HOUSING BUBBLE UPDATE

The numbers are in, and what we’ve been saying would happen for some time now is undeniably here. The housing bubble is for real, and it is starting to show signs of bursting.

Check out some of the recent statistics on housing and you’ll get a better sense of what’s been happening:

Unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years.

• The Commerce Department reported Monday that sales of new single-family homes dropped by 5% to a seasonally adjusted annual rate of 1.23 million units last month. That was the slowest pace since January 2005, and the number of unsold homes is now at a record high of 528,000.

• After climbing steadily for a decade, the nation’s homeownership rate appears to have leveled off. New data released late last month by the U.S. Census Bureau put the homeownership rate at 69% in the fourth quarter of 2005, down from 69.2% a year earlier. It is the third quarter in a row that the rate hasn’t posted a year-over-year gain.

• The National Association of Realtors’ Affordability Index now stands at 115.8, the lowest level since the third quarter of 1991. When the index stands at 100, a family earning the median income has just enough money to afford the median-priced home, assuming a 20% down payment and current interest rates. Forty-three percent of first-time homebuyers purchased a home with no money down.

• According to the National Association of Realtors, existing-home sales are expected to decline 4.7% to 6.74 million this year, down from a record 7.07 million units in 2005. New-home sales are expected to fall 8.5% to 1.17 million from a record 1.28 million last year.

• The trade group predicts housing starts, or the number of new homes built, will reach 1.87 million units this year, down 9.3% from the year earlier. The national median existing-home price for all housing types is expected to increase 5% this year to $219,200, while median new-home prices are projected to rise 5.7% to $250,900. That’s about half the rate of home-price increases last year.

These statistics all add up to a frightening prospect for those relying on ever-increasing home values to provide them with the investment returns they are seeking. The numbers are also troubling for those who intend to rely on their homes to bail them out of any potential financial crisis.

We’ve been warning you for quite awhile now that home values will be coming down, and those risky exotic mortgages that so many home buyers have taken out in recent years will come back to bite them now that interest rates are on the rise and will presumably continue rising in the months ahead.

The bottom line is you need to be prepared for a correction in the housing market, and all of its ramifications. A slowing housing market and increasing interest rates mean less borrowing from the equity in homes, which has been a big driver of consumer spending over the past few years. The pullback in spending will undoubtedly be felt in nearly every segment of the economy, and this of course will have a big effect on stocks.