Truck Driver Wisdom Suggests Housing Stocks Are Bottoming

Today I wish to discuss "truck driver wisdom" and how it relates to expectations for the market overall. Several years ago (early 2003 to be precise), I read an article that quoted a trucker from Pennsylvania. I think his name was Jim. The exact quote escapes me now, but the gist was something to the effect that "The market's going lower; everyone knows it's going lower."

I realize that in this age of greater stock ownership, this fellow from the Keystone state may have been some kind of day-trading maven. More likely though, he was just a regular guy who reads the newspaper, watches the nightly news and checks his 401-k statement every month. I suspect his common sense and gut feelings serve him well as he travels the highways and byways of this broad land, but as it applies to the stock market, not so much.

I used his quote as the centerpiece of an address I gave at an NYU business school conference that year. My contention was that when a truck driver is quoted by the national press regarding the stock market, his views are close to being fully discounted and reflected in stock prices. His opinion reflected the consensus. This was a major buy signal for me.

The overall market bottomed in early 2003 and the rest, as they say, is history. So what are the truck drivers telling us now? They would say that the housing market is in real trouble. Existing home sales, housing starts, new permits and so forth all point to additional pain and suffering ahead. Mortgage rates are up, as are foreclosures, as well as inventories of unsold homes. Home prices have not fallen enough yet, the truck driver would continue, to create incremental demand from new buyers. Lennar (LEN), a stock I own, today announced an unexpected loss. The ray of hope that the housing market was bottoming back in April has been totally obscured by newly gathered clouds of darkness and gloom.

Despite all this, I am very comfortable with 6.9% of my portfolio in housing stocks. I really like all the attention and focus this industry is receiving now; to me it suggests that smart investors will be making well-reasoned, thoughtful decisions about the stocks. Right or wrong, this focus is likely to help these stocks move to where they should be. I think that will eventually be higher from here.

Keep on truckin'!

Disclosure: Author is long LEN

Comments

[brynaw:]

Umm, the housing market doesn't quite turn on a dime, Mike. It seems a tad early to join the ranks of serial bottom-callers (NAR, NAMB, etc.), especially when the last housing bust took a full 6-7 years to fully play out (1990-1997) and we're only in the first inning of this one. Consider the infamous Credit-Suisse chart, and I think you may get some idea of how long the current housing bear market may last: tinyurl.com/2h4x8t

Your "truck driver" story sounds apocryphal. Around my neck of the woods (SoCal) Joe Howmuchamonth is *still* convinced that house prices are about to reverse course and continue their "normal" 20%/year ascent to the sky. The housing bubble (and MBS/CDO) implosion stories are definitely gaining traction in the MSM, this much is true. However, most of the sheeple are still convinced that any correction will be shallow and short-lived. So, the contrarian play in housing was --and still is-- to focus on the fundamentals: overall direction of inventory, sales, core demand (minus speculators), borrower quality and access to cheap credit.

And what are those fundamentals telling us?

2007 Jun 27 06:33 AM

[robert99:]

This is quite possibly the most ridiculous piece of commentary I have read in a month - And I read 20-30 pieces a day. I can understand the logic behind a contrarian viewpoint (I'm holding AVR... ugh), but the value of contrarian analysis must be weighed against the fundamentals of the relevant topic in order to arrive at some semblance of a logical and potentially valuable conclusion. While it is sometimes true that by the time a trend has become widely known by the masses it is already undergoing a reversal, such is not always the case, and to base one's decisions solely on what the masses believe (albeit the opposite of what they believe) is, in two words, utterly stupid. I'm not trying to begin a flame war, but I don't think any other adverb/adjective combination can fully describe the visceral feeling of contempt I felt for the author after realizing that his analysis of the housing market is based on nothing more than a contrarian analysis of mass sentiment. Or maybe he IS aware of the large and growing pool of evidence which suggests the housing market is hanging in the breeze, off the face of a cliff, by a silk string, and, for some reason, chooses to ignore it. However, in the interest of fostering worldwide financial education, I feel compelled to offer up some evidence that <strong>the housing market is nowhere near a bottom<strong>, just in case he does not have access to it:

First, the Shiller used housing chart, which shows the value of homes since 1890, adjusted for inflation: www.speculativebubble.... It was created in February of 2006, and if it were updated today, you would see a top and slight decline. Remember, the reason a home appreciates over time is NOT because it increases in real value (unless you add value through additions and renovations), but because it keeps pace with inflation. Even though most advanced governments around the world are printing and lending money out of thin air at more than 10% a year, and real inflation is growing at unprecedented rates, it is hard to imagine that inflation has devalued your money by 80% in the last ten years, which is what the case would have to be in order for the housing market to not currently be in a bubble. Very unlikely indeed.

Another chart is the one the previous poster pointed out: tinyurl.com/2h4x8t In terms of subprime pain, 'You ain't seen nothing yet.' We are in the EARLY phases of ARM resets, and the subprime resets haven't even topped out yet!!! More ARM resets mean more foreclosures, which means more newish houses on the market, and as we all know, excess supply drives prices down. Not good for the homebuilding industry.

Ah, I can't forget about tightening lending standards, which means that your average dishwasher with no down payment can't buy a $200k home anymore. That's going to have a serious impact, and will continue to do so as the investigation into 'predatory lending practices' goes on, and lenders are compelled to tighten their lending standards further.

And this is just the tip of the iceberg. I haven't even mentioned the slowing US economy... Check out thebigpicture.com for some good information on the housing market. I wouldn't buy a housing stock right now, or anything even remotely related to US housing, including home builders, HD, LOW, REIT's, or materials producers (GNA, LPX, USG). We have seen NO solid signs of a recovery, despite what the cheerleading squad says, and I expect things to get MUCH worse before they even BEGIN to show signs of a turnaround. Good luck with your Lennar though - They're probably not going to go out of business, but I wouldn't be surprised if they return to 2002 to 2003 valuations before heading back north in a few years.

