Housing Buyers Beware

The stars are aligning.

Like the money managers in 2000 who either closed up shop or joined the New Economy—I'd better either jump on the real estate bandwagon, or stop barking at the tires. Predictably, I'll put a stake in the ground and say what so many others have been preaching for so long: the housing cycle is over.

There are worrisome signs that soaring energy prices are beginning to spill over to the rest of the economy. This last month after 3 major hurricanes, surging fuel prices pushed inflation up by the most in 25 years. 2-year Treasury yields, more sensitive to expectations for monetary policy, reached four-year highs after streaking past 4.3% this week.

Mortgage giant Freddie Mac reported today that the nationwide average for 30-year, fixed-rate mortgages rose this week to 6.15 percent, up from 6.10 percent last week and the highest level since 30-year mortgages were at 6.21 percent in late July 2004.

The housing market cannot continue dodging these natural market forces forever. Although we have witnessed tremendous appreciation during the last few years, rising inflation and soaring energy prices were not a concern as they are today. Homebuilders must now manage around unprecedented raw material price increases that will filter directly down to the consumer.

If the housing market turns south, where is the economic damage likely to be the greatest? Surprisingly, the greatest economic impact may not come where prices slide the most. Instead, the regions that see the most pain will be those where homebuilding has been a major source of new jobs. A decline in housing could accelerate job losses in the entire local economy. The most vulnerable spots according to a new analysis by BusinessWeek, include the Riverside-San Bernardino region, San Diego, Phoenix, Las Vegas, Tampa-St. Petersburg and greater Baltimore. In each of these areas, new jobs in construction accounted for over 20% of total payroll growth in the past year versus a national average of 10%. Surprisingly, some of the areas that have seen the biggest runup in housing prices aren't overly vulnerable to a homebuilding slide.

Those planning on residing in the same dwelling for many years can continue to sleep well at night knowing that they will be sheltered from a potential bubble. But everyone else, especially those in the higher-risk areas, should be very careful entering the market in the near future.

Southwest Airlines - Strong Buy of the Month Review

Since recommending Southwest Airlines (NYSE:LUV) back on Sept 16, the stock has enjoyed a 13% 30-day rise despite the overall bearish market conditions and continued rising fuel costs. The airline industry (AMEX:^XAL) rose only 4.5%, in comparison, during the same time period.

The solid showing was fueled by several positive catalysts:

• 3 separate upgrades from Fulcrum, JP Morgan & Citigroup
• Interruptions from Hurricane Rita were much less than expected
• Flights are starting to recover at New Orleans airport
• September traffic increased 19%

With Southwest's increasingly aggressive pricing, rising growth opportunities, and superior survival prospects, the stock should continue to shine.

PHH Cornering the Credit Union Market

PHH Corp (NYSE:PHH), which was spun off from Cendant (NYSE:CD) earlier this year, said it had agreed to acquire the mortgage assets from CUNA Mutual Group, making it the largest mortgage bank for credit unions. Under the deal, PHH, which already provides mortgage services for as many as 500 credit unions, will take on the 1,400 served by CUNA Mutual Mortgage and the $11 billion in credit union-originated mortgages being serviced by CUNA Mutual. In the last 12 months, the origination volume at CUNA was approximately $1 billion.

The company’s decision to sell the business operations of CUNA Mutual Mortgage comes after several months of strategic review of CUNA Mutual’s mortgage division. The company is also conducting reviews of non-core business areas companywide in an effort at improving its focus and efficiency. PHH, long a player in credit union mortgages, was acquired by Cendant, then spun off again in February as publicly traded company. The company has a servicing portfolio of almost $150 billion in mortgages, ranking it 11th largest in the country, according to National Mortgage News.

The acquisition of CUNA Mutual's mortgage operations will significantly expand the credit union market for PHH Mortgage and immediately make it the top mortgage lender in the credit union market. After completion of the deal, CUNA Mutual said it expects to eliminate the 200 jobs in the mortgage operation in the Madison suburb of Fitchburg.

Since Monday's news, the stock has fell 5% to $26.35.