New Home Sales: Revising Their Way Higher

Yet another housing data point to digest. This time it's the monthly New Home Sales report from the Census Bureau. It looks like all of the headlines concerning the release are touting a 3.3% rise in new home sales from last month (to an annualized rate of 526,000), and a number of articles are once again implying that, again, this may again be yet the latest sign again that the end of the real estate downturn again is here – once again.

Most of the articles I've seen either ignore or glance over the fact that last month's figure was revised down from an annualized rate of 526,000 to 509,000. So, if last month's figure hadn't been revised lower, this month's figure would have been dead flat with last month. Depending on your level of optimism or pessimism, that's either 0% growth or a 0% decline, but it's definitely less than 3.3% growth. It is, however, a nice easy way to manufacture growth. Personally, I'm thinking of revising my April intelligence lower by 10% to boost my self-esteem this month.

To be fair, the report itself isn't completely terrible. The months-of- supply figure (how long it would take to sell the new homes currently for sale given the current rate of sales) fell modestly from an absurdly high 11.1 months to a ridiculously elevated 10.6 months. That's the right direction, but only time will tell if it's the beginning of a trend. It does illustrate what needs to happen to get back to equilibrium -- builders need to build fewer houses relative to the level of sales. You can track all of the home price data, builder optimism surveys, permit numbers, and sales info you like, but residential housing isn't going to bottom out until the months-of-supply (inventory) figures for both new and existing homes get a lot closer to normal levels.

As an aside, those who are clamoring for a return to normalcy (which I think includes everyone) should be embracing the fall in housing prices. The lower prices will make housing once again affordable to more people and thus lead to the higher demand that the housing market needs. Moves by Congress to offer "aid" and to "support" the housing market at best will forestall the correction in prices that must ultimately occur to get back to equilibrium.

Despite having strong contrarian sympathies, I currently remain modestly short the housing sector, primarily through exposure to two housing-related ETFs -- long UltraShort Real Estate ProShares (SRS) and short SPDR Homebuilders (XHB). I suspect the housing shakeout will take longer to occur than many think. Furthermore, it's very unlikely that we'll experience another housing boom for quite some time.

The home builder industry is likely to emerge a bit smaller and more consolidated with rather unspectacular growth and margin opportunities. Even once they bottom, I imagine that there will be more fertile pastures elsewhere - probably in fertile pastures (I like agriculture.). That's not to say that there may not be some intriguing deep value plays at some point, but at the current time, my strategy with the housing sector is fairly straightforward -- short substantial advances, cover on the declines, and some day finish staining my deck.

 

Comments

[maxnigh:]

With sales, foreclosures, starts, inventory, all so negative, why does SRS, not show a profit?

2008 May 28 12:14 PM

[fubsy_cooter:]

I wonder what the creds are for posting on Seeking Alpha? I ask b/c you stated SRS as a way to play the housing sector short. SRS is not a measure of the housing sector. It is an inverse play on commercial real estate. It basically shorts REITs like Simon Property Group that invest in commerical...not residential real estate.

2008 May 28 04:24 PM

[Greg Pinelli:]

I don't know what the creds are for posting either..however, SRS does more than just invest in the DJ Real Estate Index..it attempts to mirror its results inversely (actually, double). In order to accomplish this it also heavily plays the financial instrument market..In fact its highest % holding today is Credit Suisse First Boston 3.080% (3/30/08)..at a whopping 42.26 % of its portfolio...
I like SRS and have found it has definite Buy/Sell parameters that can make it very profitable..In any case, it's insurance for those who think real estate never goes down and bond prices always go up.

2008 May 28 04:40 PM

[Jay:]

Max - SRS plays the COMMERCIAL, not RESIDENTIAL real estate market. I don't even know why SA allows this "article" to be tagged to SRS.

Geo - the 42.26% of the the SRS portfolio is a particular repo agreement - overnight cash - they're not playing the bond market (or the "financial instrument market") - I'd love to hear about your "definite buy/sell parameters" though.

2008 May 29 09:46 AM

[Ken Bell:]

Wow. Cooter! Why the hostility? Did someone's ARM just reset? Just kidding. Ok. I reread the article, and it seems the "problem" is that I used the term "housing"" instead of real estate" when mentioning SRS and XHB. Fair enough. That could have been clearer. The focus of the article was on the housing part of real estate, but I wanted to share that I was also long SRS. To clarify, I'm bearish on both residential and commercial real estate, so I have exposure to both.

2008 May 29 10:02 AM