StockTouch Blog

Did we hit the housing bottom?

December 7, 2011 by Peter

It’s hard to see the bottom during long-term cycles as they are virtually undetectable in real time. This is due to the fact that they are so loooong and so flat with most market participants loosing interest in the sector, as was the case for stocks back in the early 1980s. Now according to Barclays, the long awaited bottom for the U.S. housing market will come in the year ahead, though strangely enough we think we’ve heard this before.

Barclay’s analyst Stephen Kim points out in this Housing Wire report that the non-distressed home market may have already hit bottom and believes the rest of the market will soon follow.

Kim believes that stability in these prices in the absence of government subsidies is strong signal that home buyer sentiment is improving.  Furthermore, he notes that stabilization in relevant economic indicators such as unemployment and consumer sentiment only strengthens his argument.

Let’s recall December 6, 2006, the date of a previous Stephen Kim research report on housing.

“Citigroup recommended that investors buy shares of homebuilders now as order trends are expected to turn positive in the first quarter of 2007.”

Now having the advantage of hindsight being 20/20 we know that he homebuilders haven’t been so hot since 2007. That being noted, I’m a bit cautious to say we’ve hit the bottom like Kim. As stated in a previous post we believe no twi crises are the same, as such there are a whole slew of new problems that show we haven’t yet reached the bottom. First while Kim points out that rates are low, money still isn’t flowing from the bankers/lenders to buyers which doesnt make it easy to buy. Second prices are still too high. High relative to rents, high relative to median income levels, high relative to other goods historical increases, high relative to building costs…essentially prices need to come down a lot more and Case-Shiller’s HPI futures market are indicating this. Finally inventory is huge in absolute numbers and keeps getting bigger.

Now looking at current market conditions and the haphazard balance sheets of the builders (big piles of debt, loads of inventory that’s not moving, and having more land than Ted Turner), it’s unlikely that the builders’ stocks have reached bottom. As they continue to hold this excess inventory and attempt to unload it, this will continue to prolong the problem, that is until housing supply reaches about 6 months of inventory (which is normal). Investors should also note that the last housing/home building downturn took 17 years to recover to its prior peak level of activity. Not to say we won’t get out of this scenario faster, but if we are to analyze the market in historical terms we need to consider the conditions of the current market, which is a market where lending still hasn’t picked up, where inventory is still too high, and where our best indication on pricing says prices are still too high.



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