April 11, 2008: Keeping Abreast of the Bust in Housing

The astute investor with the luxury of time should be looking past the current loan, foreclosure and home building situations and begin to focus on "what's next".

I am fortunate to have the advantage of being in several facets of the real estate business.

Here are some thoughts along with a few stock picks.

Increased stips (stipulations to receive loan consideration) including income, employment stability, cash on hand (20%), family stability, credit and credit scores are making it hard for many to secure a mortgage. FHA loans will be the best way to go for most mortgage products. And many will have to accept less of a home, especially a new home, which is not a bad thing since so many buyers purchased McMansions expecting appreciation of the property to bail them out of a poor financial decision. Homes are a place to live - not an investment. Thus, I am focusing my efforts on two areas: rental property that is clean and well-managed, and single family homes built for the lower middle class and middle class that are within reasonable budgetary constraints. Are there mortgage brokers and some banks still using questionable financing to structure mortgages? Emphatically, YES. But the word is out on foreclosed home angst, and more home buyers are becoming semi-educated to say no to loans that seem too good to be true. Foreclosed properties are generally trashed by their unlucky owners, and are usually of no interest to home buyers who prefer a home they can move into and live comfortably in immediately. Never, NEVER, have faith in one property appraisal. Get two appraisals or more. Assume that appraisers are still tight with those who want you to pay a premium price for property.

Rehab properties are being mass marketed by many of the same crowd who poorly rehabbed properties or worked over gullible real estate "investors" with no money down, cash out deals a few years ago. I see them everywhere I travel and get a laugh out of them pitching the same old snake oil to a new group of millionaires in waiting. Avoid them like the plague. Banks are sitting on their best properties knowing the market will likely turn in their favor sooner than most expect. The fact that banks or their shills buy back most of the foreclosed properties at auction says something about their plan. Real estate garbage is left for the bottom feeders to pick from. Sure, short sales, etc. are possible, but for the average home buyer somewhat complex tactics should not be attempted - especially with a pitch man hawking them.

Rentals are a great place to be now. With good, clean home buyers being shut out of the credit market, middle class and upscale rental properties bought right are a terrific investment. Same for commercial or office properties. Buying right is the key. And, making sure one understands that rental real estate is a not in the final analysis a brick and mortar business. It is a people business.

Home builders love those McMansions. Look great, decent floor plans and a superb profit margin using cheap cookie cutter materials, especially when they could wrap their own mortgage and title company into the transaction. This is changing. Smaller, more energy efficient homes priced for those who want a good, clean residence in a decent area without cathedral ceilings,Viking kitchens and huge lots to maintain are "in". Wasted square footage is out. With many big box builders and large independent contractors dying on the vine with excess lots it is easy to buy lots at 50 cents or less on the 2006 dollar. Contractors who would not lower their bids and reserved themselves for custom homes on golf course communities are starving as well. I find them falling all over themselves trying to get work and will now work in many cases at half of last year's price or less. This cycle will end, as do all cycles. But I am convinced that the large cheaply constructed mansions are overbuilt, beginning to look why they were priced relatively cheap to begin with and energy hogs. Labor rates will fluctuate, but I believe that the smug take it or leave it offers of the past few years are not going to return soon, if at all.

Here are some stocks I like:

Lowes (LOW) has placed, designed and stocked their stores with home stuff guys like and women love. It is trading at $24.53 per share. Too cheap for outward looking investors. It should leave Home Depot in the dust.

IShares Global Financial ETF (IXG) mirrors the index which will do smartly in an upcoming real estate and financial resurgence cycle. IXG trades at $72.59 per share. As with all ETF's, place a limit order to avoid too large a spread when you buy.

U.S. Gypsum (USG) is a best of breed building materials company. You need their products. Trading at $38.53 per share, it is already showing signs of establishing a long term uptrend.

Resource Capital (RSO) is executing well now and has a commendable portfolio of commercial loans with a default rate of less than 1% as reported. This appears to be an honest company punished for the misdeeds of others. RSO trades at approximately $7.80 per share.

NorthStar Realty Finance Corporation (NRF) is, like Resource Capital, a company that deserves your attention. They have a solid reputation in the business. Trading at about $9.00 per share.

Weyerhauser Company (WY) is a "wait and watch" stock. Many view the stock as a short term loser based upon slow land and timber sales. Trading at $62.32 per share, I would buy on dips below $58 and wait. The assets of this company are excellent. WY will perform very, very well later this year.

General Electric (GE) and Wal-Mart (WMT) will benefit in several ways from this article's content and predictions. I prefer WMT.If Wal-Mart decides to expand their property improvement departments at both their flagship store and at Sam's Club, the stock price will be enhanced (note to Wal-Mart: either improve your lousy produce department or diminish them and stock up with home improvement products).

I know this article may seem too contrary and unconventional, but my goal is to have you start thinking ahead, not looking back into the rear view mirror.

DISCLOSURE: THE AUTHOR HOLDS A LONG POSITION IN IXG.