More pain for housing stocks?

A sustained recovery in home prices and homebuilding shares remains elusive.

By Anthony Mirhaydari Feb 19, 2010 5:05AM

MirhaydariThanks to a combination of ultralow interest rates and massive government support, homes prices started to climb early last year -- ending three years of pain that cut 30% off of the peak values reached in 2006. For many, it seemed as though the housing implosion was finally over.


Unfortunately with many of these supports about to end, and with the underlying supply-demand relationship still soft, another round of price declines looks inevitable. This is the opinion of the global economics team at Deutsche Bank doesn't expect home prices to put in a definitive bottom until 2011 as the inventory of vacant homes remains high and foreclosures continue to mount.


Even if you have a low opinion of economists and their forecasts, the stock market is singing the same sad tune about the housing market. Right now, after testing resistance at the top of a seven-month trading range, homebuilder stocks like D.R. Horton (DHI)Toll Brothers (TOL), and  Lennar (LEN) have stalled out and are starting to roll over.




There is good reason for this. The Federal Reserve has already started to tighten policy, raising the interest rate it charges banks on Thursday. Next month, the central bank will also stop buying up mortgages -- which has helped keep mortgage rates low, boost affordability, and keep home prices from falling.


As a result of all this, Barclays Capital expects mortgage rates to climb by at least 1.5% by the end of the year -- which, according to their research, will dampen housing demand by more than 11%.


Also, the federal government's support to housing will soon end. The first-time homebuyer tax credit will end April 30. The FHA is expected to tighten lending standards. All of this suggests demand for new homes will remain at low levels for the homebuilders.


Adding insult to injury has been the recent rise in lumber prices -- which are up 96% since the beginning of 2009 as wood mills cut production in response to the housing meltdown. This doesn't bode well for homebuilder profitability.


My positions


To take advantage of the situation, I've added a short position in Lennar to my portfolio at Wall Street Survivor. Also, after riding the market higher this week (previewed in my previous post on Tuesday), I've closed out the majority of my long positions.


For the month, my holdings are up 10.9% compared with the 2.5% rise in the S&P 500. Overall, I'm up 59% since the portfolio was initiated in September.


Disclosure: The author does not own or control a position in any of the funds or companies mentioned.


Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at Feel free to comment below.

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