Are Homebuilders Pricing in a Bottom?
A: Lets mesh some group stock performances with recent housing data and environment to see what may prove to be a good time to start buying distressed properties in the hardest hit but fundamentally solid local markets!
Look at the stock performance of the homebuilders in the past week; which had 15-25% gains in the sector! A great bounce that is squeezing the shorts now. Keep in mind that these stocks will price in a rebound 4-6 months in advance of it actually coming; with institutions opening new positions, a bullish longer term analyst call, a ton of short interest, and vulture/contrarian investors getting started. Is this renewed confidence or another dead cat bounce? If it is renewed confidence in the homebuilders, I wonder if the time is ripe to start nibbing at fire sale deal's of existing/new homes in markets that have been killed in the past 2 years! You can never pick the bottom, but you want to buy on the way down when news is real bad and you can still negotiate the price down more. When inventory trends do reverse course, and confidence regains, it will be too late to have that control over the seller. Just a thought!
Remember my two previous posts (Realizing When To Re-Enter The Market & Spotting A Bottom In Local Housing) on spotting a housing bottom; since we won't know where a bottom is until its already happened! Lets revisit the main points:
Inventory Increases Slowing - Look to buy when inventory levels have topped out, reversed course, and are into a correction to more normal levels.
Affordability - Local economy needs to be sound with tight jobs market. If you can't get a job in that town/city, then your not alone and afordability of homes will be pressured.
Buyer/Investor Confidence - Look to buy when buyer confidence shows signs of bottoming and bad news gets absorbed easily. This may be a sign that the road in the future will be brighter, or not as bad, as originally expected!
Interest Rate Policy - Look to buy when the fed nears the end of a rate easing campaign and interest rates are nearing their bottom. What if this easing cycle will be over right after it began? If fed starts raising rates, its because economy is strong and inflation is renewed concern!
Time on Market - Look to buy when time on market tops out, starts to reverse course and head back to the norm.
Well, we are seeing renewed confidence / interest in the homebuiders after another awful report came out, but brighter times may be in sight. Plus there is huge short covering pressure adding to upside and a bullish call by Citi Investment analyst Stephen Kim stated (via Marketwatch.com):
"The woes in the U.S. housing sector have been extensively documented, and we do not pretend that any near-term relief in industry fundamentals is in sight," Kim added. "However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact."Thoughts running through my head are:
a) how many more limited-time fire sale's will there be from builders to help reduce inventory?
b) how will bulk REO's (real estate offerings - I'll post on this in a few days) help reduce existing foreclosure inventory? Thats a hot market I hear right now!
c) will contrarian investors interpret a bounce in homebuilder index as a catalyst to start buying existing deals for longer term investments
d) if fed ENDS rate cuts or raises rates, then US economy is handling nationwide housing slump well
e) will secondary mortgage markets repair themselves, leading to looser, but still tight lending standards
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Comments (3)
Congratulations Noah! on making the list of the Top 25 Most Influential RE Bloggers.
Posted by ARDELL | October 4, 2007 2:03 AM
THANKS!! Coming from you its always a great honor!
Posted by Noah | October 4, 2007 9:01 AM
We're getting signs of life here in Las Vegas. We were the biggest of the big runups, and the doom and gloom reporting here is tremendous. But I've had 3 listings sell this month, and the buyer calls are up 300% from last month.
Found you from the top 25 list! Congratulations.
Posted by Uncle Jack | October 4, 2007 7:14 PM