Can the Housing Recovery continue? Don't bet on it

by Wayne Ferbert on September 4th, 2012

There has been a lot of press about two factors that seem encouraging to the housing market: (1) Case Schiller home price index rose in June; (2) new permits are increasing for new home builders.


Both of these factors have driven a SIGNIFICANT run in home-builders and construction indexes that track closely to the home building industry.  But I am VERY skeptical.


If you have bought the home builders and enjoyed the run up of the last 3 months (+23%), then it is time to take your profit. Don’t be greedy. Just ask yourself the following question: do I know a lot of people that think the economy is improving? Is the job picture improving or even getting any clearer?


You know the answer to those two questions. Without a better job situation, the low mortgage rates alone cannot drive this market up. Housing prices might drift up a little – but are houses really selling for materially more in your neighborhood? If the economy continues to trudge along, will people really be lining up and creating demand for existing or new homes that will make any dent in the 5-year crater that we call ‘home equity’?


It defies logic. So, if you have profits get out. Look at the chart of the Homebuilders ETF (XHB) and the Home Construction Index ETF (ITB) compared to the S&P 500 (SPY) over the last 3 months. If ever a chart screamed for profit taking, this is the chart.

When you see data about the economy, an industry, or housing prices, ask yourself the simple question: if the trend is up, do you really think demand is out-pacing supply? If the trend is down, do you really think supply is out-pacing demand?


In this case, what is your answer on the housing market? I can’t believe for a minute that demand is out-stripping supply. Nor can I believe that people are creating bidding wars for properties. Not in this economy. Anecdotally, I have heard of more people putting in one price and that is it. Take it or leave it buyers. That approach doesn’t seem like it will drive home prices up.


In addition, banks are still increasing their unfortunate ownership of homes thru foreclosure. This trend is still in pace with over 2 million homes in that process. This will only increase supply. The banks still carry a lot of mortgages on their books – and they want it off their books. That selling pressure will not help prices either. Lastly, the economy has been terrible for over 5 years now. FIVE YEARS!! How will the young buyers be able to step in the market and buy when they have struggled to grow income and find employment in the last 5 years?


I think the Case-Schiller data is a small spike that might continue for 3-6 months. But another decline is right around the corner. I don’t think we will free-fall. We just aren’t at the bottom yet. The recovery in housing is still years away.


So, if you are long housing – take your profits. It was a gift. If you aren’t invested in home builders, find an alternative. There is nothing to see here!

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