Deck Stacked Against Real Estate Recovery

 |  Includes: BZH, HOV, KBH, LEN, PHM, RYL, TOL, XHB
by: Markos Kaminis

Remember that real estate recovery so many experts have been talking about lately? I believe it was the latest Housing Starts Report that got the premature ball rolling most recently. Or it may have been the "happy" measure of home builder sentiment reported the day before. Well, data reported over the last week begs to differ, as does the macroeconomic backdrop.

Recent reports were mixed in making the case for and against a near-term real estate revival.

Pros - Recovery

Cons - Recovery

Housing Market Index?

Existing Home Sales

Housing Starts?

New Home Sales

FHFA Home Price Index?

Pending Home Sales

PulteGroup (NYSE:PHM) EPS?

Ryland Group (NYSE:RYL) EPS

Click to enlarge

The reason I placed question marks after all four of the positive data points is because I don't even see those as positive. I covered the supposed enthusing Housing Market Index, which the popular press promoted as a positive sign, in my article entitled Builder Confidence Will Prove Fleeting. Truth be told, what was touted as confidence better reflects a milder state of depression. The index improved six points, but reached a mark of 35, 15 points short of the point that delineates between positive and negative sentiment.

The argument against the Housing Starts data is a little harder to see because starts increased 6.9% in June on their way to an annual pace of 760K. Single-family starts rose 4.7%, reaching 539K. That's good enough news if that were all the news, but unfortunately it's not. You see, Building Permits, a forward looking indicator for future starts, declined 3.7% in June to an annual pace of 755K. Permits for single-family projects only edged up 0.6% to 493K. Meanwhile, starts got a big lift from multi-family projects of 5 units or more, with those rising 17%. If it's a Renter Nation we are inheriting, well then this is not good news for America in my view.

After a real nice rally that caught fire last fall, along with stocks generally, the SPDR Homebuilders ETF (NYSEARCA:XHB) recently reflected a reconsideration of real estate recovery. Those last two data points just debunked here, or at least placed into question, have helped to put support under the industry. However, it's misplaced and mistimed in my view.

Chart forSPDR S&P Homebuilders

While performance has been mostly positive, not every publicly traded builder has done well over the last month. You can see here that while Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH), Lennar (NYSE:LEN) and PulteGroup have done well, Hovnanian (NYSE:HOV), Beazer Homes (NYSE:BZH), and lately Ryland Group have underperformed.

Chart forSPDR S&P Homebuilders

When Existing Home Sales fell 5.4% to an annual pace of 4.37 million in June, it meant more to mortgage bankers like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) than it did to the new home builders. But when New Home Sales were reported Wednesday down to a pace of 350K in June from 382K in May, well then suddenly the issue was broader reaching. On Thursday, the Pending Home Sales Index, which measures contract signings for existing homes, also slipped 1.4%.

I was an outspoken advocate for homebuilder stocks before the latest rally started, but what changed my feeling for the group was vision for the economic developments that are becoming clear today. While recognizing that the publicly traded and better capitalized larger builders have gobbled up market share from now defunct smaller contractors, my concern is that the cyclical sector should be stymied by the economic recession I see developing. That's why the question mark next to PulteGroup in the table above.

Even so, I've noted that the builder stocks should still offer short-term trading opportunity on select strong earnings news against the deteriorating macroeconomic backdrop acting for the other side of the argument. Yet, I cannot ignore the even tighter lending conditions that I believe will develop soon along with an increase in unemployment and a fogged future for financial markets. However, housing supply may be limited due to the starvation of new construction - I expect demand will also be ratcheted lower - making the equation a more logical one for real estate longs to understand.

All that said, I recommend real estate acquisition now for those who can afford it today and who can qualify for a mortgage, because today's affordability of homeownership will not last forever if my long-term concerns for the dollar prove true. In that case, you will see higher real estate prices, but on inflation that prices most of us out of the market. At that point, too many Americans would have only one option, the renter's burden. So, in fact, I see the deck stacked and stacking against growth in real estate sales.

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