February 9, 2007: Real estate, a bottom...or a bottomless pit?

Yesterday, media elites reported what we involved in real estate have known for a long time. The sub-prime mortgage market is blowing up. Several stocks hit the skids. I will try to sort out the carnage and mention a few stocks that are worth studying for inclusion in your portfolio.

First, the initial point of contact lenders are the culprits here. They were not minding the store as mortgage brokers and their willing accomplices, appraisers, fed
them juiced appraisals, massaged loan applications and gave just about every warm body that walked in to buy a home 100% financing. Poor credit risks were given excellent terms at only slightly higher interest rates than the gold-plated client. Remember that real estate appraisal,like prostitution and and forgery,is an art and not a science. Thus, the art of appraisal, not monitored, encouraged schemes to pump up home values so that buyers would draw thousands of dollars cash back at close for "repairs" and brokers get higher fees for bigger loans,amongst other techniques. This has turned the sub-prime market into a Ponzi scheme. The larger banks are then stuck with bad paper and lots of foreclosures.

Second, the government is also to blame for mandating loans based upon ethnic class rather than a credit standard.Instead of holding to a standard, lenders throw up their hands and just say "sign here, you're approved" to keep the Feds off their back.This ultimately has a devastating effect on inner city communities,as foreclosures and "free money" often turn into blight and drug houses. Unintended consequences.

I have reviewed the latest housing statistics and a lengthy, respected brokerage survey on the housing market today. I traveled south last week to see the housing bubble first hand. The situation is grim for many areas. Florida is amongst the worst.Vacant properties are in the millions of units nation-wide. Foreclosures are at very high levels. Panic? No. Start looking now. First at banks, next at the housing industry.

Once the sub-prime and refinanced-at-the-top-of-the-bubble loans burst, I look for the industry to begin to move forward, gradually, by mid-summer. That said, some areas have so many excess housing units it will take a few years to work off the inventory. Look at some national and selected regional institutions, as follows:

No furniture companies. Sales are down everywhere, especially in the southeast.

Wait a bit before looking at any housing-centered REITs.

CapitalSource (CSE) Excellent company that is diligent in avoiding problem loans.
Lazard (LAZ) Moving forward doing good business. Not usually in the housing "mix".
Goldman-Sachs (GS)Pricey? Yes.Fully valued? No.Influence on housing industry? Yes.
Wachovia (WB) Buy it. Excellent positions taken in the home financing industry.
Capital One Financial (COF) They are in about every good credit risk's wallet.
Northern Trust (NTRS) Again, not usually grouped in housing, but its stake appears large and healthy.
Countrywide Financial (CFC) Excellent loan portfolio, I think. Good management.
First Horizon (FHN) Spike up as CEO has announced retirement. Finally! Buy on an pullback into the 41/share area.

Three home builders:
Lenner (LEN)
M/1 Homes (MHO)
WCI Communities (WCI)

and, a manufactured home/land REIT/ finance outfit
UMH Properties --I like this one a lot as a long term investment with a hefty divi- dividend. The Landy family has their tentacles in this stock.

I have information overload on this subject. I will throw out more data and potential stocks over the next few weeks. Importantly, get serious about investing again in this sector: SELECTIVELY.