Housing and Its Future

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Includes: REZ, SPY
by: David Urban

A lot has been written about the housing market and its overall effects on the economy, so I will not spend much time here.

Without dating myself, the S&L crisis was partially solved through the removal of bad loans from the balance sheet of banks, the repackaging of said bad loans, and selling them off in tranches to investors.

The quicker the bad loans are dealt with, the quicker credit policy will normalize. At the present time, banks will continue to invest in Treasuries overlending as long as the risk reward matrix favors Treasuries. Attempts to push the banks out of Treasuries and into lending will likely backfire as banks are in a risk adverse mode and unwilling to lend in the manner which caused the credit bubble.

The aftermath of the housing crisis has dominated headlines across traditional and electronic media, yet I am avoiding it for a number of reasons.

Harkening back to my commentary at the beginning and middle of 2010:

Non-performing loans continue to cause problems in the US banking sector. In fact, financial stocks remind me of post crash Internet stocks. Some recovered all of their losses 10 years later but ask the shareholders of stocks like Microsoft, Cisco, Yahoo, and Intel about their 10-year returns. There are values but you should not be buying now for a buy-and-hold strategy.

When a bull market starts the leaders of the new bull market are not the leaders of the previous bull market. Going back almost 20 years to the late 80's/early 90's when the high yield debt bubble burst and the S&L crisis consumed headlines the banking sector required years of mergers and healing before returning to normal. It is my opinion that the same will happen with the popping of the housing bubble in 2008.

For the past two years, the US has gone through a process similar to the five stages of grief where we initially denied that there was a problem and everything was under control. Then we had anger at the banks for making these loans regardless of the failure of people to provide proper loan documentation while chasing quick real estate gains. Banks then tried to negotiate and workout the loans so that borrowers can stay in their homes. Finally, people are throwing up their arms and walking away which leads to acceptance by the banks that they have to face up to the problem loans.

It has always been my belief that the faster we work through the problem loans the quicker credit policy can return to a sense of normality.

For the banking industry, the key to getting out from underneath the banking and mortgage problems is loss recognition. Once losses are recognized, the industry will move forward.

History is not on the side of banks and the housing market with respect to historical trends and market leadership. Looking back into history, previous leaders after the LBO wave of the late 80's were shunned in the 90's as the internet and technology boom took hold. After the popping of the tech bubble in 2000, technology stocks were shunned and stock prices of blue chip technology companies such as Microsoft (NASDAQ:MSFT), Dell (DELL), Cisco (NASDAQ:CSCO), and Intel (NASDAQ:INTC) languished. It is true that companies such as Apple (AAPl), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) have flourished to a certain degree, but if one looks at the NASDAQ one sees an index which has come nowhere close to recovering to its previous all-time highs.

I believe that the financial stocks will suffer the same fate as the technology companies and that the next bull market, commodities, is beginning to appear on the radar screen of most investors after moving up for the last seven years.

Rather than focus on the problems and the back and forth between global regulators and financial stocks, housing data, and other items, I prefer to look for solid values and the beginning of the next bull market, which will drive the equity markets to new highs.

Disclosure: No positions