Bailout for Homeowners and Lenders?

Developments in housing remain crucial for the economy and for stocks.  Nearly any account of the housing situation includes reports of the number of foreclosures, the inventory of empty homes, and the potential ARM re-sets that may stimulate even more foreclosure activity.

Any help for distressed homeowners would help to shift the supply curve for homes.  This would suggest more stable prices and a lower inventory overhang.  Some have speculated that demand has been suppressed by the expectation of further price decreases.  If this argument is true, then the foreclosure bill might affect demand as well as supply.

The House has already passed a version of the bill under the leadership of Barney Frank.  The Senate Banking Committee is now considering a similar bill.  The Chairman, Christopher Dodd remains optimistic that a compromise will be reached.

The Administration is using a veto threat to affect the legislation.  Their position is represented in the Senate by Richard Shelby (R- Alabama).  Shelby, a former Democrat who switched parties years ago, is calling for more aggressive regulation of the Government Sponsored Enterprises (GSE'S) in the home financing business.  He is also concerned about bailing out the undeserving with taxpayer dollars.

Those in favor of the proposal think that the cost of the bill, perhaps $2 B or so, is easily justified by the benefit for the housing market and the economy.

Putting aside our own opinions on the legislation, we believe that the market would react positively to something helping out homeowners.  For this reason, it is important to watch the key players, especially Shelby.

Meanwhile, housing remains firmly at the bottom of the sector ratings.

TCA-ETF Update

There has been a lot of movement among the top sectors in the last few weeks.  While energy and natural resources choices remain at or near the top, we now also see some technology.  All of the financial sectors have again fallen out of the "buy" range.

The percentage of ETF's earning a "buy" signal is down to 53%, well off the recent highs.  The overall strength ratings are also not as high as in recent weeks.

Listed below is the weekly update.

Comments

[ken]

I suspect you are right in saying that any federal action will likely help the housing market.

But in the end it will be the people who decide this is the right time to buy a home who will stabalize the market. It won't be long till many start to realize that opportunities like this come around but once in a lifetime. The unique homes in the best locations will get snatched up first. The drab tract home built in the remote exurb will remain a drag on the overall market for another couple of years. In the meantime the smart money is searching out deals in older and better located neighborhoods.

I am waiting to read the inevitable stories about the intrepid risktaker who buys a vintage home at a bargain price in a great area with plans to remodel. Instead of spending a two week vacation at a resort they will be spending that money at Home Depot instead.

This is a great time for risk taking youth and liquid cash. The opportunities for both abound.

[VennData]

...or they could be buying into the teeth of another ten, twenty percent - or more - leg down.

It's pure speculation. No one knows.

[Jeff Miller]

Venn -- You are correct. No one knows, which was the basis of our "which inning" article.

What I am trying to do is point out things we should be watching. The government actions are a patchwork, each with an effect. They bear watching.

Thanks to you and also to Ken for your helpful observations.

Jeff