Homebuilding stocks have skyrocketed so far this year. The Home Builder ETF (XHB) is up 16%, and KB Home (KBH), is up 76% and Ryland Group (RYL) is also outperforming, up 23%. Almost all the homebuilders are up more than the 8% gain for S&P 500.
The melt-up in housing-related stocks is similar to what occurred at the same time a year ago. Back then, investors widely believed the US economy was coming back and therefore the housing market was bottoming. Then reality hit and real estate stock prices were knocked sharply lower.
Last years false dawn is reoccurring all over again. Joining me today to talk about why that is so is Mark Hanson, Managing Director of MHanson.com. Mark tracks what is really going in global real estate markets, and he was ahead of the curve in predicting the U.S. housing market’s 2007 bubble burst.
Mark explains why the current false dawn for real estate is very similar to last years and what lies ahead for real estate stocks:
To summarize Mark’s key reasons:
- Despite the seemingly better numbers; in reality home sales and prices remain depressed even with some of the most favorable conditions imaginable; such as historic low mortgage interest rates, low prices, unseasonably warm weather, etc, etc.
- Move up buyers are not participating in this housing market. First timers and investors are the only home buyers today. The real problem with the health of the housing market is that most current solvent homeowners lack enough equity in their current home to sell and buy a move up. This housing market will not recover until move up buyers come back into the market.
- Like last year, demand is being pulled forward as a result of massive government stimulus. Yet despite all the stimulus home sales are anemic and prices are still at lows.
- Then there is an enormous shadow inventory of homes not reflected in the official data. This excess supply has to put a damper on prices.
- Lastly, defaults and foreclosures on jumbo mortgages are rising sharply and the prices of higher-priced homes will continue to fall hurting the high end markets the most.
The bottom line is that the housing market remains structurally broken. It took 20 years for the housing bubble to blow itself up. Given the structural impediments that still exist, it will take a lot more than four years for this housing market to stabilize, let alone rebound (to sell and re-buy requires paying a realtor 6% and put 10% to 20% down on a new house).
Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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I agree with you James. I think any program that helps clear the teonnivry is great and should be the focus. I still believe strongly that you have a tremendous supply of buyers that want to buy but can’t buy because they were a victim of the economy. Seems like some type of simple insurance product that they could opt to take advantage of, which would make lenders comfortable enough to lend to someone that doesn’t meet the typical guidelines. Or maybe there’s another idea to tap into this pool. It’s a big pool. I couldn’t agree with you more, if someone wants to rent, great. If they can’t afford to buy, they shouldn’t. I’m an investor too, and love to have a steady pool of renters out there. But, this bubble of buyers that are now renting mainly because they lost their homes would willingly help clear out that teonnivry. Your ideas would also be a huge boost too. I like the idea of benefits to those investors that put down more. Thanks for the post! ^ Andy