U.S. Housing Boom? Not Yet

| About: SPDR Homebuilders (XHB)

In response to new data suggesting that the US housing market may be stabilizing, many investors are wondering whether it’s a good time to try to profit from an improving housing market.

My take: I don’t advocate aggressively leveraging to housing-related investments because I don’t expect a strong housing rebound in the near term.

To be sure, there have been some upbeat housing numbers lately as certain aspects of the housing market – like affordability — have clearly improved and most of the damage from the housing bust is over. Last week, new data showed that February building permits — a good indicator of future housing starts — rose to 717,000, a three-year high. Meanwhile, the inventory of new homes is now equivalent to 5.6 months of sales, the lowest ratio of inventory to sales since 2006.

But when viewed from a big picture perspective, recent housing market data has actually been mixed. New numbers out last Friday, for instance, showed that new home sales fell in February for a second month to the slowest pace since October.

More importantly, however, a short-term housing recovery isn’t likely because there is still a significant shadow inventory of homes. In other words, there are a lot of potential homes available for sale, or likely to be sold, that aren’t yet officially listed. As The Wall Street Journal’s Real Time Economics blog pointed out last week, mortgage information tracker CoreLogic estimated that there was a pending inventory of 1.6 million units in January that were seriously delinquent, in foreclosure or already owned by lenders. That puts January’s shadow inventory at the same level as in January 2009.

Meanwhile, the housing market is also being weighed down by the fact that US consumers are still struggling under debt from the last housing boom and are only about half way through their deleveraging. Household debt is still 112% of disposable income, higher than the long-term average of around 80%. At the same time, as The Wall Street Journal recently reported, the high level of student loan debt could also postpone some consumer home buying.

But while I’m not advocating a broad push into housing-related investments, income-oriented investors may still want to consider REITs as part of a broader income portfolio.

Sources: Bloomberg and The Wall Street Journal

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