On September's Depressing Housing Market Index

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by: Markos Kaminis

The reaction of housing stocks to Monday's depressing Housing Market Index seems to say the bad news has been well understood and priced in. The solid earnings report of a housing stock, Lennar, also went far in keeping homebuilder shares in the green today. However, global events bring our attention to the worst case scenario, which is not only absent in the valuation of housing stocks, but ignored by the entire market. We suggest our President tread carefully with regard to Iran, given the current vulnerability of our economy. We further urge our government to focus the entirety of its attention to first curing the economic situation and labor problem, before placing a vulnerable economy in the line of fire.

The Housing Market Index (HMI) for September stuck at a very low mark of 13, matching both August and the low point reached in March of 2009. Oh by the way, that was the low point for the stock market as well, when full panic had a grip of every American, especially those with 401K plans dwindling away. Thus, this latest check of builder confidence is worrisome, and it supports our case for a double dip in home prices and possibly the economy generally, should some new catalyst find this sensitive economic situation.

What sort of catalyst do I suggest? Well, there are more than enough possibilities, like for instance sovereign default within Europe; the disintegration of the European Union's troubled euro; an asset bubble burst in China, which would hurt the domestic demand that is supporting US manufacturing now; a significant terror attack (though we can’t live in fear of it); the loss of control of government debt and entitlement programs; war in any oil sensitive market, like Venezuela for instance.

And there is one major risk in focus this week, which threatens to send shipping costs skyrocketing and the economy deep into recession at a moment's notice. That moment would be the one in which Israel and/or the United States and Western nations engage Iran in conflict. Though this may be the necessary step, it would also mark the moment when Iran launches missiles, aircraft and maybe even troops, perhaps all over the Middle East, but most likely toward Israel and maybe into Kuwait, Iraq, Saudi Arabia, and Afghanistan. That's the day all hell breaks loose and oil prices top $150 on their way to plus $200 per barrel. Iran's real reaction may fall significantly shorter than where we have forecast, but we have not even spoken of China's reaction, given a major source of its oil supply could be shut to it.

So yes, things could get worse, and yes we do sit on the brink of economic depression; and yes, our government had better tread carefully while our economy is so vulnerable.

The Housing Market Index is sad enough, even without such a risk. Who needs a catalyst with homebuilder confidence already so low just on the lack of demand and the flood of distressed properties to meet that slim pool of home shoppers. Who needs such catalysts when banks will not give money away like they used to. Who needs such a catalyst when 10% of America is unemployed and another 7% not making enough money to pay for basic necessities, let alone a new home. They can't qualify for the loan anyway, not even applying old standards of lending (the legal ones anyway).

The National Association of Home Buiders' published its report yesterday, and we quote:

"In general, builders haven't seen any reason for improved optimism in market conditions over the past month," noted NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "If anything, consumer uncertainty has increased, and builders feel their hands are tied until potential home buyers feel more secure about the job market and economy."

"The stall in the nation's housing market continues," agreed NAHB Chief Economist David Crowe. "Builders report that the two leading obstacles to new-home sales right now are consumer reluctance in the face of the poor job market and the large number of foreclosed properties for sale. However, we do expect that moderate improvement in the job market will help boost consumer confidence and improve conditions for new-home sales in this year's final quarter."

I'm not so sure about that last part.

The component indexes measuring current business (measured 13) and opportunities over the next six months (18) stuck at the same low marks seen in August. Perhaps these readings are so low now, that any further deterioration will be hard to find in the index. In other words, this may be about as bad as it gets for homebuilders.

The industry also reported that foot traffic dropped in September, as that index fell a point to a depressing mark of 9. I would have to say this is the most important component reported, as it measures real business opportunity.

By now, my Greek readers are well aware of the impact the First-Time Homebuyers Tax Credit had on housing. At this point, you must understand that the synthetic demand it created was limited to the few folks in position to buy their first home, or who qualified for the tax incentives offered when the law was expanded. By now you understand that economic activity of the sort we are mired in, with unemployment laboring all things, cannot support gains in housing nor any consumption.

Regionally speaking, it looks as though the softening manufacturing space is having an impact on Midwestern activity, with the regional index dropping three points to a mark of 12. The honeymoon is indeed over in Detroit, and so those of you thinking about buying into GM's IPO, might think twice about the timing. It's certainly suspect that the offering is being sought this soon.

In the densely populated Northeast, the index also fell 3 points to a mark of 16. It seems it would be difficult for the West to get worse, as that index now sits at 8, unchanged from August. Only the South improved, with the regional measure gaining two points, to a mark of 14. Perhaps oil slick slowed Gulf activity is returning toward normal now, which would explain the different direction posted by the region's homebuilders.

Given the state of affairs was already understood to be harsh by the stock market, the report had little impact on trading Monday. In fact, the Dow was up about 1% as I wrote this. Toll Brothers (NYSE: TOL), an important high-end homebuilder, saw shares rise of 3% at the time of this writing, as the entire housing sector benefited from a good report from Lennar (NYSE: LEN). LEN shares were up 9% at the hour of publishing, so a pretty bad scenario has already been priced in.

However, we argue the worst case scenario is one nobody wants to think about, and would send these shares tumbling, along with the entire market. Tread carefully my dear President. The economy is of highest priority now, because nothing else can be addressed until it is off cliff's edge vulnerability.

Article should interest investors in Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund [Nasdaq: TRREX], Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), AMEX: VAZ, AMEX: NKR, AMEX: MZA, AMEX: NXE, AMEX: NFZ, Nasdaq: XNFZX, Nasdaq: FSAZX and Avatar Holdings (Nasdaq: AVTR), NYSE: HON, NYSE: GD, NYSE: COL, NYSE: GR, NYSE: LLL, NYSE: SAI, Nasdaq: FLIR, NYSE: ERJ, NYSE: SPR, Nasdaq: BEAV, NYSE: TDG, NYSE: CAE, NYSE: HXL, NYSE: ESL, NYSE: TDY, NYSE: CW, NYSE: HEI, NYSE: TGI, NYSE: ORB, NYSE: AIR, Nasdaq: KAMN, Nasdaq: AVAV, Nasdaq: SWHC, NYSE: HWK, Nasdaq: LMIA, NYSE: XOM, NYSE: BP, NYSE: CVX, NYSE: COP, NYSE: ECA, NYSE: E, NYSE: EPE, NYSE: PZE, NYSE: PTR, NYSE: REP, NYSE: TOT, NYSE: WMZ, Nasdaq: GULF, Nasdaq: TRAMX, Nasdaq: TRIAX, NYSE: ISL, Nasdaq: XISLX, NYSE: NOC, NYSE: RTN, NYSE: ATK, NYSE: LMT, NYSE: BA, NYSE: IWM, NYSE: TWM, NYSE: IWD.

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