Blood on the Street?

Not just yet. I'm watching the XLF, which has just cracked 30 on the way down, from a recent top at 38. But this is only a discount back to the price of late 2005, hardly a bargain given the remaining unknowns in the banking system's exposure to credit derivatives. Some of the individual banks (e.g., Wachovia) seem like bargains already, but I'm not taking the time to do research on them.

Anecdotally, I'm hearing stories which suggest the fall in housing prices in overbuilt locales is only going to accelerate, which will further increase foreclosures and pressure on the financial sector. Some friends who own a nice condo in Miami bought more than a few years ago are planning to walk away from it (not a good idea since even if they have to cut the price to what they paid for it all those years ago to get it sold, they would still be better off in avoiding damage to their credit rating.) The glut is so extreme they can't even rent it, and they've had to move away for professional reasons, so they can't live in it. Now that's an outlier, but a "gentle" fall of 10% in prices in most places would still push up foreclosures as people with no remaining equity make the same choice.

Socketsite has a good post (and note the informed comments) on Fortune's forecast of housing prices and rents for the next five years based on theory of regression to the mean of the differential between them. The methodology is questionable, but the numbers are not absurd, and taking into account a scenario where falls in prices like those actually occur would be wise. For SF, they project the projected fall in prices of 10% and an increase in rents of 18%. Major Florida cities are expected to see 30% price declines.

This article from Barron's is instructive.