Why the Subprime Bounce Will be Short-Lived

Banks, brokerage firms, and other sectors that are linked to the moribund housing and mortgage industries got a much-needed lift last week when the Treasury announced plans to extend teaser rates on a number of troubled loans. The S&P Homebuilders ETF (XHB) rose 7% on the news, and although it is still -25% for the year, many investors feel like the tide may be turning.

Although there may be an opportunity for short-term traders, it doesn’t appear likely the problems in subprime loans are over. First off, the true extent of write-downs has yet to be determined. And if banks have to report further losses from their loan portfolios, both mortgage providers and home builders will likely follow them lower.

Slackening demand for newly constructed homes is another setback for the rebound theory. Many large metropolitan areas are sitting on much larger than average unsold inventory of homes. It will take time, and lots of sales incentives, to get through the morass.