Contrary to the words of our economic cheerleaders -- Ben Bernanke and Hank Paulson -- the subprime mortgage meltdown refuses to stay contained. This economic cancer has now spread to the lumber and title insurance industries.
Reuters reports that one of the biggest lumber companies, Weyerhaeuser Company (NYSE: WY), will probably have to close plants and restrict operations because of weak market conditions. This should not come as a surprise since dropping home prices may crimp new home construction -- leading to less demand for lumber, roofing material, nails, concrete, and all the other materials and labor that go into building a house.
But the Wall Street Journal [subscription required] surprised me by reporting that the title insurance industry -- which issues policies that essentially guarantee a homebuyer is the rightful owner of a property -- also is taking a dive. The paper reports that claims against leading title insurers -- due, in part, to a rise in subcontractors who file a lien for unpaid work on a house -- have spiked 52%. Moreover, title insurance revenues are down which indicates a drop in new mortgages that require title searches to get approved.
The result is that the stock of leaders in the industry -- First American Corp Calif. (NYSE: FAF), LandAmerica Financial Group (NYSE: LFG), and Fidelity National Financial (NYSE: FNF) -- have tumbled 28%, 57% and 40% respectively from their June highs.
The lessons? The housing market takes many different industries along for the ride on the way up and on the way down. And we are just beginning the down slope of this roller coaster ride.
Autor Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the stocks mentioned.
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