Bond Insurer Rally and the Housing Picture

We ended the day with another rally off positive news for the bond insurers ABK and MBI. S+P reaffirmed their AAA ratings, allowing them to stay in business, and temporarily aiding the value of bank-held mortgage assets. After Cramer made his statement a few weeks ago on the importance of the bond insurers to the overall health of the market, any news on the group has tended to cause a large market reaction.

My personal opinion is that all of this remains a side show, but we must continue to respect the market, and the majority of participants who also place credence on such news. The fact that the market is rallying off any signs of improvement in the bond insurer picture shows that we've been pricing in the worst. The next piece of news will most likely be the much talked about $3 billion bailout for ABK - and I also expect another rally when details of this deal hits the wires. In addition, will Moody's have something else to say about the insurers this week as well?

The housing market remains the most important unknown factor in the entire equation. More importantly, the default rate amongst mortgages will be watched closely. As more defaults come in, the credit ratings of our beloved bond insurers will continue to be threatened. Most don't believe that we are anywhere near the end here. The story remains that if housing prices don't stabilize, more and more homeowners will be worn out and forced to short sell or simply walk away. I personally think that housing prices will need to reach a point where the monthly cost of a 30 year fixed mortgage with 10-20% down is similar to the cost of renting for the same property (after tax benefits are included). The rental market is a much more fluid and dynamic environment which more accurately depicts what is truly affordable to the general public for housing. In overheated markets, there continues to exist a large gap between rent and mortage costs.

Wikipedia - US average PRETAX household income here:
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
It appears low, but the median household income is $48,000, the top 20% > $88,000 (where most homeownership lies), and the top 3% = $155,000.
The median home sales price in 2007 is around 300k.

Another wildcard is the economy. In periods of recession, rents actually may go down, as individual housing budgets contract. In addition, we must pay attention to interest rate trends, as well as the availability of a 20-30% downpayment from homebuyers. The current credit crisis has drastically cut the lending environment from which buyers can qualify, basically leaving a gaping hole between would be buyers and sellers.


So what's next for the market? I continue to have a negative bias based on macroeconomic risks, as positive catalysts will be fewer and farther between as this year moves on. If and when the market breaks lower, I suspect we may not actually need a major piece of news, it will occur as a technical plunge. It's difficult to even call the market oversold at this point either. The outlook for even great companies such as GOOG or AAPL has noticeably deteriorated after their recent earnings reports. However it's important to trade with the market, and I suspect we may have some "collateral" upward movement in the market for now. Tomorrow we have the Core PPI and Consumer Confidence numbers. I think with last weeks' reaction to the CPI we will need to pay closer attention to these numbers. Remember that CPI-PPI = corporate profit margins. See you tomorrow!