If you listen to the mainstream financial media, you’ll get a sense that somehow in the midst of this rather weak economic recovery, housing has come roaring back! That, in turn, will lead to strong and sustained growth for the future. There will also be, as my daughter says, a storm of chocolate raindrops delivered by unicorns and elves.
The truth is that the hard data belies this economic fairy tale. What I’m calling a “false positive” on housing is mainly due to the Fed’s continued foolish policies. Indeed, with government policy being to throw everything it can at the housing market — including mortgage write-downs, never-ending delaying of foreclosures, debt forgiveness, HARP and quantitative easing — it’s amazing that the only recovery we’re seeing is in the form of speculation.
Housing sales aren’t being fueled by average folks looking to buy a home. Just 61% of buyers are purchasing primary residences, the lowest number since 2005 and down from 70% in 2008. Meanwhile, speculators accounted for 27% of housing sales. They’re buying homes to rehab and subsequently flip or rent
Anecdotally, hard-money lenders I work with say business is booming. These are the guys who’ll make loans to speculators that places like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) won’t touch.
We see this in the form of mortgage applications remaining flat while existing-home sales are rising.
What I see happening is another mini-bubble. Home prices are being artificially supported by the Fed’s zero-interest-rate policy and the trillions it has thrown at the housing market. Speculators are buying and flipping, part of what caused the housing crisis to begin with.
The only questions is: How widespread are mortgage-packaging and derivative-selling this time around, and do bond insurers have enough liquidity? I don’t like the direction this is headed in. First, it shows what I’ve been saying — that we aren’t in a recovery and in fact are headed for another recession. Second, it’s creating an artificial bubble in assets … again.
Still, that doesn’t mean money can’t be made. The rental market is booming because speculators are focusing on multifamily housing. A lot of homes are being built specifically for rental. Therefore, the homebuilding stocks are the place to be for some speculative gains. Lennar Homes (NYSE:LEN), Ryland Group (NYSE:RYL), Beazer Homes (NYSE:BZH) and Standard Pacific (NYSE:SPF) could all move higher.
But you better set stops and have an itchy trigger finger to get out, because it could all collapse quickly.
Apartment REITs are another place to look. Avalon Bay (NYSE:AVB), Equity Residential (NYSE:EQR), and UDR (NYSE:UDR) are the largest. Although the shift from owning to renting is largely over, I think a second wave may come as we fall back into recession.
So, I think these stocks still have upside, and they also pay modest dividends. Avalon pays 2.9%, Equity Residential pays 2.4% and UDR pays 3.8%.
As of this writing, Lawrence Meyers didn’t own a position in any securities mentioned here.
