Why I'm Calling a Real Estate Bottom

 |  Includes: DHI, HOV, KBH, TOL
by: Markos Kaminis

Over the last few months, I’ve been talking about the imminence of housing growth to a mostly unreceptive audience. Last week, though, one particular data-point reached the wire that is definitely supportive of my argument. The Pending Home Sales Index, which measures contract signings and is therefore an early indicator of activity, marked a level significantly above the prior year result. That year-to-year comparison is what we’ve been looking for in order to mark the bottom on housing. However, we also received news last week indicating that home prices may have reached bottom this spring as well. It may yet be too early for some to accept the housing turn around, but I’ll go ahead and declare it anyway.

The Pending Home Sales Index rose 8.2% above its April mark, to 88.8 in May. But April was hampered by weather and had fallen sharply off from March. Therefore, it was not surprising to see significant sequential month growth in May. What impressed industry watchers, but not my well-informed readers, was that May’s index was 13.4% higher than May of 2010. That year-to-year difference was remarkable, and you could have bet we would remark about it here considering the beating we’ve been taking on our positive real estate market view of late.

May’s positive year-to-year change marked the first such result since April of 2010, when activity benefited greatly from the government tax break for first time buyers. This time around, given no such synthetic catalyst, we’ve got something truly impressive, perhaps even the start of true growth. However, it is notable that last year’s period suffered a bit due to the pull forward effect of that same tax break.

May, June and maybe even July’s Pending Home Sales Indices were likely affected as prospective first-time buyers and some others that had been given incentive to enter the market pushed forward their actions a month or more to take advantage of the $8K tax break. Also, housing naysayers would be right to remind us that absolute levels of activity remain extremely low despite the improvement. Yet, we cannot deny that growth is occurring now, and across the nation as well.

The Northeast reported a 4.4% year-over-year improvement in its regional index. The Midwest saw a 17.2% improvement against the prior year. The South was 14.6% higher than a year ago, and the West reported a 13.5% better figure this year. That’s widespread. Markets like Houston, Hartford CT, Minneapolis, Seattle and Indianapolis saw contract signings roughly 30% higher than a year ago.

Contract signings precede closings by 30 to 60 days, so we should soon see at least existing home sales pick up steam in the months ahead. New home sales could of course take a bit more time, especially given the number of distressed properties still remaining on the market. However, the real estate pricing data reported last week by Standard & Poor’s Case Shiller, and the week before by the FHFA, seem to show that the trend should now be for inventory drawdown, stabilizing to rising pricing and modest home sales growth.

This inevitably will drive new home sales growth as well, and as I've detailed in past articles, this should drive early movement in homebuilder shares like those of Toll Brothers (NYSE: TOL), D.R. Horton (NYSE: DHI), Hovnanian (NYSE: HOV) and K.B. Homes (NYSE: KBH).

I therefore declare: real estate has bottomed.

This declaration is of course contingent upon there being no new catastrophic economic event, including the non-passage of debt ceiling legislation, downgrading of American credit worthiness, significant rising of interest rates and dropping of stock market valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.