Three Reasons Why Housing Isn’t Recovering… And Six Ways To Profit
Friday, August 7, 2009
Guest Editorial by Louis Basenese, Advisory Panelist, Investment U
Editor’s Note: Last week, I commented on the latest batch of housing market data, giving my view on what it will take for the market to recover. Today, my good friend and esteemed colleague Louis Basenese of Investment U follows up with his take. Now, just because Lou is a Yankees fan doesn’t mean you shouldn’t listen to him! He explains why the so-called “signs of stability” are just teases… gives three reasons why the market isn’t rebounding… and six ways to profit from the situation. I think it’s spot-on, but let me know what you think via the “Comments” link at the bottom.
Martin Denholm, Managing Editor, Smart Profits Report
Shrink Wrap: The New Beneficiary Of The Housing Slump
If ever an off-the-wall indicator existed to predict the fate of the U.S. housing market, I’ve found it…
You see, business is booming in one particular niche of the real estate industry - shrink-wrap.
That’s right. With money tight and demand in the doldrums, contractors and developers are wrapping mothballed building projects in plastic - from single-family homes to 25,000 square foot commercial properties.
The beneficiary? Privately-held Fast Wrap - a leader in shrink-wrap protection and weatherization. Usually, its products are used to protect lawn furniture, cars, boats, motor homes or industrial vehicles from the elements. But now, the bulk of its new business comes from the real estate industry.
In fact, the company has inked deals to shrink-wrap 240 homes in the Northeast, prompting management to double its sales expectations.
Sorry folks. If “shrink-wrapping” homes to preserve them for future use is suddenly a worthwhile idea, then there’s no end in sight to the demand destruction. It’s akin to airlines “grounding” aircraft during tough operating conditions… or oil drillers “cold-stacking” rigs when exploration plummets.
So if you’re thinking of capitalizing on the “unbelievable real estate bargains” - via the stock market or your local neighborhood - think again.
The outlook for the U.S. housing market remains grim. And the bargains will only get better from here. First, let me prove it. Then I’ll reveal a few ways to play the downturn…
Forget “Signs Of Stability”… We’ve Got “Signs Of Sogginess”
The mainstream press would like us to believe that a rebound is imminent. They keep pounding any data that shows the slightest sign of stability.
For instance, Bloomberg jumped all over the report from the National Association of Realtors, which showed that pending sales for previously owned homes rose for the fourth consecutive month.
Other outlets had a field day with the news from the Mortgage Bankers Association, who said refinancings hit a three-month high in early July.
And ditto for the news that foreclosures dropped 11% in the second quarter.
But these “signs of stability” are bogus. Or as value investing legend Whitney Tilson would say, they’re the “mother of all head fakes.”
Here’s the real story…
The Housing Market Is Like A Cheating Baseball Player… It’s On Performance-Enhancing Drugs
These short-term housing improvements were fabricated. They materialized because of temporary factors like the $8,000 first time homebuyer tax credit (set to expire on November 30), artificially low interest rates (remember, the Fed’s been buying Treasuries en masse since March to suppress rates), plus government and bank moratoriums on foreclosures.
In the end, this massive intervention is merely propping up short-term results and prolonging the inevitable. Furthermore, to turn a blind eye to all this government meddling and pretend it’s not artificially influencing demand and prolonging foreclosures, would be irresponsible.
Don’t get me wrong. I’m happy to see an improvement from “bad” to “less bad.” But overall, the numbers are still awful.
Three Obstacles To A Housing Rebound
Get this: More than half of the homeowners who took advantage of loan modification programs are delinquent again. They weren’t paying before they got interest rate and/or principal reductions. And go figure? They’re not paying now. Great idea, Washington!
On top of that, housing prices are still too high to attract buyers, yet too low for sellers who are underwater on their mortgages. Such out-of-whack supply/demand dynamics will only foster more uncertainty.
In my opinion, before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…
Rebound Obstacle #1: Inventory Glut
Nearly 10% of all homes built this decade are sitting vacant, compared to the historical average of 2.2%.
