The Great Real Estate Debate

The great real estate debate will certainly rage on today, as Existing Home Sales were reported lower through May. The debate pits those who view the weights on real estate still too burdensome to allow for sales growth against those who expect sales to grow this year on an annual basis.

Our founder 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.

Relative tickers: Nasdaq: ITIC, NYSE: BAC, OTC: FMCC.OB, OTC: FNMA.OB, NYSE: GS, NYSE: MS, NYSE: WFC, NYSE: TD, NYSE: SRS, NYSE: URE, NYSE: IGR, NYSE: XIN, Nasdaq: RYHRX, Nasdaq: TRREX, NYSE: TOL, NYSE: HOV, NYSE: DHI, NYSE: BZH, NYSE: LEN, NYSE: KBH, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: RYL, NYSE: MTH, NYSE: BHS, NYSE: SPF, NYSE: MHO, AMEX: OHB, NYSE: VNQ, NYSE: PNC, NYSE: JPM, Nasdaq: HOFT, NYSE: ETH, NYSE: PIR, NYSE: WSM, NYSE: HD, NYSE: LOW, AMEX: VAZ, AMEX: NKR, AMEX: MZA, AMEX: NXE, AMEX: NFZ, Nasdaq: XNFZX, Nasdaq: FSAZX, Nasdaq: AVTR, NYSE: AIV, NYSE: EQR, NYSE: AVB, NYSE: UDR, NYSE: ESS, NYSE: CPT, NYSE: SNH, NYSE: BRE, NYSE: HME, NYSE: MAA, NYSE: ELS, NYSE: ACC, NYSE: CLP, Nasdaq: AGNC, NYSE: SUI, NYSE: AEC, NYSE: PMT and AMEX: TWO, NYSE: SPG.

The Great Real Estate Debate

The Existing Home Sales data actually exceeded the low bar set by economists. With the consensus expectation set for 4.75 million, sales of existing homes rose at an annual rate of 4.81 million through May. The result was still disappointing though, as it marked a 3.8% decline from April’s rate of 5.0 million (revised from 5.05 million). Those who argue that real estate is still in for another couple years of decline, or at least struggle, would have you know that this May was still 15.3% short of May of 2010. Last year’s sales pace ran at 5.68 million, fueled greatly by the temporary tax incentive provided by the government for first-time buyers.

The blue sky forecasters, however, would remind bottom-seekers that extraordinarily wet weather affected April contract signings. Existing home sales and new home sales measure completed transactions. Thus, it seems obvious that the wettest April on record, not to mention tornado tormented in parts of the country, kept homebuyers from walk-throughs and from entering into contracts, which affected closings down the road in May. It takes about 30 to 60 days to close on a home.

Recent oil and especially gasoline price spikes, driven by the war in Libya and turmoil in Bahrain, impacted the consumer mood and consumer spending over recent months. We expect $4 gasoline also kept some from buying a home, as housing affordability went by the way-side in many monthly income calculations. That said, things have changed for the better with regard to gasoline and weather, and so there’s reason for optimists to chirp, however prospective the real estate pessimist sees it.

The pessimists will remind us that some factors have nothing to do with weather nor gasoline and aren’t going away soon either. With 1.8 million distressed properties on the market still, prices continue to decline, giving little incentive to enter the market today. I would argue that foreclosures are a draw to the market for bargain seekers and investors. Indeed, investors accounted for 19% of purchase activity in May, versus 14% last May. Meanwhile, housing affordability is awesome today.

The median price of sale of existing homes was 4.6% less this May than last May. Distressed property sales, which typically get a 20% haircut, represented 31% of sales in May. Some argue that the inventory of distressed property would take two years to burn off given the current rate of sales. But the optimist would complain about the simplicity of such a calculation; the sales rate is improving when we exclude last year’s tax incentive driven activity.

But… they’ll say, don’t forget the affect of lower pricing in relation to the home many might leave; I’m speaking here of the lost leverage toward step-up property. A voice would no doubt also rise, reminding us of the many homeowners with underwater mortgages; those poor saps who bought homes in the last couple years of the housing bubble when things really got insane. Finally, the economy wasn’t a smooth running engine even before the latest dip in manufacturing and consumer mood, not to mention the pace of GDP growth.

Yet, dear dreamers, mortgage rates remain conducive to activity. Based on data from Freddie Mac (OTC: FMCC.OB), the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 4.64% in May, down from 4.84% in April. But nobody is lending, they would rebut! Still, I’ve taken note of recent lobbying efforts, even public relations moves, toward easing regulation and facilitating homeownership in America. We would of course pray that effort did not include bringing back liar loans from the dead (may they rest in peace). I expect though that U.S. politicians, heading into the election year, will look toward reviving the American dream while locking up the animals that perverted it.

The NAR reports inventory fell 1.0%, to 3.72 million existing homes for sale. Housing hounds would rather point to the inventory level marked in months, which deteriorated to 9.3 months from 9.1 in April. However, because sales pace is dynamic and should improve, it seems best to me to look toward the hard inventory number of homes for sale.

I note a positive development in the divergence of different markets. Where economies are improving and employment especially so, housing prices have stabilized or are growing. I’m talking about places like Texas. This is a good sign for the rest of the nation. In every turn, there is a starting point, and in a broad and diverse marketplace, there should be a starting place. Even in this latest report, we saw strength in the Northeast, where the median price of a home sold rose 6.1%. The population concentrated region only saw a 2.5% decline in sales. The West was also impressive, as sales levels held steady. Weather impact was evident though in the Midwest and South, where sales sank 6.4% and 5.1%, respectively.

The debate rages on, and you are challenged to choose your side. I’m looking for growth off the low base, a point made time and again in articles I’ve authored this year. My greatest concerns are not intrinsic to the real estate market, but rather tied to the economy that I view still vulnerable, and to the high possibility of disruptive events over the next several years. That said, there are bargains to be had across the United States, and I would take advantage of the vastness of the distressed property pool, which for certain has helped to reduce risk for foreclosure bidders. What say you on the topic of the great real estate debate?



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).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.