Last week we saw a glimpse of what is expected to be a better spring season for real estate, with a 4.3% rise in January existing home sales, along with a drop to from 6.4 to 6.1 months of inventory, but a somewhat neutral 321,000 new construction sales number.
Yet both reports led to a fierce selloff in homebuilder stocks. So what’s going on?
Well, a number of forces are at work. First, homebuilder stocks have run up extensively since October 2011, so it will take some powerful numbers to continue that trend.
However, the tepid new homes report last week just did not measure up. As a result, many homebuilder stocks — such as Ryland Group (NYSE:RYL), Beazer Homes USA (NYSE:BZH), Lennar Corp. (NYSE:LEN) and KB Homes (NYSE:KBH) — were blasted lower. RYL was down more than 3% on Friday, and KBH dropped about 2.6%.
Second, we saw a revision upward in the December new home numbers from 307,000 to 324,000, which actually meant the January sales of 321,000 were down, and this spotlights one of the recent problems in the housing industry. Just a few months ago, the National Association of Realtors had to wipe the egg off its face when the organization admitted its existing home sales reports from the past several years were flawed.
If an industry loses credibility with its data, how can stock analysts trust the numbers that are being presented? Plus, in an election year like 2012, could political pressure be exerted on industry groups to make their numbers appear better?
It seems that more and more data is being revised from previous months. This is a very disturbing trend for three reasons.
- First, people either made or lost money on incomplete or phony data that initially was reported.
- Second, the newest data must be interpreted off revised numbers, which are different than what the analysts used to make their predictions. That changes whether the report exceeds analyst expectations, which often is what moves prices higher or lower.
- Third, instead of trusting the data, Wall Street has to wonder, “Will this new report be revised next month, and if so, will that revision be better or worse?” Without the confidence that reports will be accurate, it is more difficult to assess stock values.
Spring Season Expectations
The real estate industry always looks forward to spring, because that is when homebuyers emerge in full force. With huge price decreases since 2006, historical low interest rates, and recently reported improvements in both employment and housing, it would seem a fait accompli that investors should expect a rosy spring season from the housing market.
Not so fast.
Although prices and interest rates are great, the duo have failed to propel the real estate market during the past two years. There is a deep sense of fear among renters in the 21-to-39-year-old demographic that prices will continue to fall and that home ownership is a bad deal. All they’ve seen since 2006 is price depreciation and massive foreclosures, and that has shaped their world view.
Plus, today’s apartment complexes and rental condos offer enticing packages of workout rooms, in-ground pools, tennis courts, lakes and walking trails. These features are very alluring to Millennials, even if they are paying higher rents to get them. Many do not want to give up these perks, nor do they long to own a lawnmower or snow shovel. Having seen their parents struggle, they no longer share the dream of home ownership that previous generations had.
A View From the Inside
Talk with mortgage and real estate industry insiders, as I do on a regular basis, and you will get a much different perspective of the market. The Dodd-Frank Act has created a nightmare of regulation in the mortgage industry, and has put many of the smaller companies out of business.
The journey from contract to closing continues to be difficult, with a high percentage of deals never closing escrow. More than a third of all real estate closings continue to be investors buying lower-priced foreclosures. The recent reports of lower inventory do not include the next wave of foreclosures, which will be released over the next 12 to 18 months, following the settlement between the 50 attorneys general and the five largest banks.
What Should Investors Do Now?
My advice is to avoid most housing-related stocks for a while longer. Homebuilder stocks are pulling back, and should not be bought until their correction runs its course. Home Depot (NYSE:HD) had a good earnings report last Tuesday, but the stock failed to rally the rest of the week. Home Depot also seems very overextended after running up from $31 in October to its current price around $47.
However, one investment that looks better is the iShares FTSE NAREIT Residential Plus Capped Index Fund (NYSE:REZ). This is an exchange-traded fund of real estate investment trusts that invest in apartment buildings.
Click to EnlargeREZ recently pulled back from $46.70 to Friday’s close at $44.90 and is sitting on support at the 50-day moving average. REZ also sports a 3% dividend yield, and its total return in the past 52 weeks has been 17.42%.
Apartment occupancy rates are extremely high right now, and even if employment numbers improve, most of the Millennials who leave their parents’ homes will move into apartments, rather than buying homes.
So spring might be blooming, but the picture for housing-related stocks doesn’t look as rosy as recent reports suggest. For now, investors might be wise to look for other sectors with better-looking blooms.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.