In total, we’re sitting on almost 10 months worth of inventory, versus a historical average of four months. If we factor in the “shadow inventory” - the roughly 600,000 homes that banks are withholding from the market - the problem worsens. Excess supply always erodes prices.
Rebound Obstacle #2: Loan Resets
Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence.
More than 20% of these Alt-A loans are already 60-plus days late - up from an average of about 3% for the last decade. If interest rates creep up even modestly over the next two years - a near cinch given the likelihood of inflation - payments will increase notably. In turn, so too will default rates.
Bottom line, another wave of massive write-downs looms on the horizon.
Rebound Obstacle #3: Foreclosures
One in four homeowners are now underwater. And if we break it out by loan type the picture gets worse: 25% of prime loans, 45% of Alt-A loans, and 50% of subprime loans.
Add in the 6.5 million Americans out of work since the recession began and it doesn’t take Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.
Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “It’s unlikely we’ll see much of an improvement [in foreclosure rates] until after that.”
The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower.
Real Estate Reality Bites… Home Prices To Fall Another 20% To 30%
As I’ve said, a simple supply and demand equation underpins the housing market. Right now, there’s way too much supply. Thus, prices can only go lower. And in my opinion, they’ll go significantly lower.
Since their peak, home prices have dropped 34%, based on the Case-Shiller Index. However, prices still rest roughly 10% above the long-term trendline.
But given that the supply imbalance is so dramatic - and the fact that markets consistently overshoot resistance and support levels - I’m convinced that prices will crash right through the trendline, falling another 20% to 30% before we see a legitimate turnaround in 2011.
I’m not alone, either. Mortgage insurer PMI Group says there’s a 75% chance that the majority of our metropolitan areas will experience price declines through the first quarter of 2011.
And if we experience a “double-dip” recession, all bets are off on how low prices will go.
Okay, now for some profitable solutions. Six, in fact…
Hit The Housing Market For Six
If you’re braver than William Wallace, you can look to profit from the decline by shorting any of the major homebuilders. I’m talking about companies like:
Pulte Homes (NYSE: PHM)
KB Home (NYSE: KBH)
DR Horton (NYSE: DHI)
Toll Brothers (NYSE: TOL)
Lennar (NYSE: LEN)
Be warned, though. The ride will be volatile.
Another way to go is via the newly launched MacroShares Major Metro Down ETF (NYSE: DMM). The ETF is benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index and features three times (300%) leverage. That means for every 1% decline in the index (i.e. real estate prices), the ETF should increase in value by 3%.
For the truly conservative investor, I recommend the “nothing ventured, nothing lost” approach. In other words, wait to go long on real estate because we’re nowhere close to a bottom. At the very least, wait for the prevailing shrink-wrap frenzy to end.
Good investing,
Louis Basenese
Editorial Endnote: With the Smart Profits Report’s upcoming merge with Investment U, you’ll be hearing a lot more from Lou. He’s also Associate Investment Director at The Oxford Club and Chief Investment Strategist at The White Cap Report - a service that identifies companies with the most aggressive growth profiles and dominant positions within billion dollar markets. You can find out more at The White Cap Report.
How One Company's Groundbreaking "Cancer Blaster" Could Make You Rich
While the World Health Organization predicts 12 million people will develop cancer in 2009, this little-known company is fighting the surge with its amazing cancer-killing device...
Although most people know nothing about it, this "Cancer Blaster" has already saved thousands of people around the world... Like Ohio resident, Caroline Brubaker, who says "with just three, pain-free outpatient visits, I had my life back" or Richard Swanson of Arizona who ended up cancer-free after just 4 hours of treatment...
The best part is, the company recently discovered an extraordinary breakthrough that could go mainstream in a matter of days... Read the full details to find out how you can get in ahead of the event - and be on your way to booking truly incredible gains.
|
One Response to “Three Reasons Why Housing Isn’t Recovering… And Six Ways To Profit”
Due to the amount of comments we receive Smart Profits Report will not be able to respond to all questions. By submitting your comment you agree to adhere to our Comment Policy.
Got something to say?
Just like in any economic picture, we can always find ways to profit where other people see a crisis.