Business & Finance
Business and Finance
Business and Finance
Wed, August 4, 2010
Tue, August 3, 2010 Bank of America, J.P. Morgan, Transocean, McDonald and Darden
CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: Bank of America (NYSE: [ BAC ]), J.P. Morgan (NYSE: [ JPM ]), Transocean (NYSE: [ RIG ]), McDonald (NYSE: [ MCD ]) and Darden (NYSE: [ DRI ]).
"Sorry Billy, I know you worked hard in high school and got into the Ivy league like you always dreamed, but you will just have to go to community college instead"
Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: [ http://at.zacks.com/?id=4579 ]
Here are highlights from Mondaya™s Analyst Blog:
Housing: Still Flooded
The $2.4 trillion number is the total amount of the mortgage, not the amount that is underwater. It is the underwater portion that is the potential loss to the big banks that made the mortgages, like Bank of America (NYSE: [ BAC ]) and J.P. Morgan (NYSE: [ JPM ]). However, mostly the risk is to the taxpayer, since the biggest holders of mortgages are Fannie Mae and Freddie Mac and more recently, the Fed.
The underwater portion is estimated to be $771 billion as of the first quarter of 2010. The depth of the water counts. Since the likelihood of foreclosure is related to the depth of the water, the distribution of how far people are underwater also matters.
People just a little bit under are not that likely to let the house go back to the bank. It simply is not worth it in terms of family disruptions, credit ratings and the personal sense of honor in paying your debts even if you are not legally obligated to do so (most mortgages are non-recourse, meaning if you dona™t pay, you lose the house, but thata™s as far as your legal obligations go). People who are deeply under are downright stupid if they dona™t.
The second graph shows the breakdown. There are a total of 14.75 million homeowners who are underwater. Of those, over 4 million are sitting deeper than the wreck of Transoceana™s (NYSE: [ RIG ]) Deepwater Horizon. That big first bar is homeowners with more than 50% negative equity.
In other words, for that $250,000 mortgage, the house is worth less than $125,000...OUCH! With the end of the tax credit, it is highly likely that we will see a renewed decline in existing home prices. If housing prices fall by 5%, then each bar on the graph -- with the exception of the first one -- will move one spot to the left, and the first one will grow by approximately the size of the second bar (offset by the actual number of foreclosures or short sales).
So where is the flood? The final graph shows the breakdown by state, in those states for which the data was available. The worst afloodinga by far is in the desert of Nevada. It is a pretty good bet that the 18% of homeowners (red portion of the bar) there that are more than 50% underwater will go into foreclosure. Right now, by paying the mortgage each month, they are acting like gamblers who are deep in the hole and increase their bets in the hope of breaking even. Even the yellow portion of the bar makes it a bit of a long shot for the probability of the house price rebounding enough to eventually have positive equity again.
Combined, those two groups are more than half the homeowners with mortgages in the state! Then consider that Nevada now has the highest unemployment rate in the country, and it looks like the whole state is rolling snake eyes. The other two poster children for the housing bubble -- Florida and Arizona -- are not in quite as bad shape; to get to half of all homeowners underwater, you need to include even those that are just adampa on their mortgages. Still, that is a lot of people who are underwater.
Housing wealth is -- or at least was, before it all evaporated -- far more widespread and ademocratica than stock market wealth. For many people, the equity in their houses was a form of aforceda savings that was going to be a big part of retirement plans, or the way they were going to put their kids through college. Now either they have to abandon those plans ("Sorry Billy, I know you worked hard in high school and got into the Ivy league like you always dreamed, but you will just have to go to community college instead,") or people are going to have to save a lot more out of current income.
As the savings rate rises, it means people will spend less at the stores, particularly on discretionary items. It means fewer meals out, and when people go out, it means it is more likely to be at McDonald's (NYSE: [ MCD ]) than it is at Red Lobster (part of Darden, NYSE: [ DRI ]).
Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: [ http://at.zacks.com/?id=5514 ].
About Zacks Equity Research
Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.
Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.
Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: [ http://at.zacks.com/?id=5516 ]
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at [ http://at.zacks.com/?id=4580 ].
Visit [ http://www.zacks.com/performance ] for information about the performance numbers displayed in this press release.
Follow us on Twitter: [ http://twitter.com/zacksresearch ]
Join us on Facebook: [ http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts ]
Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
