Monday, July 14, 2008

Housing is Still a Big Problem

Top Line: The market seems to continue its slow slide which feels more like a water torture for the owners of stock. Our position remains that we should see a little rally to alleviate the completely oversold condition but that doesn't mean we aren't going to see more downside right on the back of that, we should. The market should drop about 20% more going into the month of September. If you do the math on that, 20% of 11,000 is 2200 points so let's round it off to 2000 which brings us down to the 9000 level or so.

On Monday morning, the stock market blasted off at the bell but that was the high tick of the day as the market fell for most of the session. There were some bursts of buying but they didn't last long as sellers continued to push prices down. The interesting thought is that the new owners tend to be more interested in picking a bottom than being long term investors so as they buy they want to sell for a quick gain. When that gain doesn't appear they sell to someone else who has the same idea.

As we mentioned in our last post, the powers that be tried to make some promises on Fannie and Freddie on Sunday evening; and, the stock market greeted that news with joy for all of one minute at the open on Monday. These GSEs are at the center of the mortgage problems that we are facing, it's not subprime. Subprime is so 2007. We now have subprime creep which means that Alt-A is having trouble, too. This resulted in the IndyMac failure late last week.

There are so many issues tied up in the mortgage mess so it's a good thing you have been following along with us over the past several Years. Contained??? Probably not. What is happening now is the socialization of the problem. All these problems are in the process of being taken under the wing of the government, as in, We the People. Last year we heard that the subprime would be contained, then we had that little challenge in Bear Stearns and now we see the need to help out the GSEs. The latest piece with IndyMac being taken over is that the FDIC is going to get involved, too. Remember the F stands for Federal and that also stands for We the People.

There was a non-mortgage related, well pretty much non-mortgage anyway, event on Monday and that was the buyout of Anheuser Busch by a European company at a huge price. This article is cleverly titled "This Bud's for EU". Ok, so it's not really about the real economy or the market but we thought it was at least comical.

On a more serious note, we wanted to recap our position on the housing market. We receive Barron's on Saturday and the most recent issue shows a roller-coaster on the front that is on the downslope but very near the bottom of that slope with a move up right after that. What the picture is supposed to convey is that the housing market is about to turn around. This is not going to happen and here are the reasons why not.

First, demand is weak. The buyers out there are looking to buy "cheap" houses and are looking for that great deal. If they decide to put an offer on a house, then they need to get financing. This is not a slam dunk like it was a couple of years ago which leads us to...

Second, lenders have tightened standards. Yes, there are still some investors who are providing money for home buyers but they are requiring very squeaky clean borrowers. Many mortgage bankers are going out of business, witness IndyMac, which translates to fewer loans being made.

Third, supply of homes on the market could be described as a glut. Whether a for sale sign is in front of a foreclosed house or the house of a desperate seller, there are a lot of houses on the market.

Fourth, the prices of homes are too high. Just because the first three have come 180 degrees (that's math speak for an about face) doesn't mean that prices shouldn't. Prices for homes have fallen, a lot in some areas, but the affordability is still in question. As we have heard, many people can't afford the houses they are in if they had to re qualify for a mortgage. The measuring stick is to compare the mortgage payment with the rent payment. In this case, the rent is not enough to pay for the mortgage payment--houses prices are too high. We know that this is not the case all over but that is the state of the market generally.

FSI: 84.45 (the lowest level since April 17th)

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