Stephen Rosenman's  Instablog

      New home sales came in at 31 thousand for September which disappointed investors who had been hoping for more like 34 thousand. The market worried that the real estate market had once again fallen off a cliff as the home tax credit was ending. When the numbers came out, the homebuilders sold off brutally.  I think we have to keep these numbers in "historical" perspective.  This year's dismal home sales are way below just about anything that has been seen in 45 years.  www.census.gov/const/soldreg.pdf ; 
      Between February 1990 until October 2008, no single month came in at less 32 thousand.  Between January 1963 to January 2008, only 18 months came at less than 32 thousand and many of these occurred in the 1960s and early 1970s.  This September was the worst September since 1981. From 1998 to 2007, Septembers ranged from 53 to 94 thousand.  
       At the same time, we saw the value of September's seasonally adjusted residential  construction increase 3.9% over last month.  Moreover, September was also up over July, June and May, giving a sign that the future of housing is looking brighter. www.census.gov/const/C30/release.pdf
       The take away message:  forget one month's disappointments.  The low housing sales seen in the real estate market are the bottom.  Expect a return to more robust new home sales as evidenced by increased construction.
        Three factors will drive that:
            The larger U.S. population will push new home sales closer to historical averages.
            Congress will extend and expand home tax credits.
            Low interest rates will entice buyers.
         The way to play it:  buy the home builders.  The twelve largest of the home builders (TOL, NVR, LEN, KBH, PHM, RYL, BZH, HOV, SPF, MDC, MTH) have a collective market cap of about $16 billion and control about 17% of all residential building.  It is hard to imagine their market caps will stay so depressed.