Real Estate's Ironic Salvation

by: Markos Kaminis

The last two days’ housing data offered a positive tone, but we reiterate our cautionary stance. Our reasoning for real estate investors to view current activity with caution has all to do with our view for tomorrow. We think the tone of the next year (to decade) will reflect a new and more biting, and deeper, recession than the last. The result of such a scenario would not save housing, though the inflation we should see would support real estate holders’ wealth and offer the intangible we under value now, shelter.

The Housing Market Index was reported Wednesday and Housing Starts were reported Thursday, each offering its own version of good news. Of course, that “good news” was only so on a relative basis, as the data continues to reflect a horrible day on an absolute measure. Housing stocks were enthused on the news Wednesday, with the group of shares we watch, including Toll Brothers (NYSE: TOL), K.B. Homes (NYSE: KBH), Beazer Homes (NYSE: BZH), D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN), Hovnanian (NYSE: HOV), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), 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) each rising. But, despite a solid data follow up Thursday, the stocks soured into the close. That had everything to do with reality, and the really bad looking clouds that we see on our economic horizon, not to mention the geopolitical vista.

The Housing Market Index, which is a measure of the mood of homebuilders, improved three points to a mark of 20. Such a spirited move could not be ignored by housing investors, since they figured it must reflect better business, which should eventually be noted in EPS results. That three point gain was the second consecutive of its sort, adding further impetus to homebuilder investors. But the absolute value at 20, deeply under the water mark of neutrality which is set at 50, still reflects dire circumstances. We covered this report in depth in our article, Home Builders and Their Shareholders are Drinking the Kool-Aid.

Similarly, markets have been pleasantly surprised by renewed growth in home sales during the second half of this year. That’s pathetic in my view, as I’ve been foretelling of this turnaround since the beginning of 2011. It’s simple math really. A low bar was set post the expiration of government incentive programs, and so it is now easily surmounted in this comparable period. Yet, homebuilders, who we suspect don’t read us often, also appear to be buying into this “surprise,” as reflected in their more positive (though still sad) perspective.

Housing Starts, reported Thursday for the month of October, also offered enthusing data despite the annual rate of Starts drifting 0.3% below September’s revised mark. In reaching 628K, the result far exceeded the expectations of economists surveyed by Bloomberg, who had set their consensus view at 605K. Moreover, Starts of single-family homes, which are seen as the purest measure of the home market, increased 3.9%. And, of course, when compared to the prior year period, Starts advanced 16.5%. Adding to the flow of good news, Building Permits filed for October exceeded September by 10.9%. This is a forward looking indicator, and so the outlook is enthusing.

So, then, why do you suppose housing stocks were lower Thursday? It had everything to do with the economy. Fitch’s report, which warned that U.S. banks were at risk of catching the fever that haunts Europe, stopped dead in its tracks all Wall Street hope. Indeed, I agree, and I see most of our supports falling out from underneath us. To name a few…

Our Federal Reserve fuel tanks, which kept us cruising on little natural reason, are running dry now. Meanwhile, our nascent manufacturing renewal should run out of steam as China also inevitably feels the effects of the global slowdown and discovers it has a few asset bubbles of its own. Regarding our manufacturing slippage, that’s in the cases where China does not already compete against us after copying technology and process, as in the solar industry. The global nature of this crisis, with softness (to be kind) across its surest consumer markets (U.S., Europe and Japan), despite the latest miraculous period of modest economic growth, puts all participants in the hole, including the BRIC nations, believe it or not.

I do not believe our consumer debt problems, now shifted to the public sector, will be escaped. That Great Depression Capitol Hill and Ben Bernanke are so proud of evading may only have been pushed forward. I expect this will be understood as history unfolds.

Housing would not escape a dip again into recession, especially the sort of economic environment depicted above. Homebuilders will not thrive in such a day, but homeowners may find an ironic source of solace. That underwater mortgage may yet swim again, because the demise of the dollar will give it buoyancy.

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