A Closer More Painful Look at Housing
homebuildersThere seemed not much we could glean from the New Home Sales data for October generally speaking, but after a more painful closer look, there are nooks full of grime and crannies full of malaise worth discussing after all.

real estate blogOur founder, Markos Kaminis, earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

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A Look at Housing

In recent reports on real estate and homebuilders, we noted that the global macroeconomic meltdown would not likely leave out homebuilders. We were wondering this week if our detractors, a group basically consisting of homebuilder long positions today, noted the apocalyptic warning from the OECD Monday or Fitch’s U.S. outlook downgrade Tuesday. Well, they’ll argue that the efficient stock market blew off the news, with the Dow up both Monday and Tuesday on record Black Friday and Cyber Monday retail sales. Housing stocks rallied as well, with PulteGroup (NYSE: PHM) up 2.5% Tuesday, K.B. Home (NYSE: KBH) up 0.9%, Toll Brothers (NYSE: TOL) 0.5% higher and D.R. Horton (NYSE: DHI) increasing 0.3%. Now I’ll tell you why I think the week’s stock buyers will regret it down the road.

October’s New Home Sales were reported at the start of the week, and not much was made of the news. There was good reason for that; it’s because not much changed generally speaking. The annual pace of new home sales rose 1.3% month-to-month, to 307K, from a revised September pace of 303K. The sales pace was 8.9% greater than the year ago period, thanks to the low bar set when housing was left to its own devices absent of the First-Time Homebuyer Tax Incentive. I should note that this last bit of information is overlooked by the biased among us.

Economists were looking for a sales pace of 310K, so 3,000 more than the actual result. Clearly, the miss was insignificant. In fact, the entirety of the report seemed insignificant, except to regional markets and discerning eyes. Breaking the data down, we see that sales in the Midwest were red hot, surging 22.2% over September’s pace and 37.5% above the prior year rate. I expect this has at least something to do with the energy boom in North Dakota, if not all to do with it. That’s because the biggest barrier to growth in the state’s energy production boom has been inadequate housing capacity. Still, this is great news for the local housing market and builders participating there. This gem in the rough report is missed by reporters purposed to push a position or by the popular press’ pumping of paper. It’s the independent voice with a core competency of discernment that adds value. By the way, we take and need donations, so please do support our effort through these difficult times via the "donation" tab atop our Wall Street Greek blog.

The western region of the nation also enjoyed a surge in activity (+14.9%), taking it to a level not seen since the spring. The Northeast was even with September’s pace, but the South reported a 9.5% drop off.

Another noteworthy tidbit was the dip in housing inventory to 6.3 months, down from 6.4 in September. Supply was 8.5 months a year ago. You would think that we would eventually reach a point of equilibrium. Month-in and month-out this development in inventory is viewed positively, seen as another step toward growth revival. At some point, inadequate supply and absent production should leave a housing shortage. That’s not the case though in a nation that is not creating jobs. Rather, empty nester homes are refilling with an increasing number of family members, children returned from college or Iraq, and brothers returned from Wall Street or prison, etc.

The final data point most often observed here is the home price information. Like seen in the S&P Case Shiller data, though in this case it’s timely, new home prices fell. Obviously, that’s not a good sign for real estate nor for homebuilders. But stock valuations have an important component reflecting future expectations, the longs will remind us. Well then it would seem fiat currency dilution for the sake of debt digestion will simply result in the penalization of all the world for the faults of those who partook in excessive leverage and who were possessed by greed. That’s not good for the homeownership rate either my friends. However, I have one caveat for you real estate survivors: if you already own your own home, then that hard asset with the extra benefit of utility value, including the ability to rent it or to provide you with shelter, will benefit from the inflation I see ahead.

In conclusion, it would seem this mundane report with seemingly stagnant data did prove quite interesting after closer inspection.

Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

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