2007 Jun 27 08:01 AM

[Paul Meisel:]

It's always hard to pick a bottom, but I think it's easy to see that housing is a lot closer to a bottom than a top. That doesn't mean you can't lose any more money.

I am looking at housing but not buying yet.

2007 Jun 27 09:40 AM

[jardine:]

Remember that house price changes are more reflexive than stock prices. If people think that prices are going to rise, they will rise. Tighter lending standards, higher rates and excess inventory are changing expectations for appreciation and therefore the return profile long term. Homebuilders might have been punished enough but lookout for the secondary effects of a prolonged slowdown.

2007 Jun 27 11:53 AM

[brynaw:]

<i>but I think it's easy to see that housing is a lot closer to a bottom than a top</i>

Paul, the historical evidence and market fundamentals indicate you have it exactly backwards. See Robert's excellent analysis (above) and links to the Shiller price index &amp; Credit-Suisse ARM-reset charts. We're barely past the top on this bubble. Going by previous RE market corrections, we have at least several more years to go before prices are back in line with supporting incomes and comparable-house rents. If non-RE inflation runs relatively high in coming years, this might shorten the process a bit --but, this remains to be seen.

2007 Jun 27 01:38 PM

[Paul Meisel:]

I think the housing market itself may take 2 more years to bottom... maybe more in some of the most overbought markets. However I think the better run homebuilders will have worked their problems off within a year. The stocks typically improve ahead of the market.

Also, new homes tend to go to the better funded and least price sensitive buyers, while the "house poor" folks suffer.

It's mostly academic for me right now anyway, I am on the sidelines watching. My only exposure to the problem is my wife's business as a realtor, and I am not depending on that to eat... mostly for free time to golf.

2007 Jun 27 01:50 PM

[tradeorfade:]

will someone tell me why people want to buy these stocks? these stocks won't be buy until they erase all of the gains from 2001-2005. Why do people love catching a falling knife?

2007 Jun 27 01:43 PM

[nlipner:]

Rather than rehash the above excellent rebuttals of your conclusion, I can simply tell you that your assumption that the truck driver "would say that the housing market is in real trouble" is completely off the mark.

Survey after survey shows the average homeowner oblivious to the real declines and believes every bottom call. You sir, have chosen to be a contrarian to your own imaginary everyman and ended up smack in the middle of the pack.

I have an anecdotal story about your everyman: last week while getting my haircut I was told of a clever friend of the hairdresser who is taking advantage of the slump to buy more investment property because of the great paper gains on property bought last year. I didn't have the heart to spout CDO leverage statistics or mention what truely marked the ends of all the other good bubbles of the last 30 years.

Personally I have been ultra-short homebuilders, reits, lenders, etc. for a while now with no regrets.

2007 Jun 27 02:51 PM

[ALEXANDER C...:]

Be careful Mike cause one of these days that 'truck driver' might just run you over...

2007 Jun 28 08:41 AM

[Paul Meisel:]

It's the same old story of why Bernard Baruch sold prior to the 29 crash. When everybody knows, the news is fully discounted. The possible exception is the National Association of Realtors....

2007 Jun 28 09:07 AM

[robert99:]

Yes, but the wild card is just how many people are listening to the cheerleaders, or are not listening to anyone at all, and continuing to snap up homes because they think they are 'cheap' at a 20% discount. As we have already seen thus far, even amongst Main Wall Street, those who said housing woes were marginalized and said to have been "contained" are just now beginning to reverse their positions. The question is - How long will this go on, how far will it fall, and how fast? I believe that most analysts have seriously underestimated how bad the housing market's going to get, and we are only beginning to transition into seriously negative territory. Most people see the cracks, but up until a week ago, even Wall Street, for the most part, had digested the FED line that housing was "contained."

2007 Jun 30 07:04 AM

[Paul Meisel:]

This could be different in your market, and the markets differ. The only people I see in the housing market now are those who have made some sort of life decision that requires a housing change. The buyers are cautious and getting good deals, and the sellers for the most part are resigned to accepting only a small profit or breakeven in order to implement their decision. I only know of one person locally that sold at a small (3%) loss and 3 or 4 repos in the last two years. That is hardly a "crash".

Now in more upwardly mobile circles, the once every 4 years uptraders, now that may be a different story.

2007 Jul 01 02:39 PM

[robert99:]

On a scale of one to ten, with one being the top and ten being the bottom of the housing collapse, we are currently right around three. Take a look at the EVIDENCE, use your critical thinking skills, and realize that this thing has the power to send the US into a full fledged recession. Whether it will or not depends on just how strong the global economy's US life support systems are - Whether international trade will support us or not. I personally believe that it can, but not before an extended period of pain here at home. The dollar will continue to drop (buy gold and silver stocks), and eventually, it will be sufficiently weakened for US exporters to kick into full gear, and THAT will be the bottom. Until then, I will be sitting relatively safely on the sidelines: 75% cash, 10% precious metals, and 15% NTDOY. (The Wii is unstoppable...)

2007 Aug 03 09:26 PM

[robert99:]

I love it when I'm right... Housing down, recession possible (probable?), gold up and still rising. By the way, I STILL wouldn't touch anything housing related. When the exuberance from the FED's .5% cut wears off - When the economic and housing data rolling in deteriorates further - The market will continue to decline, led by housing and mortgage related tickers. It's going to take much more than a half point cut to save the economy, and I think the FED is going to sacrifice the dollar (to a certain point) to stave off *gasp* stagflation! Let's hope they don't overdo it and give us some nasty hyperinflation on a stick.

2007 Sep 19 09:52 PM