Reports Of Housing's Demise Have Been Greatly Exaggerated

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Includes: BAC, ITIC, IYR, MORT, MTG, WFC, XHB
by: Markos Kaminis

Summary

Recent reports of housing's demise have been greatly exaggerated.

Pending Home Sales, while hyped by reports to be showing real estate decline, is actually trending higher and at its second highest point this year.

Real estate relative stocks have mostly suffered through September and are worthy of inspection and prospection here. Physical real estate investors can rest easy as well.

Don't believe the hype. Media and most reporters grabbed hold of the fact that the Pending Home Sales Index declined in August, and in so doing, missed the point that the modest decline still left the index near its highest point this year and on a trend line higher.

The Pending Home Sales Index reported Monday for the month of August declined 1.0% month-to-month to a level of 104.7, from 105.8 (revised from 105.9). That sounds like a bad result, and it's the point of notation most reported on. However, looking just a little closer at the data, which is why you follow me, we see that this modest decline follows July's sharp increase of 3.2%, and leaves the index still at the second highest level it has been this year.

Now, I'm the first to note the importance of directional change in investing, but in this case, the month-to-month decrease has been overly hyped. This is likely partly true due to its poor match against August of 2013, or the prior year period. The index is 2.2% below that period's level of 107.1.

However, inspection of the long-term chart of the Pending Home Sales Index tells the true story; please take note of the 1-year chart. While it has decreased from this time last year, the index is clearly on the rise this year. And while it was down against July, the trend line continues to show rise. Its current strength is also apparent when considering the index's sharp gain in July, to which this month's data may simply offer some balance.

I just watched Professor Shiller on CNBC talk about Existing Home Sales and Pending Home Sales decline. Talk like this and the reporters' headline grabs are dangerous and loose in my opinion, because the Existing Home Sales chart looks very similar to the Pending Home Sales chart. That is because Pending Home Sales is a precursor to Existing Home Sales; it marks when a contract was signed, and existing home sales mark when it closes. Like pending sales, the existing home sales drift in August came after a sharp rise in July. And like pending sales, existing sales are still running at a strong rate relative to the rest of this year.

Let's recall why things slowed down at the start of this year. Remember that polar vortex that slowed down housing activity, not to mention causing a severe contraction in GDP? Wait for it… there's that aha moment. So don't believe the hype friends, and try to use this faulty reasoning to find value.

Housing Relative Stocks

September Thru the 29th

iShares US Real Estate ETF (NYSE: IYR)

-5.3%

SPDR S&P Homebuilders (NYSE: XHB)

-4.9%

Bank of America (NYSE: BAC)

+6.0% (company specific driver)

Wells Fargo (NYSE: WFC)

+0.5%

MGIC Investment (NYSE: MTG)

-6.3%

Investors Title (NASDAQ: ITIC)

+1.7%

Market Vectors Mortgage REIT (NYSE: MORT)

-5.1%

Housing relative stocks have been driven by this hype to mostly lower ground in September and likely offer opportunity now despite the Fed rate outlook. They are worthy of inspection and prospection here. And physical real estate investors, don't you worry either. This latest news is noisy and full of hype. Given the polar vortex real impact on housing and the economy, now seemingly forgotten by news reporters and investors, I dispute the argument that housing is in downturn now! Real estate is recovering still and finally gaining traction. I will be following up this real estate article with another very important piece discussing a critical reason why housing has significant upside, so readers may want to follow my column.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.