Tuesday, November 20, 2007

Dismal Housing: No End in Sight

Fannie, Freddie, Countrywide, and some builders crowded the front page of the financial press today as their stocks dived to new significant lows.

Freddie Mac (FRE) reported a $2 billion dollar loss as the fair value of its assets dropped by $8.1 billion. Freddie indicated that it must seek outside funding in order to meet regulatory liquidity requirements; meaning an immediate infusion of up to $4 billion is needed to keep the government sponsored mortgage entity afloat. Additionally, the firm was forced to increase its provision for credit losses to $1.2 billion, from $112 million, a year ago. Most investors view Fannie Mae (FNM) as being in a similar situation. The speculation is that the issues will just keep getting worse in upcoming quarters.

Countrywide (CFC) spent most of the day denying bankruptcy rumors as their stock tumbled below $10 for the bulk of the trading day. This is a case of the stronger and more frequent the denials, then the greater the probability of the filing occurring sooner rather then later. Many local investors give them less than six weeks in our bank “death-watch pool”. The situation may possibly end with some sort of merger with another bank in which assets are valued for pennies on the dollar as the last resort

On the homebuilding front, D.R Horton reported (DHI) reported huge quarterly losses today. While there is speculation that many builders will go under due to liquidity issues, Standard Pacific (SPF) sunk over 20% today on this type of concern. Many more will surely follow.

Some traders would look at the huge tumbles of FNM and FRE as short time buying opportunities as the market was over enthusiastic in punishing both stocks for the negative news from Freddie. There is a good likelihood of a short term rebound. However the recent news today that drove the stocks to 10 year lows is just the leading edge of further write-downs that will occur in upcoming quarters. Leaving both government sponsored entities drained of capital and desperately seeking financial assistance. This may amount to further issuing of preferred instruments which smacks the existing common shareholders, to the straight-out begging for a bailout from the federal government (read as “possible bail-out with your tax dollars”).

Housing's Roof Collapsing

“The drop in housing prices is causing most of the pain. A report from real estate information firm Zillow.com released Tuesday shows that U.S. home values fell 6% in the third quarter, the largest decline in the last 10 years.”

“On top of that, nearly 16% of homeowners who bought houses in the past year now have negative equity in their homes, meaning they owe more than what their homes are currently worth, the report says.”

The turmoil leaves many of those focused on mortgages or housing with a knot in their stomach. The question for many active investors will be “when will it be time to start bottom feeding and grabbing the survivors at rock bottom prices”. Who wants to catch the falling knife or should we just let it bounce off the floor and grab the handle down the road?