The Future of U.S. Housing... and How to Profit
By Dr. Steve Sjuggerud
July 24, 2007

Last week, I took True Wealth readers on a path the U.S. could go down over the next few years... and described the investment possibilities that come out of it, starting with where we are now...

Two of my friends are trying to buy homes here in Florida right now. They're not speculating to get a bargain. Their families are growing, and they need more space.

So they've made a few offers. Comically, the sellers aren't budging on their prices so far... Sure, the sellers hear about how the real estate market is weak on TV. But somehow, the sellers think they're immune.

It reminds me of dot-coms back in 2000. People wouldn't sell their dot-com stocks after they were falling... They somehow thought their portfolios were immune from the obvious wreck going on. They thought that if they didn't sell, their stocks would come back.

It's definitely not time to be a "stubborn seller" in Florida. It's time to take what you can get, right now, before lower prices arrive. They are on the way...

"Post-boom hangover lingers" was a headline in Southwest Florida's Herald Tribune earlier this week. "The homes that are on the market [in North Port], or soon will be, represent a 4.7-year supply given the current pace of sales."

Of course North Port, Florida, is an extreme example. Nationwide, it would take nine months on average to sell all the homes available for sale at the current rate. That is the highest supply of existing homes for sale since the 1990-1991 recession.

To fix this huge supply of homes for sale, either demand will have to pick up dramatically or prices will have to come down.

Legendary investor Bill Gross, who manages more money than anyone ($700 billion) and whom I met last month, guarantees prices will fall and things will get worse... He says he is "as sure of this as I am the sun will set in the west. The uncertain part is by how much."

One problem is the large number of adjustable rate mortgages (ARMs) resetting next year... In 2008, Bill says, "nearly $700 billion in ARMs are subject to reset, nearly three-quarters of which are subprimes."

So Bill believes "you can add [more housing woes] to your list of inevitabilities," next to "death and taxes."

Okay, so enough of that bleak outlook... What is it exactly that you should do?

First off, since home prices aren't likely to go anywhere for years, it's time to get out of properties you don't need, while you still might be able to get a decent price. Don't be stuck upside down with a mortgage and taxes on a property, expecting that you'll make it up some day when the price of the house goes up. After such a dramatic increase in real estate prices, it will take years before home prices climb again.

And, as it happens, the housing meltdown has presented us with another opportunity.

Gross pointed out that the subprime mess is not an isolated incident... First, we saw mortgage companies close their doors from making bad loans. More recently, the big investment banks are getting hit. Shareholders of a few Bear Stearns funds that invested in mortgage securities were wiped out. (Interestingly, their last statements, as of March 31, said their funds were worth more than $1.5 billion.)

The bust of the Bear Stearns funds is having serious ripple effects everywhere... The risk departments at all the big banks no longer want to lend. At the same time, investors don't want to invest in high-risk bonds.

Investors do have one absolutely direct play on Wall Street's new fear of risky bonds. And it's a fund I've talked about in these pages before, the Access Flex High Yield Bear Fund (AFBIX). This play is ideal in times of rising fear. Specifically, it is a bet on the cost of insuring a high-yield, risky bond. If the cost of insuring a risky bond rises, you make money.

Investors are finally demanding higher interest rates if they're going to buy risky corporate bonds. I couldn't believe how little interest investors were willing to accept when buying "junk" bonds.

In June, investors demanded less than 2.5 percentage points above the risk-free Treasury bond rate. That number has since jumped to above three percentage points above Treasuries. But this is still a long way from where we were in 2002, when investors demanded a full 10 percentage points above Treasuries to own junk bonds.

I think this number will continue to rise. And shares of AFBIX are hitting their stride. Own them now, as the most direct bet on what Bill Gross is as sure of as the sun setting in the west.

Good investing,

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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