So often when things do not go by design, we will hear those responsible blame it on the weather. You know what I'm talking about, because you are hearing about it in conference calls as we speak. But as far as the latest slip in real estate goes, I believe it really is the weather this time that is slowing things down. So, as real estate relative stocks get cheaper, I suggest you not fret and rather consider it a buying opportunity generally.
Real Estate Relative Security
Last 12 Months
iShares US Real Estate (IYR)
SPDR S&P Homebuilders (XHB)
Wells Fargo (WFC)
American Capital Agency (AGNC)
MGIC Investment (MTG)
As you can see via the table here, for the most part, real estate relative stocks have come under pressure so far this year, save this past Friday's burst higher. Whether it be the major mortgage lenders like Wells Fargo and Bank of America (BAC), mortgage insurers like MGIC Investment or homebuilders, the stocks of companies in the sector have mostly been lower this year. The chart above shows the SPDR S&P Homebuilders leading the downtrodden. Now, there are exceptions of course.
For instance, in the case of the mortgage REITs like American Capital Agency, where 2013 was a pure nightmare, capital is now seeking shares of deeply discounted stocks as a safe haven to protect capital gains made elsewhere last year. American Capital Agency and Annaly Capital (NLY) are also benefiting from what I see as a Goldilocks sort of Fed and economic environment today for them. Now, I recently wrote that mREITs are losing their safe haven appeal, but that is mainly because of the distress seen in real estate data lately. As a result, until investors come along to my way of thinking about this seasonal issue I'm discussing here, NLY and AGNC may still soften. Though Friday's trading seems to illustrate an epiphany like what I'm discussing. The performance of the IYR has also been anomalous, I believe because rents and property values are still rising.
Housing Data Has Been Soft
Pending Home Sales (Dec.)
New Home Sales (Dec.)
Existing Home Sales (Dec.)
Housing Starts (Dec.)
There's no doubting December's weakness in housing, and when reported January should be even worse because the forward looking data has indicated so. For instance, while Existing Home Sales actually improved modestly from November to December, Pending Home Sales data shows existing home sales will run into a road block in January. The same goes for New Home Sales, though the annual pace of those dropped dramatically in December. Housing Starts data, which is a forward looking indicator for the new home market, slipped from November. Even worse, the pace of permits issued, which is a forward looking figure for future starts, fell to 986K from a pace of 1.017 million in November.
I believe the weather is the culprit behind this real estate slowdown, despite some economic data indicating there could also be a slowing in economic activity. That is also likely weather affected in my view. My reasoning is simple, and was recently verified by a reporting agency as well, when weather was blamed for the deep drop in Pending Home Sales.
While the data reporters make seasonal adjustments to these figures, this winter has been extraordinary. The seasonal adjustments made to data account for the average impact of the seasonal period. Therefore, this year's extraordinary winter is likely impacting data more than the adjustments compensate for. Just look at the facts about the weather and you'll see why I believe this is true. There were 4,406 record cold temperatures set across the U.S. in January and 1,073 snowfall records.
Obviously, when record cold temperatures are plaguing the nation and snowfall is far above average, consumer activity is going to slow as Americans bunker down and wait out the bad weather. So never fear real estate relative investors, and get ready to buy again once investors start to come in line with our way of thinking about this temporary weather issue. That spring selling season could literally spring these stocks sharply higher in short time and Friday's market performance may have offered the first green shoot.