Has Housing Bottomed Yet?

The economic data released this morning was better than expected, especially in the housing sector. Pending home sales for June rose +3.6%, which handily exceeded expectations for a 0.7% increase. Moreover, this was the 5th straight monthly increase for this datapoint.

This will likely prompt the question, "has housing bottomed"? I think the answer is yes, due to the fact that low interest rates and first-time buyer tax credits have helped spur demand. But a bottom for housing will not look anything like a bottom for stocks. By that I mean that the housing bottom is likely to be prolonged and shallow. I expect home prices to stop dropping, and bounce mildly in some areas, but I do not expect solid home price appreciation for a few years.

In other economic data, personal income for June fell -1.3%, but personal spending increased +0.4%. That is a good sign. For the economy to continue to strengthen we need to see consumers start to spend a little again.

Consumer staples are the strongest sector so far, helped by the acquisition of Pepsi Bottling Group by Pepsico. Utilities are the biggest laggard.

Asian markets were mixed overnight; the dollar is roughly flat; the 10-year yield is higher near 3.70%; and the VIX is flat near 25.50.

Trading comment: WMS reported strong profits and raised guidance, and the stock is spiking higher. I am taking profits here, and will look to reenter down the road a bit. Yesterday, I added Transocean (RIG) and AK Steel (AKS). RIG should benefit from higher oil prices and an economic recovery, while AKS should benefit from stronger auto production and steel prices.

The market is still oversold, and I don't want to chase it here, but I am willing to buy individual situations that look promising.

Disclosure: long AKS, RIG

Comments

[Matevski:]

"Has Housing Bottomed Yet?"

No.

Aug 04 03:46 PM

[Larry House:]

Consumers are on a no-spending vacation for a few years. Many, unfortunately, spent their home equity. Many, then, will be poorer until the home price comes back--if it ever does. The government is the spender of last resort. Can that go on for years? Can the government borrow as it is now for years to come? Think taxes will go up? Do you believe only the $250,000 and up crowd will be taxed? Think higher taxes will further mute the consumers' desire/ability to spend? Do you really think this recession has ended?

Aug 04 03:57 PM

[Mark Bern:]

Has housing bottomed yet? It depends on what measurement you are considering. If you are asking, "Have housing sales bottom?" Then the answer is probably yes. If you are asking, "Have housing prices bottom?" Then the answer is: maybe, but probably not.

The reasoning is quite simple. The number of sales will continue to increase for several reasons, the most important of which are:
1) There are a lot more foreclosures yet to hit the market at bargain prices. In many areas, these houses are priced at 50% below what comparable homes on the market are asking.
2) Investors can pick up foreclosures at bargains that allow a positive cash flow again. This is something we haven't experienced in a while.
3) There is pent up demand for housing since there were very few people buying homes for months. Eventually, all those who want a home and can aford one will enter the market. They may wait a little longer, but, psychologically speaking, they become afraid that they might lose the house they want at a price that seems very affordable and they jump in.

On the flip side we have the pricing conundrum. Why will prices continue to drop for at least another year or maybe longer and then stay flat for a while (IMHO)?
1) An organization that monitors foreclosures recently reported that thus far we have had 1.5 million foreclosures since December 2007 (beginning of this recession). The report also predicted that the total number of foreclosures are expected to rise to 13 million by year end 2014.
2) Another report cited that 30 percent of all homeowners with mortgages are now delinquent. They may not be in foreclosure and many will avoid losing their homes, but some portion of those people will be foreclosed upon.
3) Employment isn't getting better regardless of what the official reports are telling us. I don't know a single person who lost their job and has been able to find new nother full-time employment over the last six months. Yes, of course there are always jobs being created in our economy. But look at all the jobs being lost in retail and services, not to mention manufacturing. As long as weekly initial claims exceed 400,000 we are losing jobs. On average we have 135,000 people ready to enter the job market each month. Of course, the majority try to enter the market in May, June, July or August when they finish school (both high school and college). But unless those people get that first job they do not count as eligible for unemployment benefits and therefore, are not yet included in the workforce. Once they get a job, they get counted, but not until. How many young people are searching in vain for that first job this summer? More than a million, in all likelihood. How many are counted officially as unemployed? None. How many are left over from last year's graduation (2008) and still looking? Who knows? But they are not counted either. If a person's unemployment benefits run out without their finding a job and they stop reporting to the state employment office to search for a job, they are no longer counted as part of the eligible labor force. They just drop off.

It takes people with jobs (and feeling secure about them) to restart a recovery and to create demand for housing. We may not see that for a couple of years.

Aug 04 04:52 PM

[The Geoffster:]

SRS took a big hit today. Must be all those green shoots sprouting up on foreclosed properties.

Aug 04 04:56 PM

[levin70:]

Has housing bottomed?

Depends on the market segment you are talking about. For houses within 2x and 3x median income, generally between $100K and $150K, there is some solidity to the concept that prices and sales have firmed to the point where the bottom, if not here already is definately forming. Go anywhere near $500K and up, and the answer is definately NO. Whereas inventory (outside of pending foreclosures) is trending down nicely at the $100K to $150K level, its still ballooning at $500K and up.

Hope this helps

Aug 04 05:38 PM

[j-dub:]

Good response
The problem with articles like this is they are by, and for thosem who simply "can not connect the dots."


"Sales are up, so that is that. Nasty little downturn we just had."
Riiiiiiiiiiight




On Aug 04 03:57 PM Larry House wrote:

> Consumers are on a no-spending vacation for a few years. Many, unfortunately,
> spent their home equity. Many, then, will be poorer until the home
> price comes back--if it ever does. The government is the spender
> of last resort. Can that go on for years? Can the government borrow
> as it is now for years to come? Think taxes will go up? Do you believe
> only the $250,000 and up crowd will be taxed? Think higher taxes
> will further mute the consumers' desire/ability to spend? Do you
> really think this recession has ended?

Aug 05 12:05 AM