Summary: The slow-down is just starting
For a few years now, there has been talk of a coming bust in housing. Most commentators don’t expect a bust in the stock market sense, but more of a plateauing for a few years, where prices don’t move, and not as many new entrant buy homes. Indeed, in some states, this might already be underway. [Where do I get these figures?]
In the last 2 Barron’s “round tables”, one investor recommended shorting the builder’s stocks (Pulte, Toll Bros. etc.). The stocks have finally come way off their highs, having peaked around July 2005.
Reading Pulte’s report, I find that demand is still high for their homes. Does that mean the bad news is in the future? or that the markets are expecting worse than what is really to come? Toll Bros. stock has fared much worse than Pulte; their report says that home prices have stagnated in most of their markets. It also says that demand has been weaker in the last quarter.
With things like this, the bad news trickles out. So, my guess would be that these stocks have at least another year of sideways or downwards move before we get to real depression.
Here’s what Freddie Mac’s chief economist says (Mar 9, 2006:
“Although the signs are mixed, the housing industry is now beginning to shift into slower gear, and higher mortgage rates will only strengthen that change. We expect housing starts to wane by over five percent in 2006 and home sales to ease by about four percent. However, we see no signs of a bursting bubble, but rather a return to a more normal pace of activity.”
“For many months economists have been speculating that the housing market was about to change course … Yet the statistics refuse to definitively indicate the direction of the market. The Conventional Mortgage Home Price Index for the fourth quarter of 2005, released March 2nd, showed that annual growth in home values hit 13 percent nationally. Housing starts in January hit 2.28 million units, the highest pace since 1973. No signals of a cooling housing market here. But sales of both new and existing homes fell in January and the inventories of existing single-family homes and condominiums for-sale rose to their highest levels since 1999. These contradictory statistics are signs of a slow down.”
Freddie Mac is projecting 2005 to be the peak year for both sales and housing starts, with the numbers going down all the way into 2008. However, in Jan 2004, they were predicting that 2004 would be the peak year, with things going down in 2005 and beyond. I guess the lesson is that we’ll know a year was the peak when we actually see a year that went down. And it still won;t be too late.
In other words, it might take till Q1-2007 before people are convinced that the peak in housing was for real [or, alternatively, to continue to think it is just around the corner]. Given this, there does not appear to be any upside for housing stocks in 2006.
(See this post for more on home-sales.)