Lately the biggest news on television has been about the Real Estate market and the sub-prime mortgage mess that our country is currently in.  Given that the “American Dream” is to own a home, and that most average homeowners have a vast amount of there net-worth and personal financial wellbeing tied to their homes, I figured this would be a nice topic to start discussing.

First, let’s get some things straight.  I own a home; in California.  In fact, my home is only 20 miles or so away from the foreclosure capital of the entire United States, Stockton.  The market value of my house has fallen like a rock over the last few years and it currently shows no sign of stopping.  Thank God.

What? You might be screaming to yourself, you’re happy that the value of your house is plummeting? Well, I’m not happy about it, but I’m happy that the market is beginning to correct itself.  Just a few years ago, I was talking with some co-workers about the median income in my city and how the current home prices were simply unsustainable.  We did some quick back of the napkin math and figured that most people could choose to either 1. buy a home and starve to death, or 2. rent and eat plenty.  Over the long term, the reality is that option 1 just isn’t going to cut it.

Now, I’m no central banker, or hard core economist.  I’m just a guy who happens to understand some of the basic economic principals out there and can add 2+2 to get 4.  When you only make 40K a year, and your about to  (when your 0% down option ARM resets) have to pay 28K a year in mortgage obligations, the math just doesn’t work – period.

Since the math doesn’t work, the prices must fall, or buyers must “dry up” – again basic economics here, no buyers  = lower prices – supply and demand at work.  Right now, my house is bleeding about $1,000 a day.  I don’t expect that rate of “burn” to continue, simply because foreclosures are accelerating the price decline.  Most of the folks that I know who have normal mortgage payments as a percentage of their income are not planning to sell at all in this market.  Supply and Demand will begin to turn once the foreclosure inventory is worked through.

Anyhow, back to why I’m happy.  The market has to get real in order to continue to appreciate.  Seriously, do you really think that it is healthy to have the appreciation of your home be 2x your annual salary on a year over year basis?  That is not sustainable and must be corrected.  The quicker the correction – the better.  When prices can move back down to a level were there are strong numbers of buyers, we will be close to a bottom.  The cheap inventory can be worked off, and then supply and demand will take over again.  Prices will begin to move up and that will be a fantastic thing.

Personally, I think the market is getting very close to a bottom.  Inventory is moving and prices are beginning to show some signs of stabilization.   I wouldn’t be supprised if there were another 6-12 months of weakness, but after that I think we wil be in very good shape.

So, what does this mean to an existing home owner?

That depends… Ideally you were purchased a house with some equity and didn’t buy at the peak.  If you don’t have equity, or you bought at the peak you might simply be out of luck and will just need to wait the market out.  This is healthy.  It sucks, but it is healthy – repeat that to yourself every night

If you happen to have a home that still has some equity in it, you might have a fantastic opportunity in front of you. Over the next year or so there are going to be some fantastic deals out there.  Bank owned homes that are out there for the taking will be all over the place.  If you can work together to put together a solid down payment and can part with your home at an emotionally “low” price, you may be able to take advantage of the market and
“move up” on the cheap.

If you’re like me, you pretty much aren’t going to do anything.  In fact, I’m going to be renting my place out while I go to Chicago for Grad School.  Why?  Because the market sucks and I am not prepared to sell my house for its current “market value.” Just a few years ago I was saying – there is no way I’d pay that much for my house… Based upon the current “market value” I’m saying there is no way I’d sell for that little.  We are in the process of swinging the pendulum back and forth, eventually it will come back to the middle and it will be time to sell and move to a new home.

If you’re in the market… Please, please, please, please, please…. Don’t buy a with a stupid mortgage.  ARM’s are not horrible, you just have to understand what they are and what the risks are.  I happen to have an ARM, it is a 7/1, I like it a lot and am VERY pleased with it.  Even in this market, I’m not worried one bit.  Make sure that you have enough equity to purchase, preferably 20% down.  10% will work with an 80/10/10 setup, but do the math and make sure you’re not going to be house poor.

A side note to current homeowners and those looking to purchase.  YOUR HOUSE IS NOT YOUR ATM.  Use that equity wisely.  Do not buy Starbucks Coffee or new shoes with it.  If you are going to tap your home equity (assuming you still have any left), do so with careful consideration, please

Things will get better… It just takes time.  Markets are very efficient.  Buyers and Sellers are not stupid and this whole process will work itself out.  Ideally the government won’t meddle to much and screw things up.  A true bottom needs to be found so that price stability can return and the market can begin to appreciate.

This was a crazy week in the stock markets!  We opened the week with the world markets tanking while the U.S. markets were closed for the Martin Luther King holiday.

On Tuesday morning, Big Ben and Co. cut interest rates a record 75 basis points!  The markets opened down dramatically, then bounced back to recover most of the early morning losses. Wednesday and Thursday proved to be up days in the market and Friday again brought us back down a bit.

