclude stock price increases in recent days, and overall household wealth in the third quarter declined, he said.
If prices continue to fall, he warned, it will take a very long time for inventories to stabilize, a big threat to the economy.
Prices are already falling, Greenspan said. "We can't say how far they will fall before they stabilize. We've had no experience in all the postwar period of anything like this. We're flying blind here," he said.
So, as I've repeatedly warned, don't get excited about the recent rally in stock prices. Keep in mind that while many in the market now think the credit crunch is over, former Federal Reserve Chairman Alan Greenspan agrees with us: The housing slump is far from over.
Take a look at the National Association of Realtors report earlier today. The pending home sales index fell by 22 percent in August compared to the same period a year ago. It's clear that home prices will likely continue to fall in the months ahead. Household wealth, to which Mr. Greenspan referred, could deteriorate, fanning a big downturn in consumer spending.
The deteriorating housing market and falling home prices open up some opportunities for investors. I have my eye on plenty of ETFs that will likely rise significantly in price in the event the U.S. economy continues to slow. Get the names of these ETFs now .
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