Media Focused on Mortgage Crisis
It May Not Be As Bad Media Portrays

There are signs the real estate market may be seeing a modicum of stability

October 28, 2007
By: Jerry Cole - Retirement, Investment

As often happens, by the time the local media start reporting the doom and gloom of an economic event, the event may either be over or already beginning to turn the tide. Now I am not saying that the mortgage crisis that has led to an overall credit crunch is over. To the contrary, there is surely more pain to be felt before you can say that.


But when you start reading about the predictions of the crisis taking until late 2008 or even into 2009 before things get better, or the predictions of housing prices falling 11% before it is over; then you have to start believing things may not be as bad as the media would have you believe.

As I learned long ago, you can't put numbers to where the stock market is going in either direction. If someone tells you they sold at the top or bought at the bottom, the chances they are telling the truth are slim to none. The same is true when it comes to the real estate market.

There are some signs the real estate market may be seeing a modicum of stability. Loans made in recent months have good payment histories as mortgage companies have adopted more conservative lending policies. And although Countrywide, the nation's largest mortgage lender, posted its first quarterly loss in 25 years, they are projecting a slight profit for the 4th quarter. As a result, their shares jumped 32% on the New York Stock Exchange on Friday.

And new home sales as reported by the Commerce Department logged a surprising 4.8% increase in September. This is a volatile measure however, and the Commerce Department also revised down new home sales for June, July and August.

To be sure, as mortgage companies have reduced their subprime lending sharply, it has become more difficult to obtain financing for purchasing a home. This will keep the housing market weak and make it more difficult for homeowners in default to emerge from the foreclosure process by bringing their payments current, refinancing or selling their homes.

The softness in the real estate market will effect those who were planning to use the equity in their homes to fund various things. It also points up that it is not a good plan to consider using home equity to fund ongoing needs in retirement unless it is absolutely necessary.

The downturn in the real estate market has been a classic example of what is known as "liquidity risk." That is the risk that an asset will be difficult to sell, or will cause the investor an out-of-pocket loss on resale due to high attendant costs to the sale of the asset. Assessing an investment's liquidity means determining how easily the asset can be converted to cash without losing principal.

Limited partnerships and thinly traded stocks are prime examples of investments with significant liquidity risks. However, some "mainstream" investments may also entail this risk.

Mutual funds, for example, may be very difficult to liquidate without incurring losses due to their fee structures. The most obvious instances occur when a fund imposes hefty redemption fees for liquidation within the first year after purchase. This is because you may have paid a sales load at purchase (class A shares) and if you sell early after your purchase, you will forfeit the front-end load. Investors who purchase Class B shares must pay contingent deferred sales charges if they sell within a given time period after purchase.

Unfortunately home owners in California who lost their properties to the fires have experienced the awful effects of natural risk. This is the risk of adverse weather conditions, floods, landslides, disease and other phenomena in the natural world. We have little or no control over these risks.

There are many defined risks however, it is important to realize that an investor with a short time horizon will be more sensitive to them than an investor with a long time horizon.

So keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)