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XMFSinchiruna (26.50)

Continuing the Housing Discussion ...



September 23, 2009 – Comments (8)

A Contrarian View on Housing

"With a resounding thud, the next shoe in the mortgage crisis is about to drop. I'm not talking about the commercial real estate shoe that has garnered so much attention already, but rather the payment option adjustable-rate mortgages that are due to reset in the coming months. In these resets, mortgage payments can balloon by fivefold to tenfold overnight, and this has federal and state officials acutely concerned about further acceleration in residential mortgage foreclosures."

"With such conflicting forecasts for the residential housing market circulating, I propose that Fools determined to invest in the space consider companies with exposure to a broader range of drivers for construction demand. If my expectations for prolonged impairment of the housing sector pan out, then shares of homebuilders like Pulte Homes may not offer much shelter. With exposure to anticipated demand from stimulus spending in roads and other infrastructure, however, aggregates suppliers like Vulcan Materials (NYSE: VMC) and Martin Marietta (NYSE: MLM) could stand to gain handsomely. If I am wrong, however, and a sustainable recovery in housing materializes sooner rather than later, this aggregates segment could be expected to participate as well."

Floridabuilder2 may opt to focus upon transcation activity over macroeconomic fundamental analysis, and I wish him all the luck in the world, but through the entirety of my investing experience, investing in accordance with carefully interpreted fundamentals has never led me astray. If I relied upon transactions to shape my outlook, then I may have presumed the gold bull market was over when the metal crashed by 31% last year and mining equities were brought to the very brink of collapse. Without my confidence in the fundamental underpinnings of that market, I may have sold my positions at a substantial loss, but instead I recognized the correction as a deep and irrational market dislocation and left my positions entirely intact. I pay attention to market activity in real time, but the entirety of insight drawn therefrom is painted upon a canvas of comprehensive fundamental analysis.

In short, fundamental qualitative analysis is the one tool in this investor's tool box that I would never invest without. :)

8 Comments – Post Your Own

#1) On September 23, 2009 at 2:59 PM, davejh23 (< 20) wrote:

There have been hundreds of foreclosures selling every month in my area, and there are still thousands on the market.  I've heard lots of talk about the bank's "shadow inventory", and a local realtor has advised me that about 70% of foreclosures to date have not been listed...banks own thousands of homes in the area, and they're sitting vacant.  Do the banks honestly believe that the housing market is going to turn around with an even larger wave of foreclosures coming?  How long can the banks hold on?...not long enough to see any turn-around...especially if mortgage rates start to increase next year.  It's going to get very ugly if we see another huge wave of foreclosures, increasing interest rates, and this "shadow inventory" dumped on the market all around the same time.  Thank you for your investing ideas based on the continued weakness in housing.

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#2) On September 23, 2009 at 3:24 PM, bullnada (< 20) wrote: is a tool I use. It is a pay site. It tracks bank owned foreclosure etc. It is amazing how wide spread this housing market mess is. You can use the site like google earth and find all the info you want in your area or the wwhole country

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#3) On September 23, 2009 at 3:57 PM, GNUBEE (< 20) wrote:

Sinch, keep these coming. As a lucky seller (under contract in less than 30 days) I still am trying to decide what the next step for me is. The more discussion on houses the better. My goal is to get in the house I will be in for the next 30 years at the lowest price point.

Key areas I'm forced to think about (Bold is where I wish a hard return was...)

Market prices, and trending (was reason to sell, as I do not see prices rising any time soon) but also a reason to hold off buying?, or is it close to bottom. Interest Rates- Need to get into the next house before the rate trap snaps. Will uncle Sammie allow them to climb based on the points you listed? I cannot see how because it would cripple many who are reset.  I'm betting I have 6 mos and up to a year before I see them climb (significantly or greater than 6.25 percent for a 30yr) Where can I find values and locations of resets?- If I decide to hold of buying how should I protect the nut I just spun off my last house?  Are builders going to be "easy prey" to "beat up" at the end of year so their books look good? What is the best method to weigh price and interest rates ratios?

Short story, I cannot see how interest rates could rise (crippling effect), and I see prices falling due to shadow inventory. Thoughts?



