Sub-Primes Take a Beating, Next Up Are the Primes
by Graham Summers
August 16, 2006
The pain in housing and real estate continues…
Yesterday, the National Association of Realtors announced that home sales were down 7% for the second quarter ‘06 from ‘05.
More than half the country (28 states) along with Washington DC saw declines in home sales for the quarter. Areas that had previously experienced the most growth were hit hardest: Arizona, Florida, and California home sales fell 26.9%, 26.7% and 25.3% respectively.
On top of this, the National Association of Home Builders just announced that its housing market index hit a 16-year low in June of this year.
Already trading at or near their 52-week lows, it’s obvious the bad news is already discounted in homebuilder stocks’ share prices. They’ve been beaten senseless for the last six months. As I’ve written in these pages before, I predict mortgage lenders are next in line.
The sub-prime lending sector is already starting to share some of the homebuilders’ pain. If you’re unfamiliar with these businesses, sub-prime lenders loan money to individuals with faulty credit. Consequently, they’re usually the first in the mortgage industry to feel the pain when housing and real estate slow.
Sure enough, Countrywide Financial (CFC), the 800-lb gorilla in the sub-prime lending sector is down 23% in the last three months. Next up are the prime lenders… those who lend to folks with good credit.
The Mortgage Bankers Association just announced that loan applications to buy homes in July 2006 were down 20% from the same period the year before. It’s only a matter of weeks before this slowdown shows up in the share prices of prime lenders like Fannie Mae (FNM) and Freddie Mac (FRE).
Both Fannie Mae’s and Freddie Mac’s shares recently rallied above their 50-day moving averages. Now, under normal circumstances, these moves would be considered signs of upward momentum.
However, given the recent slowdown in mortgage lending, these rallies seem like a result of the stocks being oversold in the late May market plunge.
This point is further illustrated by the fact that both Fannie and Freddie have experienced strong resistance at their 200-day moving averages in the last three months. Both stocks have failed to break this level… which indicates a lack of interest from big mutual funds.
Put these two stocks on your watch list… I expect to see them both head lower in the coming months. The slowdown has just begun.
Good trading
Graham |
