Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.Housing stocks have been the whipping boys of this market. A few months ago, there were tepid upward swings in some of them, caused by investors thinking the worst might be over. But they were wrong. The worst wasn't over and things look blacker now than ever.
It's the perfect time to start looking at the sector and consider investing in the leaders.
There's an old saying on Wall Street: Buy stocks when there's blood in the streets. In other words, when total chaos reigns, you've got a much better chance of making money because most people think the world is ending. But it doesn't. Never has. Somehow things have a way of righting themselves. Economic laws still apply. Supply does dry up. Demand returns.
The housing market looks to be dripping in red right now. First, there's the absolute problem of too many houses on the market in some areas of the country. (Remember, real estate is a very regional investment. When nothing is moving in Dallas, it has no effect on condo sales in Manhattan. While interest rates have a cooling effect nationally, local sales are still driven by supply and demand.) Too many spec homes and condos were built while money was inexpensive and flippers were flipping. The flippers have flopped.
Some are trying to rent their second or third house or condo, hoping the rent will cover the mortgage. Others are simply putting up the For Sale sign and waiting for the first bid. While still others are walking away, having put very little down payment into the project.
That brings us to the next problem for the housing sector: The sub-prime loans. These marginal loans made during the low interest rate environment are flowing back to the lenders as borrowers can't make the payments. Now the lenders are tightening up credit requirements, and many borrowers don't qualify anymore. They've been taken out of the market to soak up the lowest priced homes. Without that first group of buyers, homeowners have a hard time moving up to another, better home. So the bottom rung is influencing all the rungs.
These are the two problems for the housing market right now: too much supply and tighter restrictions on borrowing money. And it looks as if things might get worse. The sub-prime mortgages seem to be dominating the headlines with speculation that we've only started to see the problems. If interest rates go higher, the monthly payments for borrowers with adjustable rate mortgages will become more painful, even impossible for some. More bad loans will hit the banks, more houses will go on the market.
Sounds like the worst of times. It may be -- and it may get worse yet. Or it may be the bottom is near since everyone seems to be crying about how bad things are. Sometimes that's the exact time change is imminent. Investors who look ahead six months may see through the current malaise and view opportunity. Six months from now will there be still more houses for sale or will buyers start to come into the market, looking to pick up a bargain before the real estate market turns? Many high quality credit customers can still afford to borrow and pay a bigger mortgage. They won't have any trouble buying a home.
If interest rates continue to go lower after this recent blip up of the last couple weeks, more borrowers will qualify to buy homes, bringing that sector back into the market. There's a good argument that the Fed will be a little more accommodating at this time just because of the housing market's problems. They don't want to cause more trouble with higher rates since the housing market is such a strong contributor to the economy.
Take a look at some of the leading housing stocks, the ones with great balance sheets where equity is much larger than debt. They've got the staying power to ride out this current crisis. When the mood changes, and it will, these are the stocks that will lead the entire group higher.
Some are trying to rent their second or third house or condo, hoping the rent will cover the mortgage. Others are simply putting up the For Sale sign and waiting for the first bid. While still others are walking away, having put very little down payment into the project.
That brings us to the next problem for the housing sector: The sub-prime loans. These marginal loans made during the low interest rate environment are flowing back to the lenders as borrowers can't make the payments. Now the lenders are tightening up credit requirements, and many borrowers don't qualify anymore. They've been taken out of the market to soak up the lowest priced homes. Without that first group of buyers, homeowners have a hard time moving up to another, better home. So the bottom rung is influencing all the rungs.
These are the two problems for the housing market right now: too much supply and tighter restrictions on borrowing money. And it looks as if things might get worse. The sub-prime mortgages seem to be dominating the headlines with speculation that we've only started to see the problems. If interest rates go higher, the monthly payments for borrowers with adjustable rate mortgages will become more painful, even impossible for some. More bad loans will hit the banks, more houses will go on the market.
Sounds like the worst of times. It may be -- and it may get worse yet. Or it may be the bottom is near since everyone seems to be crying about how bad things are. Sometimes that's the exact time change is imminent. Investors who look ahead six months may see through the current malaise and view opportunity. Six months from now will there be still more houses for sale or will buyers start to come into the market, looking to pick up a bargain before the real estate market turns? Many high quality credit customers can still afford to borrow and pay a bigger mortgage. They won't have any trouble buying a home.
If interest rates continue to go lower after this recent blip up of the last couple weeks, more borrowers will qualify to buy homes, bringing that sector back into the market. There's a good argument that the Fed will be a little more accommodating at this time just because of the housing market's problems. They don't want to cause more trouble with higher rates since the housing market is such a strong contributor to the economy.
Take a look at some of the leading housing stocks, the ones with great balance sheets where equity is much larger than debt. They've got the staying power to ride out this current crisis. When the mood changes, and it will, these are the stocks that will lead the entire group higher.
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