Housing Heals Before Contracting Lethal Infection

Much has been made about the latest increases in new and existing home sales, much too much. Modest increases in activity from dreadfully low levels during a period when seasonality should spur growth is a low-bar leap. Though, I think it is clear based on the data that the housing market is finally overcoming the burden of the bubble. More importantly, though, a storm is gathering over yonder, and the future concerns me more today than this past April can enthuse me. Today’s action in homebuilders and financials, with the SPDR S&P Homebuilders (NYSE: XHB) and Financial Select Sector SPDR (NYSE: XLF) each off more than 1%, seems to say that you finally agree. I’m glad to have you on board Mr. Market; now buckle up.

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Housing Healing, Facing Infection

New Home Sales were reported Wednesday for the month of April and Existing Home Sales were reported Tuesday for the same span. The XHB caught a breeze on the first report, but was unable to ride the hot air for a second day. The shares of homebuilders Toll Brothers (NYSE: TOL), Ryland Group (NYSE: RYL), PulteGroup (NYSE: PHM), K.B. Home (NYSE: KBH), D.R. Horton (NYSE: DHI) and Lennar (NYSE: LEN) were mixed Wednesday, though housing related shares were mostly lower. Some, like Toll Brothers (NYSE: TOL) benefitted from company specific news. Still, despite the market share driven rise of the like, I say buyer beware, because the macroeconomic environment will sink all cyclical ships. That’s why the modest increases in sales activity in April, while they do show real recovery in real estate, will draw no capital from my store today.

The U.S. Department of Housing and Urban Development reported a 3.3% increase in new home sales in April, but that only brought the annualized pace of sales up to a measly pace of 343K. Granted, that was 9.9% better than the pathetic production of April 2011.

Through years of attrition, the standing inventory of decaying new construction has dwindled, with 146K fresh homes estimated for sale currently, or 5.1 months supply at the current pace of sales. That’s again better than March’s 5.2 months and last April’s 6.7 months store. The pace of sales is finally benefiting from the clearance of the wreckage of the housing bubble (read foreclosed and bank owned property). This view is also supported by a median price increase seen in existing home sales, which arose last month on a better mix of properties sold. That data would indicate that there’s an increasing portion of non-distressed property selling through. The number of new homes for sale is thin against last April’s 174K, so the builders would be nicely positioned now if not for the distressed global macroeconomic environment that is offering contradicting information to the investment decision generally.

Existing Home Sales nearly equaled new home sales in their increase, rising 3.4% in April and 10% against the prior year. Single-family home sales, which for many better reflect the true American home market, rose 3.0% and were 9.9% higher than last year. Inventory was up, but the Chief Economist of the National Association of Realtors (NAR), Lawrence Yun, clarified why. He said that April historically drives and leads the year in homes for sale. This year, April marked a 9.5% increase in homes for sale, to 2.54 million. At the current pace of sales, that represents a 6.6-month supply, up from 6.2 in March.

Fear not (at least not about this), as home price data ensures that the increase was not driven by distressed properties, but by better demand drawing sellers. In fact, shortages have sprung up in the hardest hit areas, like Phoenix, Arizona and Las Vegas, Nevada. The median price of an existing home for sale was pulled higher by all this, rising 10.1% year-to-year, to $177,400. Again, this was due to the better mix of homes for sale, not general price increase, so don’t go betting on a new housing lust because of it. Yet, other data-points also showed a change for the better. All-cash sales fell to 29% of transactions in April, down from 32% in March. Investors accounted for 20% of all purchases, versus 21% in March. And first-time buyers rose to 35% of all purchasers in April from 33% in March. These are all signs of a normalizing and recovering market.

Congratulations real estate market, you’re getting better just as we contract a lethal infection from European trash. It’s like recovering from illness, but contracting a dangerous disease just before your release from the hospital. All this good news about April is enthusing, but the latest data out of the Mortgage Bankers Association shows a slowing of mortgage application activity for home purchases in May, despite record low mortgage rates. Oh, Americans are benefiting from European strife by refinancing and lowering their debt costs, but they’re not buying homes according to the latest data from the MBA. Why do you suppose that is, if all is really hunky-dory? It’s the economy stupid!

I must have said it a million times over the last year, but Mr. Market is finally listening. America sells 20% of its exported goods into Europe, which just barely kept out of formal recession territory in the first quarter. Meanwhile, economic bifurcation has driven political fragmentation, which now threatens to break apart the euro-zone. The first effects of economic contagion have been felt from China to the United States, and our still vulnerable economy seems to be sniffling more and more. It’s precisely the wrong time to start a war, and yet, the pressure is intensifying upon one of the world’s most important suppliers of fuel, which also has the ability to disrupt an even more important spigot. Investors are selling stocks? Go figure!

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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