Alternative Realities

In End of Housing Slump Seems to Be Drawing Near, the Wall Street Journal reports

[r]ecent firmness in mortgage applications and an increase in new-home sales suggest the housing slump may be nearly over, limiting the risk of wider damage to the overall economy.

Meanwhile, Gene Sperling, offering up his thoughts in a Bloomberg column, comes to a different conclusion. Citing substantial inventory overhang, he reckons that Housing Bears May Just Have it Right for 2007.

In a Nov. 27 comment, [Merrill Lynch chief economist David] Rosenberg notes that in addition to the record 4.3 million residential units for sale as of October, there were 1.95 million home completions, the 12th-highest month since 1979. Units under construction were through the roof as well. Rather than seeing supply dwindle and prices start to firm up in early 2007, Rosenberg says ``it could be a year before the reduction in starts begins to put a meaningful dent into the inventory backlog.''

John Mauldin, an investment adviser and frequent contributor to Investors Insight, a financial-data publisher, throws an extra log on the fire. According to Mauldin, even the current projection of housing sales may be overstated and thus the existing supply of homes greater than what is reported in the official data. The reason is that the Census Bureau, one of the Commerce Department's statistical agencies, fails to account for cancellations in home sales contracts. Cancellations ran as high as 40 percent for some major homebuilding firms last quarter.

As long-time marketwatchers can attest, prices generally don't move in a straight line. A primary uptrend will often be wracked by major downside corrections, while a genuine bear market will see frequent short-covering rallies. These countermoves are noise, however, obscuring recognition of a secular trend driven by compelling fundamentals.

When it comes to housing, vastly more supply than demand seems like the only reality worth paying attention to in the near term.

Comments

[Yaser Anwar]

Interesting comments, if you notice carefully sir, that housing stocks are 6 months fwd looking. I've been noticing this relationship for some time now.

The trade was to get in housing stocks 6 months back and that would have been right, especially considering the #s today.

Similarly today I think its almost time to get in sub-prime mortgage lenders. Sure the #s were good today, on the housing and economic side, but the underlying trend has been weak.

So getting in sub-prime seems about right now, when everyone expects Fed to next cut anytime soon. If we get a few negative blips of data then we'll see the Fed funds say a different story.

I might be a little too early on the trade but 6 months is a long time and I expect some softness to prevail, which may lead the Fed to cut in 2H.

Bottom line- I'm waiting for a correction, to start building positions in the mortgage sector and S&Ls, who will benefit the most from a Fed's rate cut.

I'd like to hear what you have to say, thanks!

[Michael Panzner]

You may be right, but it seems you are betting on a cyclical bounce rather than the secular trend. Given the length and breadth of the bubble we've had in the housing sector and in related industries (e.g., subprime finance), it seems likely that the unwinding process -- along with all of the collateral damage that will cause -- has a long way to go.