The Bailout, House Prices, and You

By now you've probably heard most of what you'd ever want to know about Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) being commandeered by the government of the U.S. of A. Of course, the one thing that none of us can yet know is the precise form the mortgage twins will take once their restructuring is completed, probably sometime next year.

You likely realize that the takeover -- call it a bailout if you'd like -- won't do much to move our housing market from intensive care to a rehabilitation unit. It's just not an elixir that will halt the slide in housing prices and instantaneously trim the bloated inventory of homes on the market. In fact, as I've told my Foolish friends in the past, my belief is that the number of homes sporting "for sale" signs is effectively dwarfed by an underground contingent whose owners would love to list them, but currently fall into the "What's the use?" camp.

The glut won't shrink quickly, regardless of who is pulling the strings at Fan and Fred. Because the takeover won't really address the other big part of the housing quagmire -- foreclosures -- it would be foolhardy to assume that the weekend's action will slam the brakes on housing's price slide. Until the glut begins to contract noticeably, most of our homes likely will be worth less at year's end than they'd fetch today.

The takeover isn't totally without value, however. It will put a firmer foundation under mortgage lending and stave off an economic implosion, albeit by dipping liberally into our tax dollars. That foundation should ultimately benefit the lending likes of Washington Mutual (NYSE: WM  ) and Bank of America (NYSE: BAC  ) , as they strive to recover from past credit indiscretions and to create more appropriate and sensible underwriting standards.

And housing will recover -- it has to -- eventually. And I'm not trying to completely warn you off of slowly and sensibly building positions in the strongest homebuilders.

The operative words there are "slowly" and "strongest." In my mind they translate to worthwhile look-sees at luxury builder Toll Brothers (NYSE: TOL  ) ; KB Home (NYSE: KBH  ) , with its build-to-order approach; and perhaps Meritage (NYSE: MTH  ) , a well-managed group that's cast a sizable portion of its lot in economically sound Texas.

Toll Brothers is accorded a single star by Motley Fool CAPS players. With the company's shares up 20% on the year, would you vote otherwise?

Related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does welcome your questions or comments. The Fool has the strongest disclosure policy in these parts.


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  • Report this Comment On September 09, 2008, at 5:19 PM, recessorcepress wrote:

    I think it is wildly premature to jump into home builders at this time. I think they will return to the split adjusted values they carried in 2000. There is no market for what they build at this time, financing is tight as a drum and their costs are too high. This is going to take several years to work itself out.

    I know too many developers who have just stopped building and many who are holding off finishing out the existing structures to conserve cash. Some I now are resorting to renting units that would otherwise be sold.

    Like every other bubble, builders had a period where they were getting very fat margins and I think the margins are nonexistent today. There will be plenty of time to get in at a much lower share price than what they are selling for today, especially with this rather peculiar run up that just occurred which now seems to be reversing. I fully expect that housing prices will adjust to 2003 prices at a minimum and that is quite a haircut.

    With commodities dropping like rocks, it looks like the market is anticipating a severe recession and I think the market is right.

    This whole debt financed insanity has left a bad taste in peoples' mouths and it will take a long time before they get over it. It seems to happen every generation, but this one is the granddaddy of them all.

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