Famed Money Manager Edmund Lynch is perhaps best known for his timeless wisdom that you can beat the pros by focusing on stocks of companies where you either work or shop or have some other edge.  But a more relevant Lynchism today is this gem:  Ignore the headlines.

That’s no easy thing.   How do you tune out all the chatter and ink on recession, housing, subprime woes, the credit crunch, rogue traders, insolvent bond insurers, $100 oil and nukes in Iran?  It’s enough to make you sit on your thumbs and wait before making any big moves.   But what, exactly, are you waiting for?
There has rarely been a moment in history when you couldn’t scare yourself into doing nothing.   And yet, as Lynch observed nearly 20 years ago, “in spite of all the great and minor calamities that have occurred … all the thousands of reasons that the world might be coming to an end–owning stocks has continued to be twice as rewarding as owning bonds.”   A top reason to not buy stocks, in Lynch’s view, is if you don’t already own a home–in which case, that should be your first investment, since an owner-occupied home is nearly always profitable.   Through a spokesman, Lynch reaffirmed these views to me–housing debacle and all.  When prices are falling, few people have the discipline to buy stocks, a house, gold, art or any other asset.   But those who do pull the trigger excel in the long run.   As John D. Rockefeller famously said, “The way to make money is to buy when blood is running in the streets.”  And the streets are stained crimson. Start with stocks.   They have been pummeled this year.   GDP braked sharply last quarter, and there has been plenty of panic about a recession.   The Federal Reserve is slashing short-term interest rates at the fastest clip in decades.   But if you stick to your steady, diversified plan while everyone else is retreating, you will be happy years from now.  For one thing, Fed rate cuts always lift the economy eventually, and the stock market typically starts responding just as headlines get gloomiest.   Sure, the market could fall again before recovering.   But the recession may be half over already–or we may avoid one altogether.   You just never know.  As for housing, certainly some skepticism is in order. Formerly sizzling markets in Florida, Nevada, Arizona and California probably haven’t seen the worst headlines just yet, though they may well be close.   And “jumbo” mortgages, those more than $417,000, are likely to remain artificially high for a few more months while banks work through their credit issues.But let’s say you are emotionally ready to be a homeowner.   You have good credit, plan to stay put for five years and have been waiting for the perfect entry point.  It’s time to get serious–before an inevitable rise in interest rates wipes out your advantage.   “The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher,” says Jim Svinth, chief economist at mortgage firm Lending Tree.   So anything you gain by a further drop in prices might be offset by rising financing costs.  Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today’s rate of 5.5%.   Monthly principal and interest come to $994.31. Let’s say that 12 months from now the same house goes for 10% less, or $197,010.   But by then the recession is history and the Fed is jacking up rates to stem inflation.   If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you’d have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate.   And you have spent a year living someplace you’d rather not be.

It’s more complicated if you must sell before you can buy.  But that logjam won’t persist forever–and if it appears you’ll be trapped for a few years, try to refinance at today’s lower rates.   Risks always seem most acute when the headlines give you ulcers.   But that’s exactly when you should think long term–and get off your thumbs.

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We have all heard this phrase but it comes to mind especially right now since so many homeowners across our Arizona and even elsewhere are faced with two choices and neither one seems to be a great choice…..walk away from their homes or have it taken from them when they can no longer make the payments.   Many people are finding themselves in just this position.

After years of constantly increasing values and homes that were used as ATM machines, the bottom has fallen out and consumers are finding themselves in positions that they never thought they would be in.  For certain, there were issues with dishonest lenders, add that to the fact that there was greed on all parts, then, just for extra measure, throw in the fact that rates were incredibly low and programs too easy to qualify for from banks that were enjoying the money being made from these loans, and now you have all these factors added to the normal life issues people have including job transfers and divorces etc.

SO, are we there yet?  It all depends on who you ask but for many of the experts, we are right in the middle with the economic news getting worse.  The ride is not yet over.  For those that can, the key is to hold on and continue to make their house payments.  For those in adjustable rate mortgages, when the payments start to adjust upward, please call the lenders.  They are becoming more and more willing to work with borrowers in a bad situation.  For those in a better place, find and work with a reputable lender who can tell you the truth about the options available to you.  Finally, if there are no better options, consider a short sale before the foreclosure with an honest real estate agent.  It may  not be as damaging to credit as a foreclosure.

As always, feel free to call either Lorry or myself and we would be happy to help!!