The Real Estate Recovery May Not Be Intact

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The real estate recovery is in question after a duo of dastardly data points were reported last week. Most investors were unconcerned about the slip, as it seemed to be on a temporary lull at the time. However, after a weak manufacturing report Monday, the sector dropped sharply lower. So is the real estate recovery intact?

When New Home Sales and Pending Home Sales reports were published last week, most investors ignored them and drove stocks to a record high close for the quarter. However, on Monday when a weak ISM Manufacturing Index hit the tape, stocks sold off en masse, including the high flying homebuilders, real estate REITs (depending on type) and major mortgage lenders. The iShares Dow Jones U.S. Real Estate ETF (NYSEARCA:IYR) actually eked out a gain on the day because of its diversified holdings beyond just residential real estate.


April 1, 2013

iShares Dow Jones US Real Estate


SPDR Homebuilders (NYSEARCA:XHB)


PulteGroup (NYSE:PHM)


Annaly Capital (NYSE:NLY)




Bank of America (NYSE:BAC)


Citigroup (NYSE:C)


New Home Sales were reported running at an annual pace of 411K in February, down from the prior month's revised level of 431K. Economists expected a pace of 425K, so the miss was doubly bad. The sales pace softened in 3 of 4 regions, with only the Midwest showing a 13.7% increase month-to-month. The Northeast marked a 13.3% decrease; the South saw a 9.7% drop; and the West declined 2.1%. The news was not representative of a vibrant new home market. However, the decline did follow January's 13.1% increase, so it had a difficult basis to start from.

When Pending Home Sales were reported a day later for the month of February, they marked a 0.4% decrease against January. Still, that was better than what economists were expecting, with the consensus forecast set for a decline of 0.7%. February's data here had a similarly difficult comparable in January, when Pending Home Sales increased 3.8%. Even though the pace slowed, Pending Home Sales were still at their second highest level in three years. The National Association of Realtors attributed the slower pace to a lack of available inventory, but I think that was a reach of a reason made by the biased industry organization.

Still, without a doubt, it's too early and this is too little data to question the real estate recovery. The strength of January certainly made comparables difficult in February, and other seasonal issues may have come to play in the month as well. Therefore, I think we can still say the real estate recovery is intact, but it's not really much of a recovery just yet either. If the economy was not hobbled by a possibly structurally damaged labor situation, then the housing market would be on fire given how affordable home ownership is today in terms of pricing and financing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.