Manager guards against housing double-dip
Forester predicted 2008's crash, and sees another coming soon
By Sam Mamudi, MarketWatch
NEW YORK (MarketWatch) -- Tom Forester is worried about another fall in the housing market -- and given his track record, it's worth listening to his concerns.
Forester predicted the most recent housing crash, positioning his Forester Value Fund(FVALX 11.88, -0.09, -0.75%) to ride out the expected downturn. That approach worked, as the stock fund was up 0.4% in 2008.
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Now Forester is preparing for another crash, forecasting a 10%-20% fall in house prices this year and arranging his portfolio accordingly.
"We think there's big risk in 2010" for investors, said Forester. "Our finger is on the trigger to get more defensive, but the timing on this is hard."
Forester's earlier prediction meant his investors didn't lose money in 2008, when the Standard & Poor's 500 Index(SPX 1,138, -12.19, -1.06%) was down about 37%.
Forester Value made 18% last year, lagging the index as it typically does in rising markets. But as a result of losing less than the average, the portfolio's returns are in the top 1% of its category for three years, top 3% for five years and top 8% for 10 years, with annualized returns of 5.7% over the decade, according to Morningstar Inc.
House of cards
Forester believes that the next housing decline will start in the second quarter of the year. He said several factors, including expiring government support programs and falling demand, will lead to the drop.
One of the causes will be the government's Home Affordable Modification Program, which allowed trial modifications of loans that would keep homes out of foreclosure. But, said Forester, very few of the modifications have been made permanent -- about 7% according to latest figures -- and that means there'll be many homes facing foreclosure this year.
Forester also pointed out that existing home sales fell 16% in November -- a worrying sign that may suggest programs like the First Time Homebuyer credit have run out of gas. December's existing sales numbers will be released on Jan. 25.
He highlighted another factor that could mean trouble in the housing the market -- the Federal Reserve's plan to end its programs of buying mortgage-backed securities and debt from Fannie Mae and Freddie Mac. The programs are set to end by April 1, and Forester thinks it could mean mortgage rates rise by roughly 0.75%-1%.
"And if rates are at 6%, it becomes harder to buy a home or refinance a mortgage," he said -- further depressing the housing market.
The real problem with this scenario, said Forester, is the impact it will have on banks.
"Banks are still valuing homes too highly on their balance sheets so they are vulnerable to a downturn in home prices again," he wrote in a quarterly update earlier this month, and this vulnerability could set off a similar downward spiral in the financial markets that was seen in late 2008.
"I think the TARP repayments were a bad idea," said Forester, because they could leave banks short of funds if a second housing crash does hit.
Forester said he's readying for a downturn by holding about 15% in cash and keeping defensive stocks in his portfolio. As of Dec. 31, some of the fund's largest holdings included 3M Co. (MMM 85.06, +0.34, +0.40%), Microsoft Corp. (MSFT 30.54, -0.05, -0.15%)and Chevron Corp. (CVX 78.14, -0.01, -0.01%).
While Forester believes there will be a downturn in the next three to six months, he admitted his dire predictions may not happen, especially if the government takes further action, such as extending existing programs, or introducing new measures, to steady the housing market.
And though he was right about the 2008 crash, he was also a couple of years early. His fund took a defensive stance in 2006 and as a result underperformed the market by double-digit percentage points in 2006 and 2007, with returns of 3.4% and a loss of 5.2%, respectively.
Said Forester about the timing of his latest prediction: "Nothing matters until it matters."
Sam Mamudi is a reporter for MarketWatch, based in New York
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