Disturbing Housing Data Not a Bother

Real Estate

On Monday, Existing Home Sales were reported running at a significantly slower annual pace. Tuesday morning, the FHFA House Price Index showed further home price decline. That one-two punch has housing stocks hunching over. The S&P Homebuilders SPDR (NYSE: XHB) was off about a percentage point Tuesday, and down further after hours. Now let me tell you why I still see growth for the real estate market in 2011, and appreciation for homebuilders' shares too.

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Disturbing Housing Data Not a Bother

The annual pace of Existing Home Sales fell 9.6% in February, to a rate of 4.88 million, down from an upwardly revised 5.4 million pace in January (revised from 5.36 million). Since existing home sales measures completed contracts, we thought there might be a good chance it was weather impacted, given the massive snowfall that blanketed the country in the December to January span, when these contracts would have been first entered into.

The problem is that the drop in the rate of sales activity was not isolated to the weather battered Northeast and Midwest, which showed sales declines of 7.2% and 12.2%, respectively. Sales activity in the warmer South and West regions of the country also posted declines of 10.2% and 8.0%, respectively. It's not as if weather was perfect in those regions of the country either, but it's harder to apply that specific explanation across the whole of the country nonetheless.

Given the fact that sales were down a lesser 2.8% when compared against the pace from the prior year period, the seasonal factor may still carry some weight. We have not forgotten, though, that the economic well-being of the nation was far worse at that time than the January 2011 period we are otherwise comparing against. So, neither can we prove this theory to explain the weakness with certainty.

While interest rates have since come down, during the span measured in this report, Freddie Mac (Nasdaq: FMCC.OB) discloses the average contracted mortgage rate on 30-year fixed rate contracts rose to 4.95% in February, from 4.76% in January. This rate change certainly played a role in curbing activity on a national scale.

The representatives of the National Association of Realtors (NAR), interviewed in conjunction with the latest data release, listed all the usual suspects as factors behind the latest dip. There's a checklist that is regularly run down by industry experts discussing real estate weakness. Credit availability tops that list, as lending standards are significantly tighter these days then the boon years of free money. Gurus also point to the appraisal conflict against supply/demand determined pricing, as appraisals often include distressed property sales as comparables. Of course, distressed property sales are special events and not indicative of the broad market pricing scheme. That said, given the great inventory of distressed properties, there's an argument to be made for their inclusion now.

The NAR report showed the median price of a home fell to $156,100, which was 5.2% below the median price in February of 2010. Tuesday's FHFA House Price Index concurred generally, showing a 0.3% month-over-month drop in January. Over the trailing twelve months, prices were 3.9% lower in January. Despite being down 16.5% since their April 2007 peak, it seems home prices are still trying to find bottom. Indeed, that’s being aided by the distressed property overhang and the large lender owned shadow inventory. The percentage of distressed property sales increased in February to 39%, up from 37% in January, though that may have only been due to a decrease in overall sales activity. Yet, existing home sales still remain 26% higher than the low established in July of last year.

I continue to believe we will see growth in the housing market this year, albeit to a still depressing absolute level. Certainly, stresses remain on the real estate marketplace, and I also believe much of the country is still suffering through a stealth recession, based on my personal interactions with small businessmen and the observations I have made. We continue to face important risks and threats, including rising gasoline prices and likely higher food prices, and real inflation as cost of production and delivery increases feed through to finished goods. Yet, our economy also has natural drivers for growth working in its favor, and growth is not so difficult to attain from recent levels.

Finally, while the current situation is bad, it is not one that can in and of itself keep our great nation down. While I recognize and even look for other factors to help keep us relatively down, we must recognize that there is a change occurring in housing, from consolidation to growth. This supports the publicly traded and decently capitalized homebuilders' shares, as a light is finally visible that should lead long lost capital to flow their way. Market share also beckons them as smaller builders are strangled from capital.



Editor's Note: Article should interest investors in 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), AMEX: VAZ, AMEX: NKR, AMEX: MZA, AMEX: NXE, AMEX: NFZ, 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).

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