The housing starts report doesn’t need much analysis - 21% down in the past year and the worst since 1984. With all the government programs flailing, from the first time buyer’s credit to foreclosure aid, housing prices surely have a good bit of blood-letting left. For long-term investors, that means don't go into plays that you think are going to benefit from a housing bounce that isn't coming. Until you see another 15% drop to long-term price norms (based on Case/Shiller 120 year trend line), I see anything highly correlated to real estate as a short.
"Bottom line is that here in the 20th month of the economic recovery, the sector that normally leads both recessions and expansions has yet to gain any traction," David Resler, chief economist - Nomura Securities.
Chart created using Hidden Levers appNot only does U.S. real estate have yet to rebound, it is likely going deeper into this slump. Since housing was ground zero for the financial crisis, until that is resolved, along with unemployment, I just can’t be a believer in the recovery. The unsold housing inventory makes me cringe. Why would anyone keep building until all this inventory is sold? Have the home builders ever heard of supply and demand? Even in New York, it baffles me that they are building a huge sky scraper at Ground Zero, with a ton of office space, when so many store fronts remain empty all around Manhattan. Why would you add to the supply glut?
What’s amazing is this dual scenario – inflation in commodities and a weakening of the U.S. dollar, but unrelenting deflation in housing prices. I would short home builders here. As the market is in correction mode, I would play double trends. Some housing stocks are more correlated to housing prices than others, so I would short those to get the biggest pop. Try D.R. Horton (NYSE:DHI) for residential construction, Drew Industries (NYSE:DW) for building materials, and Pinnacle Financial Partners (NASDAQ:PNFP) for regional lenders. Shorting these takes advantage of the S&P being reigned in, and the underlying economic trend in real estate. That's what I call doubling down.
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