Mike Larson: What was one of the best performing sectors in late 2011 … and the first several days of 2012? Would you believe HOUSING?? The Philadelphia Housing Sector Index, or HGX plunged to 73.65 in October. But then it started rising, ultimately tagging 109.65 this week. That’s a gain of 49 percent in just a couple months. Some individual stocks in the sector performed even better. Leading home builder Pulte Group (NYSE:PHM), for instance, more than doubled.
So what’s going on? Is the recent string of decent U.S. economic data foretelling better times ahead? Is Wall Street awash in optimism about the upcoming spring home buying season? Does the move reflect hope about Washington’s latest whiz-bang plan to save housing?
All of the above.
But unfortunately, just like the last couple of times the pundits came out of their shells to declare a housing “bottom,” this one should prove fleeting. Let me explain why …
Meet the New Bottom, Same as the Old Bottom
In the past few months, we’ve clearly seen some of the housing data take a turn for the better. Existing home sales rose to a 10-month high of 4.42 million units, at a seasonally adjusted annual rate (SAAR), in November. Home builder optimism increased. And housing starts rose to a SAAR of 685,000, the best level in 19 months.
Still, these figures are far from the robust ones we had in the single family housing market a few years ago. We were selling more than 7 million existing homes a month, at an annualized pace, back in 2005. So the latest “big gains” are really more like slight increases from the deeply depressed figures we’ve had since the market crashed.
A significant portion of the construction boost is coming from the multifamily arena, too. In other words, more people are opting to rent rather than buy homes, and builders are responding by churning out more apartments.
Another sign there’s less here than meets the high: Home pricing remains under significant pressure! One home price index compiled by the research firm CoreLogic dropped 1.4 percent between October and November. That was the fourth straight month of declines, and it left prices down by more than 4 percent from a year earlier.
The chief economist at real estate firm Zillow.com, Stan Humphries, added that he believes “We’re still three to five years away from ‘normal’ housing market conditions.”
Simply put: What we’re seeing now in the underlying housing market looks a lot like what we’ve seen for the past couple of years. Temporary upticks in sales. Temporary increases in construction. But ultimately, not the lasting, durable recovery many on Wall Street would have you believe in.
So What about the Housing STOCKS?
That brings me to the housing stocks (NYSEARCA:XHB). They’ve been rising at a much faster rate than the underlying real estate market. The simplest explanation? All the rumors and chatter out of Washington about another big housing market “fix.”
Several days ago, the Federal Reserve released a white paper titled “The U.S. Housing Market: Current Conditions and Policy Considerations.” The report highlights many of the challenges facing housing, and discusses potential solutions. They include a renewed easing in lending standards and the conversion of some of the for-sale housing stock into rental housing.
Key officials, including Fed Governor Elizabeth Duke and New York Fed President William Dudley, followed up with a speech blitz designed to encourage Washington to more aggressively target housing. The highly unusual foray into proposed fiscal policy reflects an emerging Fed belief that lower rates and quantitative easing aren’t “working.” Monetary policymakers would instead like to see their fellow policymakers in Congress and the White House shovel more taxpayer money down the housing rat hole.
Meanwhile, recent reports say that Fannie Mae and Freddie Mac are planning to sell foreclosed inventory in bulk to investors. Those investors will then turn around and rent out the properties. The goal? Reduce the inventory of distressed for-sale homes, relieving pressure on home prices.
Clearly, this push from the Fed and elsewhere has been in the works for a little while. And clearly, it looks like big investors “got the call” early because Washington is leakier than a sieve. That helps explain why housing stocks started rallying long before the news broke.
It would also mirror the pattern we saw before each previous rescue program — HAMP, HARP, HOPE NOW, etc. — was rolled out. Chatter picks up. Proposals make the rounds. Investors who are plugged in buy early.
So what happens next?
The same as before! The reality fails to live up to the hype, and the housing stocks ultimately fall again!
Look, each and every previous plan has been rolled out with huge fanfare. But the end results have fallen woefully short of expectations. Just one example: The Obama administration’s signature HAMP plan, the most ambitious attempt to tame the housing crunch ever, has resulted in just 750,000 permanent mortgage modifications to date. That compares with original expectations of 4 million to 5 million!
So my recommendation is straightforward: If you caught this rally, sell into it. If you didn’t, and are looking to make potential gains going forward, consider select investments that rise in value as the stocks in question fall.
That’s what I’m looking to do, and you can find out more information by clicking here.
Related: iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), ProShares UltraShort Real Estate ETF (NYSEARCA:SRS), ProShares Ultra Real Estate ETF (NYSEARCA:URE), Direxion Daily Real Estate Bear 3X Shrs ETF (NYSEARCA:DRV), Direxion Daily Real Estate Bull 3X Shrs ETF (NYSEARCA:DRN).
Until next time,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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