Why I’m Not Worried About Sub-Prime

Back in May, I ran a series of articles in The Kelly Letter in which I examined the state of real estate in Colorado and California. I spent more than a month driving around, talking to realtors, comparing the word on the street to bold headlines, and sending along my findings to subscribers.

From my May 19 report:

I wrote a couple of weeks ago that housing prices in Colorado were no bargain. Now I see that they’re no bargain in southern California, either. The popping of the bubble, the bottom of the market, the slump, or whatever else the media wants to call their phantom news story about housing’s demise, is nowhere. True bargain hunters are holding cash, because bargains are hard to find.

I had dinner with another friend of mine, a fairly wealthy investor who’s always on the lookout for something new. His circle of friends, he told me, are watching real estate and waiting…and waiting…and waiting. They’ve been waiting for three years. The media keeps reporting a fire sale, but nobody’s seen any smoke.

What I’ve concluded is that the general real estate market is not a buyer’s paradise.

Since then, the sub-prime issue has ballooned to an even bigger news event, but my subscribers and I remain undaunted for a couple of reasons.

First, we’ve thought since the end of April that the stock market would see a weak medium term after rising higher in the short term. That’s exactly what’s played out.

Second, and more important to this article, is that the stakes are not as high as shrill headlines would have you believe.

True, the housing market has slowed. Ask yourself, however, what it has slowed from. Did it slow from a moderately good pace to a bad pace? Did it slow from a bad pace to a dismal pace?

No. It slowed from a breakneck amazing pace to a decent pace. Nobody thought the runaway housing market of the past few years could last forever, did they? To put this in perspective, home sales and housing starts are about where they were in 2002. Those levels were considered fine back then. They’re still fine today.

Next, ask yourself how much of the U.S. economy housing represents. By the tenor of the news these days, you’d think half of the U.S. gross domestic product comes from the housing market. It doesn’t. Housing accounts for a mere 5% of the economy. Even if housing slipped by 50%, the overall economy would suffer only a 2.5% loss. That’s not nothing, but it’s not the stuff of The Big One. Besides, housing is nowhere near falling 50%, so we’re actually looking at a hit to the overall economy of maybe 1%.

Folks, this is no disaster. The stock market is not finished. We’re not seeing the front edge of a storm that will demolish all we’ve built over the years.

We probably have further downside ahead, but it will be followed by up, and we’ll still be standing. Smart investors are watching for good entry prices on stocks they’ve wanted to own for years and hoping for a lower market in the near term. You read that right: hoping for a lower market.

The Kelly Letter has already bought one stock in the downturn so far, and we’re looking to buy more, including a home builder.

If you can’t recognize the word O-P-P-O-R-T-U-N-I-T-Y between the headlines these days, you’re in the wrong business.

Tomorrow: A similar conclusion from Stratfor.

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