The Smart Profits Report: Issue #407
Tuesday, March 27, 2007
Housing Starts: The 16-Year Real Estate Party Is Over... More Woe In Store For Real Estate
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
This time last week, the market just capped off a solid day, following news that February housing starts climbed 9%. On the face of it, that's all well and good. But for me, the data wasn't a cause for celebration. While 9% was a solid rise, the improvement was calculated from figures in January - numbers that were 9-year lows! After taking a massive swoon, a reverse move upward is expected. This got me thinking about the housing market in general. And having plowed through the data and charts, it seems to me that this is a "house of cards" (pun intended) that could get much worse before it gets better. So let's look at some key indicators out there and devise a plan for dealing with this huge economic driver... After A 16-Year Run, The House Party Is Over If you take a look at the charts below, first showing the figures for housing starts and permits from January 1991 to January 2007, then a closer look at the numbers for the past year, you can clearly see the current trend. 
When you take the broader perspective into account, it's tough to interpret the small rise in February housing starts. Additionally housing permits fell again in February - an issue that was overshadowed by the better-than-expected housing starts number. And the data on sales of new homes in February that came out yesterday was less encouraging. Beware The Biased Reporting There's no question that commercial and residential real estate makes up a huge part of the U.S. economy. But because so many people are now feeding at the real estate trough, it's tough to find unbiased comments about the market - especially when almost everyone has a vested interest in a continually rising real estate market. Just about every word on the housing market that is printed or spoken in the media is put through that biased filter. That means even the smallest victory is celebrated when it may not actually be good news for the real estate market. There are some new wrinkles in the real estate market that make the housing bubble "different this time." While we (and other countries) have witnessed normal housing boom and bust cycles over the years, there are two huge mitigating factors that accompany this one: - Not Learning From 1929: Failing to take a lesson from the 1929 stock market crash, regulators have allowed lenders to extend unprecedented leverage to real estate buyers. We have seen what may be only the tip of the iceberg with the problems in the sub-prime lending market.
- Public Company Pressure: Because there are a large number of homebuilders listed on the stock market, these companies have keep chalking up consistently good results - both for the good of the market, as well as their shareholders. And when they can't (like now), their shares get crushed. In the past two weeks alone, Lennar was the second company to put up earnings that were way down - some 70-80%, and to cap it off, then guide lower for the rest of the year. Result? Lennar dropped from a close of $45.58 last Friday to an intraday low of $42.64 today, before closing at $44.50.
With these two big problems, more trouble is looming... New Home Starts Up + New Home Sales Down = Investor Beware As the numbers showed, new home starts in February rose solidly - albeit from very low levels. But new home sales declined by 4% - below the consensus estimate of almost all analysts. This is the news that had the stock market reeling on Monday - and is another warning sign. But here's an even more disturbing sign in the new home sales: There were big downward revisions for the last three months of data. This shows that the market may be even weaker than first imagined. So given this data, what's a prudent investor to do? I strongly suggest that you not try to catch a falling knife in the housing market. Just last weekend in Denver, I spoke about investing principles at a predominantly real estate conference... and I heard one horror story after another from both brokers and investors. No matter how good the bargain looks, it's always wise to look for solid proof on the price charts that the market has really turned from down to up before jumping in. Great trading, D. R. Barton, Jr. Today's Smart Profits Cribsheet - Early Tuesday morning, Standard & Poor's added to the real estate market's woes, with numbers that showed the average price of a single-family home dropped 0.7% in January, compared with January 2006. It was the worst performance for the S&P/Case-Shiller index - a measure of real estate growth in 10 major metropolitan areas - since January 1994. On a broader scale, the S&P/Shiller 20-city gauge showed a 0.2% decline. According to Robert Shiller, MacroMarkets Chief Economist, the data demonstrates the "dire" state of the real estate market across America.
- When a crucial market like housing turns volatile, you can either wait patiently for the storm to pass... try to time your investments (a risky proposition)... or look overseas for better opportunities while the U.S. market corrects itself. And today, the best opportunities are increasingly found abroad, not in the U.S. In a recently-published report, you'll find out five advantages of international real estate and three ways you can profit. Even better... the report includes 31 other top investing and wealth-building secrets from the world's foremost moneymaking experts, who boast over 480 years of experience between them. Find out how to consistently dodge the stock market's bullets and book gains of 119%, 190%... all the way up to 4,001% a year. For more information.
Related Articles: The Chart of the Week While the market has been chopping around, we find strength among one of the typical safe havens - utilities. The S&P Select Utilities Spider (AMEX: XLU) is almost back to it's all-time highs from late February. 
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