Housing Market's Landing Will Get Rougher

Includes: DHI, KBH, LEN
by: Faisal Laljee

Is the housing market doomed? Let's see:

* The number of people defaulting on the very first payment has risen during the last couple of months. Shows that people refinancing at current rates or buying at these prices cannot afford the rates they are getting and homes they are buying.
* Housing inventory levels are at multi-year highs. It takes time for municipalities to issue permits for new residential development. Such permits are finally being issued for applications submitted 12-18 months ago, causing supply to rise at a time when demand is low due to high prices.
* Wage growth has not kept up with increase in home prices, rising rates, gas and energy prices and inflation.
* Home builders desperate to lure doubtful buyers are offering major incentives like free upgrades, appliances or 6 months no interest financing, much like auto manufacturers. Look what happened to the auto business.
* Consumers are finally tapped out. They used equity in their homes to off-set lack of wage growth. Now they don't have any equity, in fact, if they sell their homes, they will owe more than their home is worth.

On the other hand, housing stocks look like they cannot possibly go down. Indeed, home builders like KB Home (NYSE:KBH), Lennar (NYSE:LEN), DR Horton (NYSE:DHI) and others have hit 52-week lows and stayed above it for the last 4-6 weeks. The Fed also stopped raising rates as of their last meeting and all signs indicate that they will stay pat at the next meeting too.

Banks have lowered interest rates on 30-year fixed mortgages these last few weeks in anticipation of the Fed decision and some people are predicting them to lower rates even further.

I believe that stocks are a leading indicator of where the housing market is going. Considering that these stocks have been cut by 50%, we are nowhere near the end of the housing bottom. The "soft" landing is going to be a little harder than most people expect.

The next 6-12 months will see housing, especially in markets like Southern California, Florida and New York, go down by another 15-30%. If anyone thinks otherwise, please feel free to dispute my notion.

KBH vs. LEN 1-yr chart:

DHI 1-yr chart:

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Tagged: , , , Residential Construction, Alternative Investing
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