The Housing Market - A treatise...
July & August 2009
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The Housing Market - A treatise... July & August 2009
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| The Truth About New Home Sales Nothing but Spin By Steve Christ Tuesday, July 28th, 2009 With the bulls desperate to keep pumping up the stock market, spin has been refined to a fine art. Even in the faintest of glimmers they can somehow plot a return to new heights. If only it were so. . . Yesterday's news on new homes sales is just the latest example of this madness. It's a world where the skies are not cloudy all day. You see new home sales were actually down 21% over June 2008 — which was flat out horrible. But since sales rose 11% from May to June, the bottom in housing magically appeared. And if you believe that one, I have a slightly used bridge to sell you. From CNN Money by Les Christie, entitled: New home sales: ‘Really good news' "Sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes," according to a report released Monday. The gain over May was much greater than expected. A consensus of housing industry analysts had forecast seasonally adjusted sales of 352,000, according to Breifing.com. However, sales are still 21% below the levels of a year ago, when new homes sold in June at an annualized rate of 488,000, according to the report released by the U.S. Department of Housing and Urban Development. Four years ago, during the height of the housing boom, the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month. (emphasis mine) Still, the report was very positive, according to Peter Morici, an economics professor at the University of Maryland who had forecast June sales to be at the 350,000 level. "That is really good news. Considering what's going on in existing home sales, with all the foreclosure activity sending down home prices, for new homes to jump like that is a good indicator that the economy is bottoming out." The median price paid for a house sold in June 2009 was down about 3% to $206,200; the mean price was $276,900. By the end of the month, the inventory of new homes had dropped to 281,000, an 8.8 month supply at current rates of sale. Last month, there were enough homes on the market to last 10.2 months at that rate. "They have to clean out that stock to get building again," said Morici. "Normal" new home inventory is about 300,000, according to Newport, which we're already below. But, he adds, the median time to sell a home is at an all-time high of 11.8 months. "That tells you it's still very hard to sell a new home," he said. The bottom in housing is nowhere in sight. . ..
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| Has the Housing Market Really Hit Bottom, or Is It Headed for Another Collapse? By Jason Simpkins A rash of positive housing data has given some analysts hope that the housing market has bottomed and an economic recovery is underway. But the soaring unemployment and rising mortgage rates could lead to a double-dip plunge for the housing market. Home prices rose on a monthly basis in May for the first time in nearly three years, according to the Standard & Poor’s Case-Shiller Home Price Index. The index of 20 metropolitan areas showed a month-over-month increase of 0.5% in May - the first increase in the monthly index since July 2006. And while housing prices in the 20 cities fell 17.1% year-over-year in May, that’s still an improvement over April’s 18.1% drop. Year-over-year declines in home prices have now lessened for four straight months. The improvement in the Case-Shiller index followed the release of several equally optimistic government reports that showed increases in home sales and housing starts, and a decline in inventories. The Commerce Department said Monday that June sales of both new and previously owned homes increased from the previous month. Sales of single-family homes increased by 11% from May to a seasonally adjusted annual rate of 384,000. That made for the fourth increase in six months.
