YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Negative Equity does not equal Postive Economy

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Last week, I visited a good friend of mine in Chicago. As we were driving back from the airport, he mentioned he had some friends in the area who were behind on a couple mortgage payments. He told me that they called their banker and were actually advised to NOT pay their mortgage so that they could qualify for government aid and get their loan balance reduced and thereby their monthly payments lowered. You know things are getting messy when there is the perverse, unintended consequence to purposely miss a mortgage payment!

It reminded me of the cover of the WSJ from last week that read, “1 in 4 Borrowers Under Water.” This is a very serious statistic. For a person to owe more on their mortgage than what the property is worth causes all sorts of problems that would impede a sustained recovery. For one, as the article points out, “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.” Additionally, if they are in times of need, they are unable to borrow against their home to maintain their spending as in times past (see last blog on November 9th: Unemployment – the Leading indicator). Even if they are employed, these people certainly won’t be doing much discretionary spending anytime soon.

Of course, these people could just drop their ethics, leave their keys in the home and walk away. As more homes fall into foreclosure, more loan losses ripple through the economy. An increased supply of homes puts even more pressure on home values…and the cycle continues.

There’s another wave of mortgage resets on the way, and unfortunately, this statistic will likely worsen from here. Until this housing market finds some stability, we wouldn’t bet on a sustained recovery.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | November 30, 2009 | Permalink

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