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The Mortgage Meltdown Continues
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The bad news regarding housing values and foreclosures continues. Because of the major downturn in property values in the areas of the country where prices increased so much during the boom many homeowners are finding themselves owing more on their mortgages than their houses are worth (upside down). There is a great expectation that many people in this position will simply walk away from their mortgages and houses. This phenomena will not just affect sub-prime loans, but even fixed loans to quality buyers. Due to the continuing bank liquidity problems, mortgage money, and money to borrow for any reason is becoming more and more scarce. Some might face the scenario of needing to move to another city due to their employment, and unable to sell because of the difficulty of a buyer finding mortgage money, and being upside down on their own mortgage, will simply walk away and make their career move without bothering to sell. The shakeout in the home/mortgage area will continue for some time. The good news is that those banks that do survive will return to more prudent policies in lending money. The easy money days are over. People will have to make significant down payments in order to buy a home. The banking industry is good at learning from their mistakes, and it will be a long time before they will be able to forget the nightmare(s) that they are going through right now and will be going through for the next couple of years. More good news is that before this is over housing will become more affordable to many more of those who seek the dream of home ownership. Home Construction will continue to suffer due to all of the cheap foreclosed homes that will be on the market competing for buyer dollars. I expect that we will see some large builders go bankrupt before the dust settles and business returns to usual. Personally I plan to avoid any stock associated with home construction and banking for the next few years. Some of these stocks will seem like once in a lifetime bargains, but in my mind the risk is too great at any cost. Some people with more nerve than me will make alot of money gambling on them, but I prefer to think of myself as an investor and not a gambler. The housing and banking stocks are for the high risk takers who are willing to bet it all on a roll of the dice. | ||
Comments (1)
I think you are being too pessimistic. It has been possible on and off to buy homebuilders at less than book value. The stronger balance sheet cases will be able to hang on the their assets and when the housing market recovers their operations will become profitable.
I have 15 to 30% profit on my homebuilders positions established in August last year and plan to sell on the rallies and buy on the dips.
Patient value investors who are willing to do the work on for example regional banks will be able to pick some nice winners. I have been using a mutual fund, not a strategy for SLO but it saves the work of going through them and gets you diversified. That would be John Hancock Bank & Thrift Opportunity, BTO. I am building a small position on the dips.
SOme of the cases like WM, C, and NCC that have serious problems would be a little too risky for me too.
Tom
Posted by Thomas Armistead | May 12, 2008 4:13 PM