Right now, we’ve got a giant disconnect — the housing market keeps sinking while housing stocks have been rising.
First, let’s look at the market for homes. The latest data has been simply awful. In August …
Existing home sales dropped 0.5% from July. That was the fifth monthly drop in a row. Sales were down almost 13% from a year earlier.
Housing inventory climbed yet again. The supply of homes for sale hit 3.92 million, a fresh record and up 38% from August 2005. Assuming sales were to stay at current levels, it would take 7.5 months to absorb all of that supply. That’s the worst reading in more than 13 years.
Most important, PRICES dropped. In August, the median price of a single family home fell 1.7% from a year earlier to $225,700. Condo and co-op median prices sank even more — 2.4%.
We haven’t seen a drop in nationwide median prices in any month since 1995. And we’ve only seen them fall by a bigger margin once in 38 years of record-keeping, according to the National Association of Realtors. This chart shows you just how serious the drop is …
Plus, here’s the latest sales data for new homes …
- The Census Bureau said the seasonally-adjusted annual sales rate gained 4.1% between July and August. But here’s the rub: That number was calculated by using downwardly revised numbers. If they had used the ORIGINAL July figure of 1.072 million units, instead of a rise, we would have a decline of 2.1%.
- In terms of supply, there was a tiny drop in for-sale inventory to 568,000 units in August from 570,000 in July. Of course, July’s figure was an all-time record, so the tiny drop isn’t really good news.
Meanwhile, bad news keeps pouring in from housing suppliers, home improvement retailers, and other related firms. Just three examples:
Lowe’s (NYSE: LOW) warned that full-year 2006 profits would be at or near the low end of the company’s previous forecast. The problem? Slumping consumer spending on home-related goods.
Masco (NYSE: MAS), which sells faucets, paint, and other key housing ingredients, slashed its 2006 earnings forecast from a range of $2.40 to $2.50 down to $2.25 to $2.30.
Pentair (NYSE: PNR), a diversified manufacturer, warned that it would miss profit expectations because the weakness in the housing market is impacting its swimming pool equipment business.
Bottom line: There’s been no shortage of bad housing news. But for the time being …
Housing Stocks Have
Enjoyed a Nice Rally
Don’t get me wrong: Housing stocks are still way down from their highs. Indeed, if you dumped them when I warned you about a housing bust a year ago, you could have saved yourself a huge amount of money.
And even if you waited until my warnings grew more dire in January, you escaped relatively unscathed.
However, in the past couple of months, housing stocks stopped going down even though the bad housing news kept coming.
What about the companies I mentioned earlier? They got hit on their bad news, to be sure. Masco dropped a couple dollars in a couple days. Pentair actually traded to a new low. But given the dismal fundamentals, we should have seen even more pain.
What gives? I think there are four forces at work here:
First, bottom fishing. Speculators are loading up on these beaten-down stocks. Their hope is that the worst is over.
Second, a rising tide lifting all boats. The Dow is flirting with all-time highs. So the housing stocks are floating higher with the broader market.
Third, lower mortgage rates. Some investors are betting that the recent decline (about half a percentage point on 30-year fixed-rate mortgages) will re-invigorate sales, and therefore, the entire housing sector.
Fourth, the Fed. Wall Street is expecting the Fed to cut interest rates in the next few months. They think this will also help save housing.
Hey, I’m an open-minded guy. If the DATA shows that the market is picking back up … that lower rates are causing sales to surge again … and that the highest inventories in U.S. history are being worked down substantially … I’ll be fine with saying that a brand new boom is underway.
But that’s NOT what the data is telling me …
If interest rates and the Fed were a real factor, home buyers would be flocking to new mortgages. But instead, the Mortgage Bankers Association’s purchase mortgage application index is slumping again.
Instead, it just dropped 5.5% in one week to a 33-month low. This is happening despite the fact that 30-year fixed mortgage rates have declined almost three-quarters of a percentage point since June.
(For more on why this is so troubling, see my report, “Mortgage Rates Down! Housing Still Falling!”)
Consider the facts:
FACT: We’ve just come off the biggest housing bubble in the history of the United States. Has any massive bubble ever worked itself out so quickly — with just one small decline?
I can’t recall one. Heck, the Nasdaq Composite is still 56% below its all-time high more than six years later!
FACT: We’ve seen the largest explosion in high-risk lending ever. Those loans are only starting to go bad. As the government cracks down on the riskiest loans in the market — and lenders balk at giving mortgages to anyone with a pulse — it will get harder for overstretched borrowers to finance homes even if overall interest rates continue declining.
FACT: So far, sales have been collapsing even though unemployment has remained tame. What’s going to happen if the economy slows and unemployment rises? After all, what good is a cheaper mortgage if you don’t have a job?
Lesson from the Last Bubble:
Don’t Get Caught Bottom Fishing
I keep flashing back to the last time something similar to this happened — the post-2000 tech wreck.
You remember: The stock market got pounded for three years straight. But don’t forget, it wasn’t a straight-line shellacking.
The S&P 500 index peaked around 1,550 in March 2000. In April, it plummeted, losing more than 150 points in a week. But then bargain-hunters swooped in. They assumed the worst was over. They shouted from the rooftops that tech stocks were a bargain.
By September, the S&P 500 had rallied all the way back to 1,530. But the bargain-hunters were premature. The tech bust wasn’t a “soft landing.” Stocks didn’t stop falling until late 2002. Each and every bounce proved to be nothing more than a bump along the path to lower prices.
Just look at a weekly chart of Cisco Systems (CSCO), the poster child of the tech boom.
There were two clear periods where the stock consolidated after big losses … where bargain hunters jumped in … and where ultimately, the stock failed to hold.
Will the same thing happen to housing stocks? The similarities between the two booms have been strikingly similar so far. That’s why I don’t think it’s going to be sunshine and roses from here on out.
If anything, I expect the disconnect between the housing market and housing stocks to rectify itself the same way that tech stocks came back in line with their fundamentals.
The lesson: Bottom fishing can be very dangerous.
Until next time,
Mike
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