Mortgage Regulations now being implemented as part of Dodd Frank legislation signed three years ago continue to cripple the mortgage banking industry and have caused many large banks to cut or eliminate their mortgage centers. I believe this evident stress in the mortgage industry, coupled with current mortgage regulations, will create headwinds for the stock market in 2014, no matter how spectacular the current gains are.
Investors who have missed the recent market gains this past year should be wary of committing significant new money to the stock market at these levels. There have been significant outflows from bond funds the last few months, and much of this money is being poured into equity funds because recent stock market gains have been so impressive. For those investing now, the question is whether the torrid pace will continue, a question nearly everyone has on their mind.
To assist in predicting a wildly unpredictable market, consider this: the recent new highs achieved by the stock market likely aren’t a sign of an economic boom. And the main reason for this: continued sluggishness in the housing market.
The newly enforced mortgage regulations make it much more difficult to obtain a mortgage and will result in fewer home sales in the foreseeable future. That will create a negative drag on the economy for years, because the housing market is absolutely crucial to a revived American economy.
Think of it this way: each home requires multiple resources, from lumber to sheetrock to shingles to paint to carpet. In addition, when someone buys a new home s/he typically invests additional funds in new appliances and furniture. In total, the construction and sale of even a single home represents significant expenditures, all of which impact the economy in a positive way. Multiply this exponential effect by tens of thousands of homes, and you can quickly see how critical new homes and new buyers are to our nation’s economy. And with this in mind, it’s easy to see how coming mortgage regulations may dampen an already limited recovery.
The current problem is that homes are not being built and sold at healthy rates. Several banks are fleeing the mortgage industry altogether, while others, even giants, are laying off thousands of workers. For example, CitiBank just let 2,200 workers go from its mortgage division.
These banks don’t make decisions like this unless they are extremely well informed and have an idea that a given market is going to continue to perform poorly. Banks do not pull out of areas where they anticipate growing profits! When we see multiple banks yanking personnel and closing entire divisions, we need to be alerted to continued problems in that sector, in this case, housing.
Those giving advice on investments management need to understand that weakness in the mortgage industry is a troubling sign that could hinder markets going forward. That doesn’t mean that investors need to sell right away, but they do need to monitor their investments closely and be ready to take action quickly when needed to lock in their profits. The market has established a true zig-zag pattern over the past several years, revealing a new era in investing that should focus on limiting large losses and reacting nimbly to changes. Despite all-time highs, there are continuing built-in weaknesses in our economy that may slow the stock market as well. Thanks for reading.
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Twitter: @JeffVoudrie
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