Tuesday, October 14, 2008


INTC just announced excellent financial results. Apple just announce lower priced computers. Earlier today, BEA Systems announced a major new order for aircraft components, which may be built in Winston-Salem. Life is good and life goes on.

The people of Iceland fell into the trap of 100% home financing. The value of homes soared and late buyers were like snipe hunters left holding the bag. Many a citizen has lost two or three years pay by over paying for real estate. This is sad but it is old news. It will take a number of years for homeowners to rebuild equity and many will choose to rent, but life will go on.

The decline in real estate prices started 4 years ago. Many people hardly cared until a few weeks ago. Now everyone is aware that real estate prices "are falling". But they are not. Some are and some are not but the replacement cost of the average home has been going up while the carrying costs have been going down. Homes in good locations are appreciating in value. This will become very clear as banks thaw. Credit Unions are offering 4% home loans! 5.9% fixed for 30 years!

The demand for long term money has fallen. People want to get out of debt and to stay out of debt. Capacity restraints that were pushing new construction have faded. As spreads between safe rates and risk rates recede, money is going to be cheap. As is always the case, investors who go against the grain will do better than those who do not. Homes in good locations are for sale at prices where the rents will more than make the payments. Now is a good time to buy real estate and the bank companies that finance real estate. There is going to be consolidation and there will be losers and winners but the average bank stock will do well.