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RS Weekly Update - Housing and Joy



October 05, 2011 – Comments (2)

“We Can’t Ignore Housing Anymore”

When I read the headline my first reaction was, “Have we been ignoring it?” It sure seems like housing has been in the forefront of everything that has been going on at least on this side of the pond for the past four years. Really I guess the past decade if we go back to when things truly started getting out of control.

I remember working at Bank of America in 2001 as a loan officer here in Alexandria, VA and thinking that the loans were just too easy. Credit didn’t matter, FICO score was only considered if it was truly bad. Pretty much we were just giving money away, plain and simple and it was all based on these property valuations that seemingly doubled overnight. Many people who refinanced their homes came back in the bank the next month or so to ask why their payments hadn’t gone down we had to explain how in fact their principle and interest payments did go down. But the escrow on their taxes and insurance skyrocketed because their homes were deemed worth a lot more than they were before. Needless to say many left feeling duped. But we (at least I know I) warned them about this beforehand.

I have to say I got a kick out of seeing that even Warren Buffett himself has changed his tune on housing. Not long ago in his letter to shareholders he wrote about seeing housing turning around at some point in 2011. Not so now though. He’s changed his mind as he stated that Berkshire’s housing units are,“as bad as they’ve ever been during this period.”

While Bernanke apparently thought that “Operation Twist” might help the cause, I think even he’s aware of the fact that until we get the employment picture turned around housing doesn’t stand a snowball’s chance in hell of really getting back on its feet.

This article makes a good point in suggesting that where possible, we need to make the option available for people to refinance their mortgages to at least take advantage of these absurdly low rates. I don’t care if they're underwater; screw the equity requirements! If they are current on their payments and have a heartbeat, we need to do everything we can to allow these people to take advantage of “The Twist” and its ilk or it’s all for nothing anyway.

I don’t see any reason to cut principle balances. You get what you get and nobody forced you to buy a house. If you didn’t know what you were doing then that’s your own fault. If it was overpriced then you shouldn’t have bought it. Maybe this will prompt our country to get real about financial education. I can tell you I am making sure my kids learn it from me because it's not a focus in school at all. But there are ways to give people the chance to get in a better spot like the one above. And at some point this could spur enough activity to get some wind under employment’s wings which could help turn the tide.

Foolish best,

Jason (TMFJMo)

Joy Global

Bring some joy to your portfolio with my latest addition:

What Does Munger Have To Do With Ford?

It’s about envy and jealousy really:

Portfolio Returns

As of market close on 9/29/2011 the Motley portfolio had returns of 4.01% versus the market's -0.94%. No doubt last week was a tough one all the way around, but the bottom line is that we're still beating the market. The gap closed a bit to 4.95%, but it's still hanging in there in good times and bad, so I can't complain about that. Hopefully we'll see a little more green this week.

Straight from the Onion

I’d say these are the kinds of CEOs I try to avoid for the most part:

Jason owns shares of Berkshire Hathaway

2 Comments – Post Your Own

#1) On October 05, 2011 at 5:07 PM, Teacherman1 (< 20) wrote:

Good post Jason

You are right in that the housing market is the "key" to making a real and lasting difference in the economy.

One thing that many people fail to realize is that aprasials are only accurate in a stable market. In a rising market, they are overstated, and in a falling market, they are understated.

It is just the nature of how they are done.

I remember back in the 80's, that a big change took place in how commercial aprasials were required to be done. Rather than being based on "comps", like with houses, they were required to be based on an analysis of the earnings and cash flow of the business they were being used for.

Sort of what should have been done on the home loans, but instead of the earnings and cash flow of the business, done on the earnings and cash flow of the borrower.

Hope you have a good and prosperous week ahead.

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#2) On October 05, 2011 at 8:40 PM, TMFJMo (< 20) wrote:

Thanks Teacherman! Very interesting experience of yours back in the '80s with commercial appraisals. I like your thinking in today's market too. Somewhere it was lost that people actually need to make money to pay for a loan.

You have a nice week as well.

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