By:
Sean McAlister

In a recent report for homebuyers, all signs suggest that their time is now. In many parts of the country, sellers have finally gotten the message by now, and homebuyers must take the hint. Real estate experts say a switch in the psychology of the housing market has helped buyers to see the silver lining around the market's storm clouds and usher in the fine shopping weather. Two years of stormy real estate markets appear to have created an ideal climate for bargain-minded house hunters who know where to look.

David Lereah, the chief economist for the National Association of Realtors, said that "we are now in a solid buyer's market," also added "It has been a seller's market for many years, but now we are seeing people across the country making deals and bringing prices down."

"What happened was, investors pulled out in droves, and the housing markets went dead," comments Lereah, "When the investors stopped buying, regular buyers got scared." A loss of confidence on the part of real estate investors triggered the psychological switch, he says.

"Now they are making deals," Lereah says, speaking about the dearth of buyers, sellers eventually realized they would have to make concessions on their sale prices.

Mickey Levy, the chief economist for the Bank of America, points out that the market is also suffering from an oversupply of homes created by an overzealous home-builder community. If the downturn was simply a product of a short-term panic, things would likely be back to normal by now.

He says that "While demand is picking up, there is still that large supply overhang," and added "And while the numbers are starting to come up for sales, prices still have a bit to drift before they start rebounding." With a listless housing market, savvy buyers in many markets across the U.S. are finding themselves in the best position they have been in for nearly a decade when it comes to price negotiations.

Levy does warn, however, that not all sellers are in a dealing mood. He also said that "Even though existing-home prices are basically flattish on a national level, I would issue a bit of caution with that number," following up with "Housing is inherently a local market, and national numbers are notorious for not offering an accurate snapshot of what is happening in a particular market.

"On the whole, Levy says to expect prices, on average, to drift slightly lower as a function of clearing out excess inventory. And inventory is the key. So, while prices in Southern California and parts of Florida may be down significantly, other markets may still be enjoying healthy price gains.

SOMETIMES VOLATILITY FEELS good, as demonstrated by Friday's market rally, but by its very nature, what volatility giveth it will also taketh away.

The latest gains, fueled by the Federal Reserve's surprise move to knock a half percentage point off the discount rate that it charges banks for loans, are a welcome relief for the ravaged market. Enjoy it while it lasts. The Chicago Board Options Exchange Volatility Index, or VIX, also known as the "investor fear gauge," tumbled early Friday to near 25 before bouncing back to 29.99 by the end of trading, still miles above its 52-week low of 9.39. There's little reason to think volatility will abate anytime soon.

Tobias Levkovich, Citigroup's chief U.S. equity strategist, wrote Thursday that although investors like to think a fed-funds rate cut will dampen volatility, he believes it would only be helpful if economic conditions don't break down further.

"As a reminder, the surprise Fed rate cut in January 2001 did little to turn the tide, even though it provided some very short-term relief, since the capital spending driven economy faltered and earnings collapsed," Levkovich wrote. "Thus, a Fed rate cut without some willingness to lend money to small business and consumers would equally end up being in vain." The rate-setting Federal Open Market Committee is scheduled to meet next on Sept. 18.

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And as horrible as August has been, historically September is the worst time of the year for average monthly performance. It would be entirely in this market's character to follow Friday's euphoria with another fire sale next week or next month.

The Dow was down 10%, albeit briefly, on Thursday from its all-time closing high of 14000 set on July 19. And even with Friday's rally the industrials are off 1,000 points in a month. In light of recent extreme volatility the Dow appears likely to re-test those lows again soon.

Be fearful when others are greedy, Warren Buffett has said, and greedy when others are fearful. The next time the Dow flirts with 12600, the dreaded, official 10% correction, there are sectors to grab greedily and some of which to remain fearful. (See "Dogs and Diamonds of the Dow" sidebar.)

Firmly on the buy side are some of the Dow's technology stocks. "They're just being indiscriminately sold now and are creating some real bargains," says Art Hogan, chief market strategist at Jefferies & Co.
As growth stocks, tech tends to outperform later in the market up-cycle and this one is rapidly approaching six years. Furthermore, tech stocks with diversified global revenue streams — meaning they're not solely at the mercy of the U.S. economy and consumer — offer the best bets. Surging demand for PCs helped Dow component Hewlett-Packard (HPQ: 47.15, +1.10, +2.4%) report better-than-expected earnings after Thursday's bell. The company also raised its outlook. Just as important, H-P has robust free cash flow and little debt — key considerations in this tight credit environment. And its forward P/E offers a discount to the broader market.

In much the same vein, Microsoft (MSFT: 28.25, +0.44, +1.6%) trades at a discount to the S&P 500 and has no debt. Intel (INTC: 23.70, +0.60, +2.6%) looks attractively underleveraged, but it's forward P/E offers a premium to the broader market. International Business Machines (IBM: 110.90, +1.21, +1.1%) trades at a deep discount to the market, but carries a lot of debt.

After tech, the most promising stocks are to be found in energy, a key overweight sector at Citigroup. "With powerful cash flow, the energy sector is not likely to be burdened with debt and our proprietary valuation work is very supportive for integrated oil and gas names," Levkovich wrote Thursday.
True, Dow component Exxon Mobil (XOM: 84.14, +3.47, +4.3%) is highly leveraged, but it also generated more than $36 billion in free cash in the trailing 12 months. Meanwhile, it's forward P/E offers discounts of about 20% and 15% to the broader market and its own five-year average, respectively.

On the other side of the ledger are the financials. They stand to continue to sell off despite seemingly attractive valuations. "I'm not a real fan of the financials here," says Ed Yardeni, president and chief investment strategist of Yardeni Research. "I think they're going to continue to be distressed and be a source of unhappy news and I think earnings comparisons are going to be tough."

Sometimes stocks are cheap for a reason, and with so much uncertainty as to where the next subprime landmines lay, the risks appear to outweigh the rewards. Remember, the equity markets, trading on emotion rather than deliberation, are the tail. The credit markets are the dog. That puts Dow components American Express (AXP: 58.89, +0.72, +1.2%), Citigroup (C: 48.81, +1.26, +2.7%) and JP Morgan Chase (JPM: 47.01, +1.54, +3.4%) off the buy-on-the-next-dip list, despite deeply discounted forward P/Es. Insurer American International Group (AIG: 65.96, +2.01, +3.1%) offers financial services, as does conglomerate General Electric (GE: 38.45, +1.25, +3.4%). Be wary there, too.

It takes a steely tolerance for risk to buy when everyone else is selling. But that, of course, is when the best opportunities present themselves. "I think that 12 months from now we'll look at some stock prices that we're seeing quoted these days and say that was really a buying opportunity," says Jefferies' Hogan. "It's just very difficult for the average investors to catch those falling knives."