Home construction unexpectedly rose in June as well. Housing starts increased 3.6% from May to a seasonally adjusted 582,000 annual rate. And even while more houses were built in June, the number of available homes on the market went down. There were an estimated 281,000 homes for sale at the end of June, less than the 293,000 available at the end of May. Additionally, the ratio of houses for sale to houses sold was 8.8 in June, versus 10.2 in May. Taken together, this data was very encouraging to analysts. “Recession is over, economy is recovering - let’s look forward and stop the backward-looking focus,” Wells Fargo Corp. (NYSE: WFC) chief analyst John E. Silvia wrote in a research note. Of course, Silvia may be going a bit too far. The fact that the housing market is “less-bad” doesn’t necessarily mean that the recession is over or that a recovery is underway. “This is really a lousy market,” Patrick Newport, an economist with IHS Global Insight told the Washington Post. “The sales are growing in part because prices are dropping, but the sales are still near all-time lows.” The recent pickup in home prices also calls for skepticism. “I think it’s a temporary respite,” Mark Zandi, chief economist at Moody’s Economy.com told CNNMoney. “It reflects the recent decline in foreclosure sales, and prices will continue to fall over the next several months.” What’s more is that, going forward, resurgence in the housing market could whither in the face of a jobless recovery and higher interest rates. Why the Housing Market Rally Has a Shaky FoundationThe federal government’s effort to lower borrowing cost has been a big reason why the housing market has been able to stabilize over the past few months. Mortgage rates fell to a record low 4.78% twice in April after the U.S. Federal Reserve announced its plan to scoff up mortgage backed securities. That led to surge in mortgage and refinancing applications. But now it appears the Fed’s effort to reduce borrowing costs is losing momentum. Mortgage rates have increased in each of the past two weeks and demand for mortgage applications is beginning to wane. The Mortgage Banker’s Association said average rates for a 30-year mortgage climbed 0.05 percentage points to 5.36% in the week ended July 24. That followed the previous week’s increase to 5.31% from 5.05%. The Market Composite Index, which tracks the volume of mortgage applications - fell 6.3% on a seasonally adjusted basis last week, after edging up 2.8% the week prior. The Refinance Index fell 10.9% to 1862.1 from 2089.7. “Refinancing activity was somewhat elevated early in the year, probably due to low mortgage interest rates and the waiver of many fees and easing of many underwriting terms by the [government sponsored enterprises],” U.S. Federal Reserve Chairman Ben S. Bernanke said in the central bank’s Semiannual Monetary Policy Report to Congresss. “However, such activity moderated considerably when interest rates rose during the past few months.” Some experts say that mortgage rates at or below 5.0% are needed to make a significant impact on home loan demand, Reuters reported. Higher mortgage rates aren’t the only thing daunting potential homebuyers either. Soaring unemployment also poses a threat to the housing market by eroding disposable income and consumer confidence. “People that are afraid for their jobs are not going to make those purchases and people that are losing their jobs can’t get the loans,” Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, Calif., told Reuters. Some 467,000 jobs were lost in June alone, and about 6.5 million jobs have been lost since the recession began in December 2007, according to the Labor Department. Furthermore, with the recession in its 20th month and long-term unemployment at its highest level since data collection began in 1948, more than 1.5 million workers are expected to exhaust their unemployment benefits by year’s end. The unemployment rate leapt to 9.5% in June from 7.6% in January, and most analysts believe it will end the year in double-digits. In 15 states, in fact, the jobless rate already exceeds 10%, including Michigan, where it’s 15% (22.5% if you include laid-off workers who have given up looking for jobs, or who have settled for part-time work). The rising tally of unemployed workers is taking a toll on consumer confidence, which fell for the second consecutive month in July. The Conference Board’s monthly consumer confidence index dropped to 46.6 in July from 49.3 in June. “Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months,” Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement. Analysts also worry that the country will see another round of
foreclosures as unemployment rises. That would lead to another large build
up in inventories and erase any gains made in home prices. The gains made in the housing market have been encouraging to many analysts and investors. But with Americans facing heavy job losses and higher mortgage rates, it’s hard to imagine how they will be sustained. The reality of the housing market is that while we may have seen the worst, a sustainable recovery probably won’t begin until at least next year. “We have a lousy job market and an excess of around 1 million extra homes that has to be worked off,” Andres Carbacho-Burgos, an economist with Moody’s Economy.com (NYSE: MCO) in West Chester, Pa., told Bloomberg. “The housing market is not going to hit bottom before mid-2010.”
