In yesterday’s column , I sounded the residential real estate alarm. Specifically, I said that the market is set for further price declines, despite two pieces of good news recently. I based my prediction on six supply and demand statistics – and today, I’ll provide six more figures that really drive the point home.
However, this isn’t Wall Street Depression Daily. And as promised, I’ll share some ideas on how you can profit from – or at the very least, reduce the pain of – additional price deterioration.
So let’s get to it…
Insiders Are Voting With Their Feet
In the face of excess supply and weak demand in the housing market, the only thing that would convince me of a potential rebound would be if housing industry insiders were optimistic.
But that’s not happening.
Statistic #1 – Insider Sentiment
Take PulteGroup (NYSE: PHM), for example. The company has slashed almost 75% of its employees since the housing market peaked.
And yet, the company recently announced another consolidation plan… but this time, in the executive ranks. It doesn’t bode well for a rebound when the nation’s second-largest homebuilder is still firing, not hiring.
And while PulteGroup’s decidedly bearish actions are speaking louder than its words, other homebuilders are vocally bearish, too.
One of them is Toll Brothers Inc. (NYSE: TOL), the largest U.S. luxury homebuilder. Its CEO, Douglas Yearley Jr., says spring sales have been “disappointing” and that “people are still scared.”
And of the housing market, Bill Wheat, Chief Financial Officer of DR Horton (NYSE: DHI), says, “We feel it could still be a struggle in 2012.”
Additionally, no insiders at the three homebuilders mentioned are backing up the truck to buy their own company’s shares at depressed prices. So clearly, they don’t have any faith in a rebound yet.
And that’s the feeling among analysts, economists and industry experts, too.
Can You Say “Consensus?”
Believe me, as a longtime contrarian investor, I tried to find an exception.
But I couldn’t dig up one single expert who’s predicting a rebound in real estate prices in 2011. Instead, they’re all decidedly negative. Consider:
Statistic #2 – More Price Declines This Year
Jason Kopcak of Cantor Fitzgerald says prices could fall another 10% to 15% this year.
Statistic #3 – No Housing Bottom Until 2012
CoreLogic expects prices to drop another 5% before bottoming out in 2012.
Yale University economist, Robert Shiller (of the S&P/Case-Shiller Home Price Indexes), weighs in, too, stating that although it’s unlikely, “a 30-year decline in home prices [adjusted for inflation] is certainly a possibility.”
I’m all for being a contrarian. But in this case, banking on a real estate rebound isn’t contrarian… it’s stupid.
And it appears that investors who were previously betting on a rebound are finally waking up to this reality, too.
Premature Speculation is Waning
If we take a closer look at the homebuying that is actually occurring, one trend immediately stands out: Investors’ interest in residential real estate is wavering.
Statistic #4 – All-Cash Transactions
All-cash transactions dropped to 31% in April, down from a record level of 35% in March. And because investors account for the majority of all-cash purchases, the drop suggests that they’re waking up to the poor fundamentals and waiting for more attractive entry points.
Statistic #5 – Homebuying Activity
If we take purchase activity overall, the trend is pointing down there, too. In April 2010, for example, investors only accounted for 15% of purchase activity. In March 2011, that number had risen to 22%. But last month, the figured dipped to 20%.
Simply put, investors jumped the gun. They thought that prices a year ago represented an attractive entry point and starting buying. But now they’re tapping the brakes. Coincidence? I think not.
Don’t Fight the Trend
So what if you doubt every statistic I’ve provided both here and in yesterday’s column?
Well, there’s one set of numbers that you can’t refute. And that’s the actual trend in residential real estate prices. After all, momentum is a powerful market force – and in this case, it’s headed in the wrong direction.
Statistic #6 – A Miserable First Quarter
Zillow.com reports that home prices fell another 3% during the first quarter – the biggest quarterly decline since 2008.
As Stan Humphries, Zillow’s Chief Economist says, “Home value declines are currently equal to those we experienced during the darkest days of the housing recession.”
He adds, “With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.”
Bottom line: Real estate prices are still declining… and headed lower still. So don’t fight it… just accept it. And then do something about it.
Here are a few ideas to consider…
How to Hedge Against – Or Profit From – Falling House Prices
The overwhelmingly weak fundamentals make a compelling case for selling short or buying puts on the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB).
As David Resler, Chief Economist at Nomura Securities International, says, “We’re still in the doldrums in the housing market.” Clearly that’s terrible news for the bottom lines and share prices of the 28 homebuilders and homebuilding-related companies included in the ETF.
Other more advanced options include trading futures contracts on CME Group’s (Nasdaq: CME) exchange. Contracts on home prices in 10 metropolitan areas are available. You can find out more information about these products on CME’s website or by visiting market maker, Jim Dolan’s, website: HomePriceFutures.com.
And if you’re actively looking to buy real estate, two firms – Home Value Protection and Property Value Insurance – plan to start offering products that allow you to purchase an insurance policy against a drop in home prices at closing. It will cost you about 1.5% of the sale price and they should be available within the next year, if not sooner.
Whatever you do, though, don’t rush to buy residential real estate. As I’ve hopefully demonstrated by now, prices are headed one way from here – down. So even though local markets differ, chances are you’ll get an even better deal the longer you wait.