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Real Estate: A Tale of Two Beatings

More bad U.S. real estate news hit the tape today, but the resulting aura of market depression may be masking a real estate play in another nearby nation. In the U.S., the National Association of Realtors (NAR) released pending home sales figures indicating that its forward looking Pending Home Sales Index declined 2.6% in June after a lift in May.

Given the amazing ability of real estate industry players to find optimistic twists on data, this revelation is unsettling, though hardly surprising. What’s really disturbing is their premise for recovery:

“Lawrence Yun, NAR chief economist, said lower home sales are expected in the short term. “There could be a couple of additional months of slow home-sales activity before picking up later in the year, provided the job market continues to improve,” he said. “Over the short term, inventory will look high relative to home sales.”

Banking on improved employment at this point is pretty questionable. In any case, the pending sales number and flaccid consumer confidence data had traders’ faces hanging down to their shins in dismay this morning.

Those wondering if it’s too late to short U.S. real estate may be looking in the wrong country. Analysis from a recent Seeking Alpha article pokes a Maple tree-sized hole in Canada’s reputation for safe and sane real estate lending practices and seemingly well capitalized lending institutions:

“In Canada, like in Australia, Israel, Brazil, India and other countries around the globe, the housing bubble hasn’t popped yet. So the fact that they are reporting record profits while the banks in the United States and Europe are struggling is meaningless. What a prudent investor should examine is how these banks prepared for the inevitable downturn in real estate. Are they better off than the American banks in 2008?”

The article’s take on individual and aggregate equity to total assets ratios is more than a little thought provoking. While home ownership in Canada lacks the tax incentives driving the U.S. market and underwriting up North was not so felonious as down here, the article – which carried a disclaimer about being short Canadian banks – argues that banks north of the border are in for a beating along with the loonie:

“All of the banks mentioned in this article are traded on the NYSE. A downturn in Canadian housing will most likely cause the Canadian dollar to fall. If that happens, then a short position on these stocks will make the trade even more profitable since the shares will fall not only because of the companies’ performance but also because of changes in the exchange rates.”

(There’s also the the iShares CDN Financial Sector Index Fund, which trades on the TSX.)

Last February, another Seeking Alpha post called for buying some of the same stocks, which had fallen in apparent sympathy with American banks pummeled by the GFC. For example, Bank of Montreal had plummeted from a $60 range in January of 2008 to the low $20s in February of 2009.

Now it’s back up to $60.

Disclosure: "no positions"