Thursday, August 16, 2007

Further Credit Crisis Thoughts

Some further thoughts on the current credit crisis:

- We have had something like this every 5 to 6 months or so, with the last one in Feb 07, before than June/July of 06. It seems to me to be due mainly, to overextended funds, if we didn't have funds leveraging, then there wouldn't be such a mass rush for the exits.

- That said, I think this one is a bit more scary than previous downturns, in that it is a real liquidity crunch, not quite the same as last year. Although similar, but a bit more severe. Further, I am not sure about overall economic growth, with the housing market slowing.


- In the housing market, I think the homebuilders (as I've followed homebuilders fairly intently for about 4 years) without leverage will make it through, and who haven't committed to these exurb-type developments, while the homebuilders who are overextended and rely on the mass community developments will have a tougher time -- many can go bankrupt. The overhang of houses is the most since at least the 70's. Mainly in the housing communities sector, in exurbs, etc -- "KB Home's new development, many cookie cutter houses which all look the same, 50 miles from downtown" isn't nice at all, long commute times, and now harder to get financing.

- Really, something like WCI should do ok over the long term -- if it wasn't for their leverage -- since they do luxury apartments, in or near city centers. I am not a fan of KB Homes or Pulte Homes, for example -- which do a lot of community developments.

- Further, on housing, it is odd to think that housing globally will go down. It is hard for me to see that happening -- in China, for example, interest rates are buffered from external developments, and people are used to spending upwards of 50%, more like 60% of their monthly income on housing payments. Demand is huge for housing there because the whole country wants to live in the cities. In the US, there should also be a vast difference between real estate valued in attractive areas -- financing will be easier to be obtained, and people will spend a bit more on monthly housing payments from a relatively low level as compared to other countries. Overall, if housing declines and interest rates go up, undesirable areas will get hit, but more attractive areas, people will pay up and not sell, and demand will still be there.

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