Real Estate: Has The Housing Market Finally Bottomed? (IYR, XHB, DHI, TOL, KBH, LEN)

Martin Hutchinson:  It was the most atrocious bubble in U.S. history pushing tens of millions of Americans into financial misery. Even today, the last of the  lawsuits have yet to be filed.  But five years later it’s finally  coming back.
The housing market has bottomed and there’s money to be made on its return.
 
The evidence of this case  continues to build.
 

Signs of a Housing Bottom

For instance, the National Association of Homebuilders’ Housing Market Index rose five points to 29 in February  marking its fifth consecutive monthly increase.

Admittedly, 50 is supposed to be a neutral level for the index. Even still,  the current level of 29 is up 20 points off of the low, and is the highest it  has been since 2007.
 
Then there are housing starts, which rose in January to an annualized 699,000 units.
 
Again, that’s not very impressive  compared to 2005’s total of 2,068,000. But it’s still a hell of a lot better  than 2009’s average of 554,000 and 2010’s 586,000.
 
Incidentally, there’s some  important data in the details here.  Multi-family starts were 175,000, up more than 70% over 2009, while  single-family starts of 508,000 were only modestly above the 2009 average.
 
Meanwhile foreclosures in January  2012 were down 19% from a year earlier.
 
Since the “robosigning”  scandal and the delays that followed it now seem to have passed through the  system, that decline suggests that the level of troubled mortgage borrowers is  also trending downwards.
 
The bottom line: Housing has found  a bottom and is trending back up again.

 
Yes, prices are still declining  slowly – the S&P-Case-Shiller index of house prices was down 3.7% in  November 2011 from the previous year.
 
But that’s mostly downward  momentum and the effect of the still large inventory of homes either going  through the foreclosure process or waiting for better sale conditions.
 

Housing’s Upward Trajectory

With building activity and builder  confidence increasing, and mortgage rates close to record lows, the overall  trajectory is clearly upwards.
 
Of course, a rise in interest  rates could derail this. But Federal Reserve Chairman Ben Bernanke has said he  is keeping short-term rates close to zero until late 2014.
 
While short-term rates are so low,  any rise in long-term rates would just make it even more profitable for banks  and mortgage REITS to borrow short-term and invest in mortgages.
 
That means mortgage rates won’t go  up far, and won’t derail the housing recovery.
 
Of course, a surge in inflation  could derail Bernanke’s plans, but that would make houses more affordable,  since wages would rise in nominal terms with prices.
 
What’s more, both political parties are practically committed to continuing a system in which government policy favors housing, with interest tax deductible and many mortgages guaranteed by the government.
 
Now that we have reached what  looks like a solid housing bottom, investors are right to wonder how to invest.
 
Within housing, the important  trend is that towards apartment building rather than single-family homes.
 
That too makes sense since home  ownership is in decline but the population continues to increase and job  creation is quite healthy.
 
Thus the rental market seems  stronger than the housing market as a whole.
 
That’s confirmed by the details in  the February consumer price index, which show that rents have risen by 2.4% in  the year to January, compared to a decline in the Case-Shiller  home price index.
 

How to Invest in the Housing Bottom

For investors there are two  possible ways to play it.
 
First, if the area where you live  is in decent economic shape, you should consider taking advantage of current  low prices and good mortgage availability to purchase either rental homes or  ideally a small apartment block.
 
With financing cheap and rents  rising, the economics of this are especially favorable at the moment.
 
Of course, you will either need to  be good at home maintenance or have good repair people available, because your  tenants will need their plumbing fixed. But if you can handle that, local rental real estate, bought cheaply, can be a good use of spare investment  capacity.
 
That doesn’t mean you should rush  off to North Dakota, which has the nation’s lowest unemployment rate.
 
Not only is it remote, but the  costs are much higher, and the chances of being ripped off by the unscrupulous  are very great. Buying an apartment in  the heart of the “fracking boom” in the Bakken Shale may give you great “cred”  at parties but don’t get too tempted.
 
With these types of investment,  it’s usually a good idea to keep it local.
 
Another way to invest in this  trend is with an apartment REIT such as UDR Inc. (NYSE:UDR).
 
UDR specializes in middle-market  apartment developments, with 60,465 apartments including 2,626 under  development as of the end of 2011.
 
The company recently announced  fourth quarter earnings, which showed funds from operations were up 25% from  the previous year. UDR also increased its dividend to $0.88 per share for 2012,  giving it a 3.5% yield.
 
For investors UDR offers an  attractive mixture of increasing income and capital growth along with rental market strength and incipient inflation both helping its performance.
 
It’s been a long hard road but the  worst of the housing bubble has come and gone.
 
Related:  iShares Dow Jones US Real Estate ETF (NYSEArca:IYR), SPDR S&P Homebuilders ETF (NYSEArca:XHB), D.R. Horton (NYSE:DHI), Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH), Lennar Corporation (NYSE:LEN).
 
 

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor  to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of  the Financial Services Volunteer Corps, Hutchinson became an advisor to  the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what  they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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