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.

 

XHB

 

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 anthony.mirhaydari@live.com. Feel free to comment below.

1Comment
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

129
129 rated 1
281
281 rated 2
444
444 rated 3
732
732 rated 4
629
629 rated 5
623
623 rated 6
610
610 rated 7
440
440 rated 8
303
303 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.