Awful Housing #'s: Good For Long Run

A: Brutal housing data just got released but I would go as far as say that it should be a sign of brighter times ahead. Builder confidence is at the lowest level in more than 12 years as housing permits slumped 7% to an annual rate of 1.23M units. In order to REVERSE the incredible buildup of inventories across the nation, we need builder confidence and permits to FALL so that less product gets built down the road! While the report is not rosy, its a necessary step to fix the problem. These reports all but guarantee bad reports to come in the near future, setting up what could be a good buying opportunity for longer term investors shopping in distressed markets. Contrarians unite!

**NOTE: When I write posts like this one, tapping into my past experiences (1998-2004) as an equities/options trader, be careful NOT to interpret the discussion as an endorsement of an individual stock or sector. I will NEVER recommend buying or selling individual stocks or sectors on this site! That is up to YOU and your financial advisers. This is not a forum that I will discuss my specific long or short holdings in; although I may blip about getting out of a general position. On UrbanDigs.com, I will only discuss how watching a specific equity sector may be a forward indication of renewed confidence in the industry.

According to CNN Money:

Builders continued to slam the brakes on new homes in September, as the government's latest reading on the battered market out Wednesday showed housing starts and permits were weaker than expected at levels not seen for more than a decade. The pace of housing starts plunged 10 percent to an annual pace of 1.19 million from a 1.33 million rate in August. That was the weakest level in just over 14 years. Economists surveyed by Briefing.com had forecast that starts would fall to an a rate of 1.29 million.

Housing permits, which are seen as a sign of builders' confidence in the market, slumped 7 percent to an annual rate of 1.23 million from 1.32 million in August. It was the lowest level of permits in more than 12 years. Economists had looked for permits to slow to a 1.3 million pace.

I wrote a post a while ago discussing whether the homebuilders are in the process of bottoming out as they sector rebounded nicely from lows; "Are Homebuilders Pricing In A Bottom?". One thing to keep in mind from a stock viewpoint as an indication of future health in the industry, is that these home builders will price in a bottom IN ADVANCE! In other words, without the use of hindsight, if the bottom turns out to be late 2008 for the housing market, then the homebuilders will most likely bottom out around APRIL/MAY of 2008 in anticipation of the near term expected recovery. In the post I stated:

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.

And Citi investment analyst Stephen Kim states:

However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact.

Right now, the news is bad, real bad. The next few reports are likely to be real bad as well. No one is arguing that . But this process sets up an emotional element where the bad news is 'so baked in' and estimates go so low, that future reports could come in ahead of expectations and surprise the street. While that is still some time away, it's getting closer. When I see builder confidence at decade lows, and plans to build new product get cut back significantly, I think that a slowing down in the pace of inventory build is near! Reread that last sentence if it seems confusing.

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