• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
Please Act Accordingly 
One Good Investment Idea a Week, That’s All We Ask
About How Are We Doing? The Library Disclaimer Contact Us
S
EARCH
Housing is the Business Cycle, So Where are WeNow?
As we’ve mentioned in the past, we are firm believers in Edward Leamer’sthesis that “Housing is the Business Cycle“
.
It continues to shape the prismthrough which we view the economic cycle. The relative stability in new andexisting home sales VOLUME (not price) has, in part emboldened the bulls whomost certainly will look to the housing market for the first signs in a broadereconomic recovery. We thought it might be interesting to take a top-down lookat the housing market through an analysis of national level statistics and a moredetailed review of new and existing home sales in the former bubble states:Arizona, California, Florida and Nevada. We continue to believe that volumesfor both new and existing home sales have bottomed, but we are still a year ortwo away from a bottom in pricing. Before we get into greater detail, we wantedto provide you with our key conclusions on the state of the housing market:1.The inventory of new single family homes is in very solid shape, but thatdoesn’t make us bullish on homebuilders2.There are actually three separate housing markets now: a) The marketfor foreclosure/distressed sales, b) the traditional resale (existing home)market, and c) the market for new homes. The national data can bemisleading as to the overall state of the housing market because it is notcapturing the cross-currents in each of these markets.3.Existing home sale volumes in former bubble markets likely havebottomed but will not increase at the same pace going forward as thetype of foreclosure properties move to higher price points.4.Any sequential improvement in median existing home prices in formerbubble states should be taken with a grain in salt. As argued brilliantly byWhitney Tilson, of T2 Partners, the sequential improvement is largely afunction of more higher priced homes entering foreclosure, which we willprove out with an analysis of the data in Arizona.5.Concerns about defaults down the line from investors that havepurchased foreclosure properties and then rented them out in the pastyear appear to be unfounded. Based on current mortgage rates and themedian price for a distressed sale, the average high school graduate inthis country can service a mortgage on these properties. Talk aboutunintended consequences.6.An environment with steady to slightly improving volumes and risingmedian prices in former bubble markets still appears to be favorable forZipRealty (ZIPR 2.65
↓7.02%
)7.Finally, the prospects for housing suggest some level of economicstability but a pretty tough slog for the next 2-3 years.
On a National Level - New Single Family Home Inventory Is In Good Shape,Existing Home Inventory Not So Much
 Let’s start at the highest level before we dig down into some very revealing statelevel data. The chart below is probably familiar to many of you. It displaysexisting single family home sales as provided by the National Association ofRealtors over the past 40-years. As you can see, existing single family home« A Pair Trade with Some Sparkle -Long Signet Jewelers/Short Blue Nile
Recent Posts
Housing is the Business Cycle, So Where areWe Now?
A Pair Trade with Some Sparkle - Long SignetJewelers/Short Blue Nile
Recent Correction in ARP Shares Brings the FCFYield Back to 20%+
What To Do About Smith and Wesson (SWHC)Now
Causality in the Natural Gas Pit - How the UNGWorks in Theory (And Why it Doesn’t)
Popular Posts
Revisiting Our Mean Reversion Pair Trade fromthe Energy Pit - Long Natural Gas/Short CrudeOil: We Still Like It
A Pair Trade with Some Sparkle - Long SignetJewelers/Short Blue Nile
Housing is the Business Cycle, So Where areWe Now?
Causality in the Natural Gas Pit - How the UNGWorks in Theory (And Why it Doesn't)
A Mean Reversion Pair Trade From the EnergyPit: Long Natural Gas/Short Crude Oil
Join Our Email List
Your email:
Subscriber CountArchives
June 2009
May 2009
April 2009
Market Quotes and Current InvestmentIdeas
 
Enter email address...SubscribeUnsubscribe
95
DJIA8417.68
 
-1.31%
Page 1 of 11Housing is the Business Cycle, So Where are We Now? - Please Act Accordingly6/30/2009http://pleaseactaccordingly.com/2009/06/housing-is-the-business-cycle-so-where-are-we-now/ 
 
sales have been stuck in a range of 4.0-4.3 million on an annualized basis forabout a year now. This puts the number of existing single family home sales atthe top end of the range witnessed in the late 1980’s through the mid 1990’
s.
We anticipate sales will remain at least at these levels for the next 12-18months, barring a major change in the interest rate environment (click on chartfor full image view).The inventory situation for existing single family homes is not yet encouraging -inventory on an absolute basis and months supply is still well above historical
norms. The one encouraging sign has been that
existing single family inventoryhas declined on an absolute basis. At over 9-months supply and 3.2 millionsingle family homes, we think inventory needs to decline by approximately750,000 homes to return to a more normal environment (click on chart for fullimage view).Existing single family home inventory has been declining on an absolute basisfor 10 straight months now, which is encouraging. To the extent that Obamaand leading lending institutions can stem the tide of foreclosures, existing singlefamily home inventory could be reduced far more rapidly than 15% on a YOY
basis. Based on the number of option
-ARM resets over the coming 18-24months, this could be a very tall order (click on chart for full image view).
Source: National Association of Realtors Source: National Association of Realtors 
NASDAQ1829.58
 
-0.79%S&P 500915.60
 
-1.25%THQI7.24
 
-2.43%ESI101.82
 
+7.08%ARP8.39
 
+0.72%CLM09.NYM59.65
 
+0.00%
chart
NGM09.NYM3.54
 
+0.00%
chart
ZIPR2.65
 
-7.02%
Page 2 of 11Housing is the Business Cycle, So Where are We Now? - Please Act Accordingly6/30/2009http://pleaseactaccordingly.com/2009/06/housing-is-the-business-cycle-so-where-are-we-now/ 
 
The situation in the market for new single family homes is much moreencouraging from an inventory perspective, although demand remains weak.The management teams of the home builders have always argued that there willalways be a certain segment of the population that just wants a new home.This has been put to the test over the past 12-18 months and it looks like in anenvironment of great distress, there are approximately 300-350,000 families orindividuals annually who want a new home, no matter what the economy is
doing. This is the worst environment for new
home sales in the past forty
years.
The good news is that many leading home builders have reported positivesequential improvement in order trends from late winter/early spring to latespring/early summer. However, the availability and price points of existinghomes available in the resale market continues to strip away demand from thenew home market. From an inventory perspective, the new home channel looks
clean. Even though the supply stands at more than 11
-months, at the currentpace of sales, the absolute level of inventory is consistent with bottoms in othereconomic downturns (click on chart for full image view).
Source: National Association of Realtors, PAAResearch Source: US Census 
2009-06-30 13:49
Categories
Books We've Read and So Should You
Business Services
Commodities
Firearms
For-profit Education
Housing
Industrials
Initial Investment Idea Write-ups
Jewelry
Long Ideas
Short Ideas
Uncategorized
Video Games/Interactive Entertainment
Tags
RGR12.60
 
+2.69%SWHC5.67
 
+2.53%HURN46.46
 
-1.09%BCO29.06
 
-0.48%NILE43.28
 
-0.07%SIG20.40
 
-2.02%
 
Page 3 of 11Housing is the Business Cycle, So Where are We Now? - Please Act Accordingly6/30/2009http://pleaseactaccordingly.com/2009/06/housing-is-the-business-cycle-so-where-are-we-now/ 
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...