Reassessing Real Estate

Mar.27.12 | About: SPDR Homebuilders (XHB)

After a week's worth of new data, the market is finally reassessing real estate. Up until now, and excluding my own steadfast voice uttering disagreement, the great majority of real estate market enthusiasts and housing longs have been declaring that this would be the year for recovery. The chart of the SPDR Series Trust SPDR Homebuilders (NYSEARCA:XHB), which represents a pool of homebuilder stocks, concurs, rising 70% from its October 3, 2011 trough through the March 23, 2012 close (adjusted for splits and dividends).

They said this spring selling season would be the one to spur a real estate recovery; they were wrong. On Friday, New Home Sales were reported running at a slower pace in February than they did in January. The U.S. Department of Housing and Urban Development (HUD) reported that the annual pace of new home sales slipped to a seasonally adjusted rate of 313K. That was short of economists' expectations, which were set at 325K based on Bloomberg's survey. It was also under January's revised lower rate of 318K, cut from the 321K pace initially reported. Most importantly, it shows no sign of new life in new housing.

Just two days earlier, Existing Home Sales, or the sales of used homes, also hit the skids. The National Association of Realtors reported that Existing Home Sales fell to an annual pace of 4.59 million in February, down from the revised January rate of 4.63 million. Sure, the decline was modest, and the reported month was within winter (not spring), but several other reports seem to show an unenthused real estate environment.

Housing Starts were reported for the month of February last week as well. I like to look at single-family starts, because the overall number includes multi-family projects, and I believe a renter nation is not a healthy nation. HUD reported that starts of new single-family homes fell to a rate of 457K in February; that's 9.9% under the revised January figure of 507K. Maybe it's just me, but such a significant decline doesn't seem like good news to these weary eyes. Now, the eternal optimists who are long housing or work in the industry will again note the month in question and the fact that the pace of Building Permits for single-family projects improved 4.9%, to 472K in February.

If you are still unsure about where housing is trending, you might study the survey of the homebuilders themselves, which was also reported last week. The National Association of Home Builders (NAHB) reported that its Housing Market Index, which measures the mood of builders, was unchanged in March, leaving it in depressed territory. The NAHB/Wells Fargo Housing Market Index stuck at a mark of 28, after February was revised down a point. The index also proved deflating to economists, who after buying into the idea of sector recovery, set their consensus view up at 30 for the month. I should also remind the reader, that 50 delineates between a positive and negative mood. At the current level, builders remain mostly deeply depressed.

If you still need convincing, take a gander at the latest FHFA House Price Index, which in an improving environment, should be expected to reflect price increases. Rather, the report for January showed no change month-to-month, and a 0.8% decrease in prices for the trailing twelve months against the prior year comparable. Adding insult to injury, the December level was adjusted lower, providing an easier bar to hurdle in January.

The stocks of home builders reflected the environment more accurately last week than they had through the capital flow driven run since October of last year. The XHB was down 1.3% on the week, but the shares of some builders saw more severe damage. K.B. Home (NYSE:KBH) was down 8.5% Friday alone and was off 19% on the week after reporting disappointing data. Even industry stalwart Toll Brothers (NYSE:TOL) shed 4.5% last week. It seems the market is finally paying attention to data and economic developments, and heeding my long ignored warnings.

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