There’s a whole lot of fuss on Wall Street right now about the impact of a first-time homebuyer credit expiring this week. The $8,000 question — whether the housing market will continue to improve without the payday, or whether we are in for another round of falling home prices and rising foreclosures.
There’s no doubt that 2010 so far has been very profitable for housing stocks. But are those profits going to stick?
Take the SPDR S&P Homebuilders ETF (XHB). This ETF is up over 30% year-to-date thanks to strength in its component companies — but many of the top holdings such as Pier 1 (PIR) and Williams Sonoma (WSM) are more closely related to retail than home sales.
Or take building supply company Eagle Materials (EXP), which is up almost 50% since March 1. The Eagle Materials earnings report yesterday trounced forecast and sent the stock soaring, but the EXP only barely squeaked into profitability on the quarter.
As you can see, there’s no shortage of evidence on either side of the argument. From the bears who scoff at soaring valuations for homebuilders to the chart geeks who insist housing stocks have more room to run, everybody has evidence to support their theory.
Take them with a grain of salt, but here are five popular reasons for being bullish on the housing market right now:
- Red hot new home sales: New home sales improved in March at the fastest single-month rate in 47 years, with a 27% jump. Yes, part of this has to be attributed to a rush to squeeze in sales before the tax credit expires, but a jump like that can’t only be driven by an check from Uncle Sam.
- Existing home sales equally strong: Existing home sales jumped 6.8% in March, according to the National Association of Realtors. Sales year-over-year were up 16.1%. That’s a great sign because March is the real kick-off of the real estate season. As the weather improves and as consumer spending continues to firm up, we should see strength across the rest of the spring and summer months.
- Land prices rising: When a California real estate developer refers to the current race to buy undeveloped land for new homes as a “land rush,” you have to take notice. Those are the exact words of Gregor Watson, a partner with McKinley Partners, in a recent Wall Street Journal article. The gist? Land prices are the lowest they’ll get, so buy now and start building for the rebound in home prices. By the time buildings are complete, the market will be on the way up.
- Housing permits strong: You may scoff at these lagging indicators, but look at permit filings — the best gauge of future construction. Building permits jumped to 626,000 in March — the highest level since October 2008. Homebuilders wouldn’t be putting up new units right now if they didn’t have faith prices and sales were moving in the right direction.
- Regional strength in home prices: For those who continue to fixate on Las Vegas and Florida: Remember that the key in real estate is “location, location, location.” Median home prices from March in the Northeast were up 9% percent to $249,800, as many sellers benefited from reduced inventory and more competition among buyers. Many housing markets America are doing just fine – meaning the worst markets have a light at the end of the tunnel.
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