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The housing slump has undoubtedly put some home sellers in a bind. And even those not currently in the market to buy or sell can be affected by a rise in mortgage interest rates, just ask the homeowners with Interest-only mortgages or those with ARMs (see the last blog posting from yesterday, July 26th for more discussion on these types of loans).

The overall market was sent reeling again yesterday amid reports that the housing sector only continues to get much worse. The Dow fell more than 300 points yesterday (at one point being down more than 400) mainly because of investors jittery over the slowing housing market and therefore perceived lack of consumer confidence.

Think about this: everyone knows that real estate is in a slump right now, yet not many buyers are using this opportunity as a time to buy. It’s easily understandable that buyers are worried. They don’t want to buy a house only to see the prices fall further. But it’s a dangerous game to play when you try to predict the bottom - this is true in housing just as it is in stocks. More homebuilders and mortgage companies are coming out and publicly saying that the bottom (which was expected in early 2008) may now even be extended into 2009! Even companies like Whirlpool are blaming the housing market on slowing sales (see my July 22nd blog entry about Whirlpool’s earnings announcement).

It seems the media only fuels the consumer sentiment in either direction. When the Dow was breaking 14,000 just a week and a half ago on July 17th, that’s all you could read about it seems. Then investors started pulling money out. And the bad news came with the existing home sales, quickly followed by similar bad news on the new construction homes. It all adds up to investors feeling too uncertain about the future and seeing the markets at or near all-time highs and deciding now is the time to take some profits.

Given the current skid in the local real estate market as described in the Cincinnati Enquirer on July 25th, it will be interesting to see if investors start to look for buying opportunities in real estate now that the real estate market has softened and the stock market is beginning to look over priced. (Adobe PDF version of the Cincinnati Enquirer article).

Even if investors don’t pull money from stocks and pour it into buying land and homes, the investors can help the real estate economy by moving money from stocks to bonds. Putting more money in Treasuries and mortgage-backed securities will help balance out the load and make banks more happy to write more mortgages.

How so? you ask… Well, since there will be investors pushing the price of the Treasuries up through the additional purchasing, they yield on the Treasuries will fall and the mortgage rates will start to move downward as it will cost the banks less to borrow money… therefore driving down the mortgage rates. Meanwhile investors, if they are also buying mortgage-backed securities, will add liquidity to the market thus giving banks added funds to loan out in the form of mortgages. As if this wasn’t just the icing on the cake, the banks existing loan portfolios will be worth more to investors as their existing loans will carry higher interest rates than the new loans they are writing at the lower rates. So the bank benefits by writing new loans at lower rates and selling the old loans with the higher rates to investors.

Let’s hope the real estate market and the stock market both rebound! However it’s more likely that only one will bouce back sooner than the other… and my bets are on the stock market right now! Real estate is a much longer-term play than the stocks and I think it will therefore have a longer tail end to the slowdown than a slump in the stock market would. As always, I welcome your comments and feedback…