US stocks recover strongly despite weak new home sales

A report showing continued weakness in new US home sales in December didn't prevent a strong performance from US stocks yesterday as attention turned once again to the possibility of further rate cuts from the Fed. Bloomberg reports:

U.S. stocks rose, extending their first weekly gain of the year, after odds increased that the Federal Reserve will cut its benchmark lending rate by half a percentage point this week to prop up the economy...

The Standard & Poor's 500 Index added 23.36, or 1.8 percent, to 1,353.97. The Dow Jones Industrial Average increased 176.72, or 1.5 percent, to 12,383.89. The Nasdaq Composite Index gained 23.71, or 1 percent, to 2,349.91. More than five stocks rose for every one that fell on the NYSE...

The S&P 500 rebounded 2.4 percent from its low of the day after the Commerce Department's report that new-home purchases slid to a 12-year low prompted traders to increase bets on a half-point rate cut by the Fed. Stocks fell today in Europe and Asia, with China's benchmark index down 6.8 percent...

Higher expectations for the Fed's rate reduction helped homebuilders in S&P indexes climb 5.7 percent as a group. The S&P Supercomposite Homebuilding Index had dropped as much as 4.4 percent today after the Commerce Department said new-home sales decreased 4.7 percent to an annual pace of 604,000 in December, the lowest since February 1995 and capping the biggest annual decline on record.

But there could be more bad news to come for US real estate if Herb Greenberg is correct. He says that commercial real estate may be next to get hit.

Memo to buyers of commercial real estate who might have cash burning holes in their pockets: Sit tight.

Prices of properties are going lower -- probably a lot lower than you think.

Don't take my word for it. The proof can be found in the shares of real-estate investment trusts, which have a remarkable track record when it comes to predicting what will happen to the prices of commercial real estate...

According to Green Street, REITs in general already are trading at 14% below their underlying asset values. Office REITs are trading at an 18% discount...

For current REIT pricing to make sense, [Green Street chairman and research chief Mike Kirby] says, real-estate values need to fall another 15% nationally. The decline would be steeper in New York, he says, with a total drop of 25%.