Housing: 'Invest at the Point of Maximum Pessimism'

US housing/real estate/construction sector commentary all appears to be from the same record. Just going around and around playing the same tunes again and again. Very few commentators appear to have looked beyond their groove and seen that perhaps we have already seen the bottom of the US housing market.

This is completely understandable from a psychological perspective. Imagine publicly announcing that you are now a market bull over KB Holmes (KBH), Toll Brothers (TOL), or Simon Property Group (SPG).

Remember, when everybody thinks alike, the opposite is most likely to happen.

For now we will put aside the opinions of our betters & take a look at what is happening with the liquid markets on the property scene. Also, we will keep in mind John Templeton's famous quote "invest at the point of maximum pessimissm".

Looking at the charts below we could be tricked into saying the the US property market has already bottomed.

Take the IYR ETF. This has performed more or less in line with the Dow over the last few months; yes, a dividend yield of around 8% would have helped move things along. But still, we believe that this is an impressive performance, taking into account the ferocious level of bearish sentiment.

Review the graphs below of key indicators & witness how close they are to resistance levels. Oh look... some have even broken through.

Yes the outlook is still fairly bleak for the US housing/construction sector, however we believe it is much less bleak then previously thought. It does sound slightly mad, "buy into bleakness", but there you go.

"Invest at the point of maximum pessimism" - We think that this point is about now.

Disclosure: Long XHB, WOOD, IYR

Comments

[Zachary Sch...:]

It looks as if many of these charts are running up into and possibly stalling at key resistance points. Also, how can we expect housing to turn when unemployment is still growing? Even if employment stabilizes, that still leaves us with too many who are out of work...

But unfortunately, we are STILL heading down and jobs are still being lost. As fewer and fewer people are bringing in paychecks, it's hard to imagine any sustainable rebound in real estate.

Zach
zachstocks.com

Jul 28 10:33 AM

[j_remington:]

I disagree.

Jul 28 11:10 AM

[Bigman16:]

Invest now and expect what outcome and how long will you have to wait for that outcome? Unfortuantely our entire way of consuming in this country is changing as we speak.

Jul 28 01:59 PM

[Russ Wetherill:]

The bottom will arrive with the sound of --- silence. When no one cares anymore about timing the bottom, that is when it will be here.

People remain much too optimistic given the economic backdrop. Has Japan recovered from their housing bubble in the early '90s? Why would the US downturn be shorter when we lack Japan's export economy?

I see a series of downward legs and brief rallies for at least the next five or more years. We have a mountain of personal, corporate, and public debt. We have shrinking GDP, an aging workforce, and runaway government spending. We have historically low interest rates and yet we have plummeting house prices. What happens to house prices when the rates go back up to 8%? What happens to consumer spending taxes are increased to service the federal debt?

These aren't hypothetical questions - rates will not remain at 5.5% 30yr FRM. Every 1 percent rise in interest removes about 8% of purchasing power. And, the deficit so far this year is more than $1T. This works out to $40B/yr in interest at 4% - just to pay the increase in the deficit. What about the $50T in unfunded Social Security, Medicare and Medicaid liabilities? Alt-A, Option ARM?

Bottom? Please... I think the author needs a reality check.

Jul 28 04:11 PM