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#4) On September 23, 2009 at 4:55 PM, XMFSinchiruna (26.50) wrote:


I too will be looking to time the bottom as closely as I can discern, parlaying my gains from precious metals investments into a home investment at just the right stage.

Banks may raise interest rates sooner than we might wish as foreclosures mount and inflation sets in ... but the devaluing dollar will absorb much of that impact. I will be focusing less upon timing the interest rate cycle and more upon the nominal home prices. 

I will keep you in mind if I make any determinations that we may be bearing a bottom somewhere down the line. I suspect it won't be before at least another 25% reduction in median nominal prices.

I'm parking my down payment in precious metal equities, and expect them to more than make up for any miss of the lowest interest rates. That's just me. ;)



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#5) On September 23, 2009 at 5:11 PM, leohaas (30.13) wrote:

"I will keep you in mind if I make any determinations that we may be bearing a bottom somewhere down the line. I suspect it won't be before at least another 25% reduction in median nominal prices."

Didn't you recently predict a 50% reduction? 100 ounces of gold, if I recall correctly...

It has long been foretold that the resetting of prime ARMs will be the next leg down in the housing market. It cannot be a coincidence that the Dutch word for "poor" is "arm"...

So count on foreclosures to continue, even though current rates are very low (resulting in very low resets as well, but no way as low as the teaser rates for the first three or so years).

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#6) On September 23, 2009 at 5:48 PM, XMFSinchiruna (26.50) wrote:


Here is my comment #11 to the post you linked back to. You'll see I backed away a bit from the 50% reduction expectation in nominal terms as I pondered your initial request for clarification, but I'm comfortable forecasting a 25% nominal reduction in the nationwide median home price to accompany a full 50% reduction as priced in gold.  :)  Hope this further clarifies my position.

I find the inevitable impact of inflation upon nominal USD prices a very tough obstacle to accurate price projections at present.


No, I meant USD. :) I see a huge reduction in the nominal USD home price by the time this reflationary experiment in depression-dodging proves to be a disaster. Perhaps not 50% more in USD terms depending upon the timing of currency-driven inflation, but the purchasing power represented by today's USD home prices will be chopped in half by the time that price-to-gold ratio returns to the 100-ounce mark.

This is why I have advised my friends that express interest in purchasing a home to park their down deposit in gold and continue to await the double-whammy opportunity of cheaper nominal prices and higher gold prices before taking the plunge. The difference for those of my friends who listen will make the $8,000 enticement look like chump change.

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#7) On September 23, 2009 at 8:08 PM, XMFSinchiruna (26.50) wrote:

From Jim Sinclair:

There are a number of important points to be made here:

1. Similar decisions have occurred in other states.

2. This is extremely important, but not necessarily a landmark.

3. The attempt at appeal will be backed by unlimited funds because of the serious ramifications in this state.

4. State by state, this exact decision is taking place and surviving the gruelling appeals processes.

5. This type of decision erodes the very fabric of the Securitized Investment Vehicle backed by a grouping of mortgages.

6. Eventually the screams of the public will be heard by state judges that depend upon the electorate.

7. From a modest kindling fire this move will grow into a conflagration of anti Wall Street, anti financial people. Attorneys will begin to seek these easy slam-dunk cases as a large revenue generators.

8. Between the error of singular mortgages being used in multi SIVs, the disaster of paperwork behind the mountain of mortgages made from 2006 to 2008, state laws on simple things like notary seals on documentation, and the requirement of having a legal standing for which to take the action (which servicers DO NOT), SIVs will be valued as below junk assets. These pure "legacy assets," as they are now called, are a noose around the neck of any institution holding them including the Federal Reserve.


Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound. 


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#8) On September 24, 2009 at 9:44 PM, sentinelbrit (55.76) wrote:

The solution is to let the foreclosed houses come onto the market and let them find their clearing price. People will get houses for a good price and then go out and spend to equip their house with new furnishings etc. House and retail sales will go up and everyone will be happy. The banks will suffer losses but that just means interest rates will remain low so they can earn a good spread and as the economy continues to recover they will start to lend and their balance sheets will gradually strengthen.

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