Straw Houses

Bill Byrnes — Mon, 18 Jun 2007 12:51:00 -0500

The Dow and the S&P are touching record highs. Not even the specter of rising interest rates can dampen this market. The last downturn in the market occurred in February and there was just a pause for it to catch its breath and run to record highs. Isn’t life wonderful?

Well, life isn’t so good if your mortgage lender is foreclosing on you and home foreclosures are rising. Take a look at Home Foreclosures Hit Fresh High which appeared in Friday’s Wall Street Journal. Deficiencies are on the rise and almost at levels last seen in the 2001 – 2002 recession. You’d expect foreclosures to be high during a recession, but not when the economy is growing. Even more ominous is the value of the collateral backing the mortgage. Home prices rose steadily from 2002 through 2005. Real estate was the place to be. Families moved into bigger homes (with bigger mortgages) and investors bought (speculated in) residential real estate. Those who stayed put refinanced, taking out money (and increasing their mortgage payments), as the value of their home increased.

The State of the Nation’s Housing, a study released on June 11 by Harvard University’s Joint Center for Housing Studies, forecasts that home values will continue to decline over the next year. If the Harvard study is correct, more homeowners will find they have no (or negative) equity in their homes, giving them little incentive to continue making their mortgage payments. If interest rates rise, homeowners with adjustable-rate mortgages may not be able to make their payments, even if they want to keep their home.

Beyond the human tragedy, voluntary or involuntary real estate foreclosures are bad for the economy and the stock market. So, as I’ve said before, use the strong stock market to re-balance your mutual fund investments. And, watch the riskiness of your investments. Don’t let a rising market lull you into taking too much risk.

The MUTUALdecision Blog: Straw Houses

Straw Houses