The double dip is right around the corner, if not already beginning.
In past recessions, the Federal Reserve could lower interest rates to spur purchases of homes and automobiles, and Uncle Sam would spend more money.
There is no political will for another large stimulus package. Even a relatively modest $80 billion proposal that’s now on Capitol Hill is meeting resistance from moderate Democrats.
With the lack of stimulus, the big loser is housing. There is no help in sight, and with interest rates at zero the Fed can’t use a rate reduction to stimulate housing. Finally, the tax credit is gone, and there is no willingness on the Hill to extend it.
Direct federal support is hitting its limits. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are now making 97% of all loans, and they’re both going to hit their statutory lending caps set by Congress before the fall elections — and these caps might not be increased.
There is no jumbo mortgage money available to anyone, and homebuilders can’t get the credit they used to have available to lend directly to buyers.
The United States is less than one-third of the way through foreclosures, and foreclosure remediation is a dismal failure, as roughly two-thirds of people getting help eventually default anyway.
There is too much housing inventory, the inventory is growing, and more than 1 million homes in default or foreclosed on have yet to be listed. I expect this situation to continue, which will only put more pressure on prices and new home building through 2012.
The bottom line is that housing and the homebuilders are about to fall off a cliff.
3 Ways to Profit in the Housing Sector
Beazer Homes USA, Inc. (NYSE: BZH) is rolling over with the sector. The BZH Aug 5 Puts (BZH 100821P00005000) are deep in the money and may soon catch the eye of day traders. Buy them for $1.35 or less.
KB Home (NYSE: KBH) has broken down, but the $12 level may provide some short-term support. So look at the longer-term KBH Oct 12 Puts (KBH 101016P00012000) under $1.65. Buy on pullbacks. (They traded at $1.15 Monday, and the stock closed below $13—Editor.)
SPDR S&P Homebuilders (NYSE: XHB), an exchange-traded fund (ETF) for the housing industry, has also been rolling over. Buy the XHB Sept 13 Puts (XHB 100918P00013000) up to 72 cents.
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