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| The U.S. Housing Market: Three (More) Reasons Real Estate Isn’t Rebounding by
Louis Basenese, Advisory Panelist Editor’s Note: Yesterday we heard from Martin Denholm, the managing editor at Smart Profits, one of our affiliate publications which will be joining us over the next few weeks. We’ll be adding their experts to our esteemed panelists to give you the best investing ideas and advice out there. Today we follow Martin with outspoken favorite, Louis Basenese, who also gives us his take and concern for investors, on the housing market. If ever an off-the-wall indicator existed to predict the fate of the U.S. housing market, I found it… You see, business is booming in one particular niche of the real estate industry – shrink-wrap. That’s right. Contractors and developers are wrapping mothballed building projects in plastic, literally – from single-family homes to 25,000 square foot commercial properties. The beneficiary? Privately-held Fast Wrap – a leader in shrink-wrap protection and weatherization. Traditionally its products are used to protect lawn furniture, cars, boats, motor homes or industrial vehicles from the elements. But now, the bulk of its new business comes from the real estate industry… In recent months, the company has inked deals to shrink-wrap 240 homes in the Northeast, prompting management to double its sales expectations on the surging demand. Sorry folks. If “shrink-wrapping” homes to preserve them for future use is suddenly a worthwhile idea, then there’s no end in sight to the demand destruction. It’s akin to airlines “grounding” aircraft during tough operating conditions… or oil drillers “cold-stacking” rigs when exploration plummets. So if you’re thinking of diving into the real estate market to capitalize on the “unbelievable bargains” – via the stock market or your local neighborhood – think again. The outlook for the U.S. housing market remains grim. And the bargains will only get more compelling. First, let me prove it. Then I’ll reveal a few ways to play the enduring housing market downturn… Housing Market Showing Signs of Stability? Puh-lease! The mainstream press would have us to believe a real estate market rebound is imminent. They keep glomming onto any data that shows the slightest sign of stability.
But these “signs of stabilization” are bogus. Or to beg, borrow and steal from value-investing legend, Whitney Tilson, they are the “mother of all head fakes.” Fact is, these short-term improvements were fabricated. They materialized because of temporary factors like the $8,000 first time homebuyer tax credit (set to expire November 30), artificially low interest rates (remember the Fed’s been buying Treasuries, en masse, since March to suppress rates) and government and bank moratoriums on foreclosures. In the end, all this massive intervention is doing is propping up short-term results and prolonging the inevitable. Furthermore, to turn a blind eye to all this government meddling and pretend it’s not artificially influencing demand and prolonging foreclosures, would be irresponsible. Don’t get me wrong. I’m happy to see an improvement in the market from bad to less bad. But overall, the numbers are still crap. Three Obstacles to a Housing Market Rebound Over half of the homeowners who took advantage of loan modification programs, are delinquent again. They weren’t paying before they got interest rate and/or principal reductions. And go figure? They’re not paying now. Great idea Washington! On top of that, housing prices are still too high to attract buyers yet too low for sellers who are underwater on their mortgages. Such out-of-whack supply/demand dynamics will only foster more uncertainty. In my opinion, before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…
Bottom line, another wave of massive writedowns looms on the horizon.
The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower. The Housing Market’s Reality Bites… But We Can Still Profit As I’ve said, a simple supply and demand equation underpins the housing market. Right now, there’s way too much supply. Thus, prices can only go lower. And in my opinion, they’ll go significantly lower. Since the peak, home prices have dropped 34%, based on the Case Shiller Index. However, prices still rest roughly 10% above the long-term trend line. But given the supply imbalance is so dramatic, and the fact that markets consistently overshoot resistance and support levels, I’m convinced that prices will crash right through the trend line, falling another 20% to 30% before we see a legitimate turnaround in 2011. I’m not alone, either. Mortgage insurer PMI Group estimates that a 75% chance exists that the majority of our metropolitan areas will experience price declines through the first quarter of 2011. And if we experience a double-dip recession, all bets are off on how low prices will go. The brave at heart can look to profit from the decline by shorting any of the major homebuilders like:
Be warned, though. The ride will be volatile. Otherwise, the newly launched MacroShares Major Metro Down ETF (NYSE: DMM) is an option. The exchange traded fund is benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index and features three times (300%) leverage. For every 1% decline in the index (i.e. real estate prices), the ETF should increase in value by 3%. For the truly conservative investor, I recommend the “nothing ventured, nothing lost” approach. In other words, wait to go long when buying real estate because we’re nowhere close to a bottom. At the very least, wait for the prevailing shrink-wrap frenzy to end. Good investing, Louis Basenese Editor’s Note: Louis Basenese is the Chief Investment strategist of The White Cap Report, a service that identifies companies that have the most aggressive growth profiles and have dominant positions within billion dollar markets.
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