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Markos Kaminis
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After witnessing the worst of Wall Street firsthand and having the ideal vision of my childhood career choice corrupted by reality, I almost switched to priesthood at age 40. However, I've since determined to put my stock selection skills, earned through blood, sweat and tears, to better use,... More
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  • New & Existing Home Sales - Foreclosures Distinguish 0 comments
    Oct 29, 2009 9:07 AM | about stocks: DHI, CHCI, SRS, URE, IGR, XIN, TOL, HOV, BZH, BAC, FMCC, FNMA, GS, MS, WFC, TD, LEN, PHM, NVR, GFA, MDC, CTX, KBH, RYL, MTH, BRP, SPF, MHO, OHB, WCIM
    New Home Sales were reported down 3.6% in September, and measured well below economists' expectations. This unexpected disappointment sank stocks on October 28th, as one would expect it might. The Dow Jones Industrials Index slumped 1.21%, while the S&P 500 moved 1.95% lower on the day. Housing stocks took an especially hard hit, with Toll Brothers (NYSE: TOL) slipping 5.5%; Hovnanian (NYSE: HOV) down 5.4%; Comstock (Nasdaq: CHCI) off 9.5%; Pulte (NYSE: PHM) -3.8%; D.R. Horton (NYSE: DHI) -4.0%; Lennar (NYSE: LEN) -4.0%; and K.B. Homes (NYSE: KBH) off 2.2%.

    Still, for those who noticed a conflict in the data and did not quite understand why it exists, the report offered confounding information. After all, the New Home Sales slump contrasted against last Friday's reported strong Existing Home Sales pace (+9.4%) for the same month. So which is it then? Which data point is telling the truth? Is housing stabilizing or is it about to take another shot to the gut?

    The Difference

    The clear difference between Existing and New Home Sales is of course foreclosures, or the absence of them within the New Home Market. Their existence in the pre-owned home market has impacted pricing (pushing prices downward), while also speeding the recent sales pace within the segment. When reported on Friday, most interpreted the sharp increase in Existing Home Sales as the beneficiary of the expiring incentive provided by the First-Time Homebuyers Tax Credit. The theory goes that those who could were rushing to enjoy the tax benefit before its end of year expiration, and we are sure this is the case to some degree. However, first time homebuyers are allowed to buy new homes just as soon as existing properties, so why the drop in new home sales then? Well, that question tells us something more.

    "I just do not believe a jobless recovery is possible when the jobless rate is as high as it is now."

    Maybe the impact provided by government incentives is losing its punch. Perhaps we should face the fact that a new normal is going to rule the day. Credit standards have tightened, and so the growing American home ownership rate, which characterized recent times, might stall for a long while to come. I do not believe a jobless recovery is possible when the jobless rate is as high as it is now. The unemployed and under-employed are certainly not qualifying for mortgages anyway. At the very least, any economic growth in the short-term should not be robust.

    Most "gurus" would not venture out on a limb like that just ahead of a GDP report that is expected to show a return to economic growth, and a sharp bump up at that. But, while GDP will likely look good for Q3, "cash for clunkers" will not a recovery make beyond the quarter, in my view. Heck, I do not even expect to see much inventory build benefit yet, and that factor would be expected to provide a quarterly kicker, before a step back into recession (or rather negative change in GDP) for another quarter. Given consumer spending appears to be giving way to consumers hiding in their basements for the winter, economic recovery might lag a bit.

    A Closer Look at the Report

    While the annual pace of home sales slipped to 402,000 from a revised August rate of 417,000 (from 429K), the trend was not consistent across geographical regions. The Northeast held steady against August sales, and the Midwest experienced a 34% increase in the pace. The South (-10%) and West (-10.6%), where development is predominant and where prices ran most ramped, drove the monthly slowdown. Foreclosures are also most common in those same important regions, and so, they likely put distance in the variation between market segments as well.

    Inventory of New Homes for sale stuck at 7.5 months in September, versus the same in August, but was much improved from the 10.9 months stock available last September and the peak inventory of 12.4 months seen in January. Still, inventory did not change this last month, which may be showing us an inflection point toward forward deterioration.

    In conclusion, a boost in sales that is supported by foreclosure activity is akin to A-Rod's batting statistics, supported by performance enhancing drugs. Eventually the beneficial effects wear off, replaced by troublesome side effects and a good look at reality - drug addiction. So, as foreclosures thin out, we expect the Existing Home Sales pace will better match its New Home cousin. In the meantime, I would suggest trusting the new home sales figures a bit more. After all, they don't cheat.

    Go Phillies!

    Disclosure: No Positions
    Themes: housing, real estate, macro Stocks: DHI, CHCI, SRS, URE, IGR, XIN, TOL, HOV, BZH, BAC, FMCC, FNMA, GS, MS, WFC, TD, LEN, PHM, NVR, GFA, MDC, CTX, KBH, RYL, MTH, BRP, SPF, MHO, OHB, WCIM
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