Real Estate and Banks
The force driving stocks down the past few days have been the financials. First it was “rumors” of some potential banks shutting down, now it’s just profit taking. Today, stocks were down modestly — which is healthy considering that stocks took a major dive yesterday. A small pullback was probably overdue.
However, it’s good to step back once in a while and look at the major trends in the market. What do we know to some degree of certainty? Well, for one, the economy is slowly recovering. I think there’s a general consensus on that one. Another one is that the real estate market is also recovering. Real Estate sales have improved significantly from the beginning of the year and the trend is continuing to improve. Let’s talk more about that.
I think the recovery in the real estate market is going to be the major factor in helping banks get back on track. If the real estate market continues to improve, it should significantly improve the financial stability of banks. Instruments like CDO’s and CMO’s, subprime, and Alt-A mortgages have been the bane of most lenders and if foreclosed properties can be quickly converted to cash through bank-owned sales, that will help the banks recover some much needed cash and improve liquidity.
The pending home sales rose 3.2% in July after rising 3.6% in June and has risen for 6 straight months. This improved home sales volume should have given and will continue to give many struggling banks the much needed liquidity as they sell of their bank-owned properties. The key is the sales volume — banks need cash to stay in business. They are not real estate companies — they’re in the business of lending money, not owning properties.
A friend of mine who is a Real Estate agent at Coldwell Banker has been telling me that homes that go on the market get many competing bids now (many over the asking price) unlike last year where homes sit on the market for months without any serious bids. She also tells me that the number of bank-owned homes for sale has also dropped dramatically in her area. That’s a telling sign that people are looking to buy homes again and from her perspective, the demand has really picked up since late last year.
So in summary, as we think about banks and financial institutions, we need to keep in mind that this increase in real estate sales will help many banks get the much needed influx of cash from home sales. If the trend of home sales increases continue, as expected, we should start seeing more stability in banks and other financial institutions, which would provide a solid foundation for the next bull market.
