This will not be a multiple choice question, and you have only one shot at getting it right. What part of our economy is the weakest? If you answered "the housing market," you win the prize.
Not a day goes by when we are not confronted with the sobering facts about the foreclosure rate, the continuous fall in housing prices, the glut of foreclosed properties on the market, the difficulties in obtaining a new mortgage or a refinance, lackluster existing home sales, and the millions of homeowners who are "underwater" between their home's value and their mortgage.
I live in South Florida and can tell you first-hand how I have lost a small fortune on my own "housing adventures." Maybe I will write a book, but suffice it to say it has not been pretty. I didn't even have a mortgage, so I could not do one of those "strategic foreclosures".
I am not complaining, just pointing out that I was right in the middle of the entire mess myself and have kept an eye on the issue since 2006, when the bottom fell out for me, and likely for many of the readers of Seeking Alpha.
Let's fast forward to January 18th, 2012. I wrote an article suggesting that we take a look at buying shares of Lennar (NYSE:LEN), Toll Brothers (NYSE:TOL), and KB Home (NYSE:KBH), all of which had a fairly strong run prior to my article. I suggested that the entire market was recovering, and that there was more room to run with these stocks.
I am reiterating that opinion now. The US housing market is on the mend, and buying shares of the aforementioned stocks could achieve positive capital appreciation.
The Proof Is In The Numbers
|STOCK||PPS 1-18||PPS 3-09||%CHANGE|
Since the article, the stocks I suggested have risen 16%. The S&P has risen 4.5%. Obviously the market seems to think that the housing market is recovering, and so do I.
Foreclosure rates have been dropping as well, as noted in this report that the last quarter of 2011 had a 27% decline from the prior year. Of course one could say the drop was due to the banks holding back on foreclosures, but the numbers still speak for themselves.
New home permits were up, then down, but construction has been up steadily, as reported in this article, so no "clear" direction has been defined by the experts. Again, the market is a leading indicator, and home builder stocks have been surging even prior to the article I wrote back in January, prompting some early investors to take money off the table. Prudent, but actually not a positive, forward-looking outlook on the sector, in my opinion.
Why The Sector Will Continue To Improve
As indicated by the housing permits and the construction numbers, although erratic, the trend has been positive. There is less inventory of foreclosed homes, and a new home is priced almost as well as the existing homes on the market now, and are very affordable based on historical statistics. Even Warren Buffet called new homes "cheap" on CNBC recently (see the interview here):
I would say the single-family homes are cheap now, too.... If I had a way of buying a couple hundred thousand single-family homes and had a way of managing -- the management is enormous, is really the problem because they're one by one; they're not like apartment houses -- I would load up on them, and I would take mortgages out at very, very low rates. But if anybody is thinking about buying a home, five years ago they couldn't buy them fast enough because they thought they were going to go up, and now they don't buy them because they think they're going to go down. And interest rates are far lower. It's a way, in effect, to short the dollar because you can take a 30-year mortgage, and if it turns out your interest rate is too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now.
Warren nailed it in my opinion. The article itself went on to state how housing affordability is at a multi-decade high, and that the homebuilders are beginning to have some pricing power in many areas even though the hardest hit areas continue to overshadow the recovery itself.
"Areas of the country that are unencumbered by a large supply of foreclosed properties -- for instance, between Washington, D.C., and Boston, Mass. -- are doing better. Cancellation rates are down dramatically, and there is even some pricing power for the builders. By contrast, areas such as California, Arizona, Nevada and the like continue to suffer in price and in sluggish transaction activity as a result of the indigestion of the last cycle. In other words, the weaker regions are masking a developing national recovery in housing that has the potential to last throughout the balance of the decade."
Sometimes recovery is hard to see. Sometimes it just comes upon us without us even noticing. Well we are noticing, and by owning shares of a few of the brand name builders now, could pay off quite handsomely for many years to come.
Lennar, Toll Brothers, and KB Home were my picks back in January. They are still at value prices in my opinion, to take advantage of in this sector of our recovering economy. Opportunities in housing, whether buying a new home, or owning some shares of stock in the builders of those homes. Either way, I do not think we would be making a bad decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Please be sure to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any security and is strictly the author's opinion.