Spring is finally here!
Okay, technically it snowed in the Northeast on the vernal equinox a few days ago. But for most of us anyway, the weather is getting warmer, the days are getting longer, and the kids are enjoying some time off from school.
That also means the spring selling season for housing is in full swing! So what kind of season will it be? My research suggests a pretty healthy one.
First, buyer and builder confidence is on the rise. Take a look at this chart of the National Association of Home Builders confidence index. It goes back three decades and you can see two notable declines: One during the early 1990s recession, and a much bigger plunge during the housing market collapse.
But in the May 2009 issue of Safe Money Report Safe Money Report, I wrote a column titled “Housing: A Light at the End of the Tunnel?” I noted that “the sharpest declines in residential real estate are, for now, mostly behind us” and said the downside in most housing stocks was in the past, not the future.
And, sure enough, that’s right around when industry sentiment bottomed. We’ve made back a ton of ground in the few years since then, and we’re now back to the normal confidence levels we saw throughout most of the ’80s and ’90s. That confirms my forecast of a long, drawn out, gradual turnaround was correct.
Second, we just don’t have much inventory of quality, used homes in many markets. Many of the foreclosures and distressed homes that were weighing on the market a few years back have been purchased by investors and converted to rentals. Others have been gradually absorbed over the past few years.
Builders essentially shut down construction during the bust years, too. That means there’s not as much “gently used” inventory as you might otherwise see out there.
Take a look at this chart, which shows current housing inventory expressed in relation to current demand. You can see we only have 4.6 months worth of homes on the market at the current sales pace.
That’s far below the 11.9 months we saw during the depths of the bust, and right back to where things were before the massive bubble was inflated. Five to six months of inventory typically signals a balanced market, so you could easily make a case that builders need to get with the program and start building a lot more homes!
That brings me to my third point: They’re gradually doing so. My local market in South Florida was devastated by the bust. Builders went broke. Prices of some properties plunged 50 percent, 60 percent or more from peak levels. Banks all but stopped issuing mortgages and home equity loans … or failed altogether.
But over the past couple of years, they’ve ramped up activity. Mothballed developments have been restarted. More and more new townhome and single-family communities are being planned and started. Prices are on the rise, and buyer confidence has returned.
On a national basis, in fact, new home sales surged 7.8 percent to a seasonally adjusted annual rate of 539,000 in February from an upwardly revised 500,000 in January. That was far, far above the average economist forecast of 464,000, and the strongest reading going all the way back to April 2008.
Moreover, banks are actually making home equity loans and lines of credit again. They’re doing so at much tighter standards and higher interest rate spreads than in the mid-2000s, mind you. But even that is progress considering how tightfisted banks have been since the bust.
Bottom line: We still face some challenges in housing, including subdued wage and income growth and the threat of higher interest rates down the road. But this should be a fairly healthy spring selling season … and that means there could be some decent profit opportunities in select building and real estate stocks.
That’s something I haven’t said in a long time. But the fundamentals and the charts don’t lie. So I’ve started doing some shopping in the sector in one of my services … and you may want to as well!
Until next time,