It has been a rough, wild ride!  Wednesday brought more than 600 points of movement on the DJI(10502.35 +4.47) – UN-FREAKING-REAL! I don’t expect this sort of action to stop anytime soon – so buckle up and enjoy it.

On Wednesday morning, I called a bottom – at least a temporary one.  I firmly believe that we will see the fed cut rates again at their meeting next week and that will continue to buoy the markets for a few more weeks.

We very well may see some additional movement down over the next quarter or so, but I’m still a firm believer that the markets will be up by the end of 2008.  The global economy has some serious issues right now, however I think we are working through them and that we will be able to come out ahead.

The credit markets are beginning to show some easing, and the government is getting ready to throw money into the hands of the public.  While I think the stimulus package, as it stands now, misses the mark – it will help somewhat.

In my opinion, it is a great time to buy! Financial stocks are very attractively priced, and with the recent crash in the NASDAQ(2265.68 +1.12) techs are looking good as well.  This year should prove to be a great one for MSFT(26.30 +0.35) and other tech companies.  We’ll see how it all goes!

Well, good luck!  Make sure all of your analysis is solid before putting on trades in this marketplace.  Vast sums of money can be won, and lost, in a very short time with these big market moves.  Trade smart!

Thanks Ben!  So the fed chairmen had a quick chat today.  In his speech he indicated that there are risks to the marketplace and economy, however he said that the fed is prepared to take “substantive additional action.”  I read that as a nice big fat rate cut at the end of this month.

I’m really hoping that this is something along the lines of 50 basis points or more.  It is quite possible that they will only do 25 basis points; however, I think that would be a big, big mistake.  They are still concerned about rising commodity prices and inflation – both perfectly reasonable concerns.

This movement has sent the markets up, at the RUT(651.04 +0.28) has been moving right along with the other major indexes.  It is very, very possible that over the next two days or so I will get a fill on my $0.15 buy back.  If the markets continue to move higher today I will re-evaluate this order.

Given the extreme rate of time decay right now, there may be an opportunity to hedge against market movement in this position as a result of favorable decay.  Basically, this means that each and every day the position it in the market, it loses value.  Given that I am short that means that I am making move each day it sits out there.

Depending on market movements, I’ll open up my trusty tools from thinkorswim and head over to the analyze page.  From there, I’ll put in a little bit of special magic and be able to see the theoretical value  for each day as we move forward.  I’ll put up a little post about it so that you understand a pretty neat way to use these tools.

Anyhow, good luck and trade smart!

I’ve been sick this week, and have been watching a bunch of CNBC as a result. I keep hearing over and over, recession, recession, recession… ENOUGH!

It is like a huge media weight trying to push down the economy. Sure, home prices are down, oil is high, gold is through the roof, the fed is easing but it just doesn’t all add up… We are definitely going into a big slow down and I think we are going to be feeling it a bit, however I’m still bullish on the market in general.

The jobs data looks good, the stock market is cheap, the fed is going to continue to drop rates, credit will ease, corporate profits are still strong – slowing but strong, the dollar is going to continue to weaken for a bit which actually helps our export position, overall… it’s going to s l o w things down. I don’t think it is going to kill us though.

There just really isn’t anything new…

Since my position seems to be against the general media flow, I did a little research and found a couple pieces of commentary today that support it. The first from Fast Money this afternoon. If you didn’t watch or Tivo it yourself, you can get a quick summary at this link from CNBC. Here is a quote from from the summary article:

Darda believes that the economy is not headed for a recession, although he concedes it could be slowing down. He adds, even this week’s ISM number, which showed a sharp contraction in manufacturing but not other areas of the economy, was not low enough on a historical basis to suggest recession.

Jobless claims are a leading indicator of the economy, he adds. They usually go up 25% year over year ahead of recession. We’re up 7.5%.

Another great bit of fact from an older Kudlow & Company episode on CNBC…

Let me just point out that without housing, 3rd quarter GDP was 6 percent annualized growth. You have to remember that going back into the 2nd quarter, [bearish economist] Nouriel [Roubini] and others were saying 3rd quarter was only going to have 2 percent growth. So these pessimists have been way, way, wrong on the low side. They have been continually blown out of the water by stronger than expected data.

And I don’t care what weekly chain store sales are saying, and all of these things. We’ve constantly had revisions upward. We’ve constantly had better news. And I think all you have to do is go outside. You can’t get a parking spot at the mall; you have to wait in line to get a table at a restaurant; you get middle seats on the airplane. There’s no evidence that this economy is slowing down. -Brian Wesbury, Chief Economist at First Trust Advisors

Finally, I was watching Kudlow & Company today and even Ben Stein agrees with me! The economists have it right, the media not so much.

Look, we live in a global economy. The fact of the matter is that world economy has a dramatic effect on the United States economy. Of course we have domestic issues that must be addressed; however, we just cannot ignore the global effect. It continues to ripple back to American companies and that will help us avoid recession. Is it going to be ugly- yeah, I think it will be – but not the end of the world.

Anyhow… predictions are predictions, my guess is as good as the next guys. If you have an opinion, I’d love to hear it.