The last man standing against this sector

Everyone turns optimistic on housing -- except me!

By Motley Fool Pick of the Day Mar 30, 2012 1:51PM

Image: Phoenix © Mark Downey / Lucid Images/Radius Images/Getty ImagesBy Sean Williams


I might just be the last pessimist in the housing sector.


Our president, Federal Reserve Chairman Ben Bernanke, nearly every analyst you talk to, the Fool's own Morgan Housel, and the most recent building permit data would indicate that the worst is behind us and housing is on the upswing. Building permit data released Tuesday indicated a 3.5-year high to a seasonally adjusted rate of 717,000 homes. This is not even one-third of the 2.27 million peak reached by new housing permits in January 2006, but it's been trending higher for a few months now and homebuilders' sentiment is also at a five-year high.


Individual homebuilders have also shown moderate new order growth and have rallied on the prospects that things are, simply, not as bad as once thought. In January, Lennar (LEN) reported a 20% pop in home orders while D.R. Horton (DHI) profiled a 13% rise in net sales orders and an 18% jump in backlog.


You might be wondering how someone could possibly be bearish in light of these figures. It's actually pretty easy if you consider the very unpopular possibility that the homebuilders don't have the slightest clue what they're doing.


Think about it. These same homebuilders were calling a bottom in 2008, then in 2009, then 2010, and so on. That strategy ensures they'll eventually be right, but who's to say that this is the year we hit bottom? The data so far would suggest the descent of building permits has stopped, but it hasn't done a thing to address the glut of vacant housing already on the market.


According to RealtyTrac, there are 1.35 million foreclosed properties waiting to be sold with LPS Mortgage Monitor predicting another 4 million foreclosures will hit the market over the next two years as banks begin to take possession of foreclosed properties. It's not a coincidence that housing prices have been steadily dropping ever since foreclosures flooded the market, and I think it would be a misconception to assume that's going to change anytime soon.


I also wonder just what homebuilders are thinking by ramping up new orders when, based on data by mortgage-data research firm CoreLogic, 11.1 million homeowners (22.8% of all homes) were still underwater on their mortgage as of the fourth quarter of 2011 -- and count me as one of them! This figure has dropped a paltry 0.2% since the third quarter of 2009 despite massive efforts by the U.S. government and the financial sector to buoy home prices and make home loan refinancing easier for homeowners.


I'd also love to see if new home loan mortgage applications dry up with the 10-year Treasury yield spiking nearly 40 basis points over the past two weeks. While there is no precise correlation, the 10-year Treasury yield often moves in tandem with the 30-year mortgage rate. A rise in the yield often leads to a rise in the 30-year mortgage rate and vice versa. A few months back I expounded on consumers' hypersensitivity to even slight blips higher in mortgage rates, so this move up could put a stranglehold on this small glimpse of homebuilding green shoots.


I'm not a complete dolt; I do feel the housing sector will rebound at some point. I just feel we are nowhere near that turning point despite what the data right now are suggesting.


Housing bulls, let me hear from you in the comments section below: What am I missing here?


Fool contributor Sean Williams has no material interest in any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's won't slam the door in your face.

Mar 30, 2012 6:06PM
You need a job to buy a house and the jobs really aren't out there. A 10$ an hour job won't buy you a 150,000$ house.
Mar 30, 2012 3:07PM

It may not be the bottom but if you're saying now is a bad time to buy for a first-timer you're crazy IMO.  Rates around 4 to 4.25% on a 30 year fixed and home prices are down everywhere.  A friend of mine just bought his first home in March, mortgage with escrows are less than his rent was, very nice subdivision, and he paid about $100K less than all his neighbors did 3 to 4 years ago.  Good for him.....

Mar 30, 2012 5:29PM
Try asking the people who are really hurting because of the price of gas, low wages, etc., if it's at all a possibility that they can even purchase a home.  Most people do not have a minimum of 20% to put down on a home that will soon decrease in value anyways.  Absolutely no one I have asked feels comfortable even paying the market prices (however much they've been reduced) for a home, much less try to build a new home!  Absolutely no one is secure these days with their home value or considerations to purchase a different home, whether new construction or old.  People that choose to have a new home built are nothing but wasting money, all prperty will decrease again.  We have not yet hit the bottom, I don't care what report you read.  This includes you idiots that think just because the DOW closes high continually, they economy is getting better!  It's not getting better, nor will it get better.  In my opinion, people should not be building new structures, they need to utilize what is vacant, and purchase existing bulidings, homes, etc.  Why claim to be green if you do nothing to be it!  I am currently trying to consider buying a home, but refuse to make any move as of yet.  This spring and summer, prices will fall yet further across the nation.  It's plain common sense to see and understand what is to come. 
Mar 30, 2012 5:55PM

People seem to constantly get confused about analyzing houses.  They are, or can be, two different things:


1.  The housing market can be viewed as an investment with the intent of directly producing income,  This is through buying homebuilder stocks, REITs, or the like, basically just like buying any other stock.


2.  Houses also have a utility value, in the sense that provide a place to live.  If you own your house, this is their primary benefit.  Even if the house goes up in value, it doesn't really provide a sensible income stream.  However, it is a very good way of minimizing your living expenses over the long term.  It can save you money, but it won't make you money.


The author should distinguish between these two things, because it is important.  I think it is a good time for home-buyers due to low prices and low interest rates.  The other question is, 'are homebuilder stocks a good investment right now?' - that's a totally different question.

Mar 31, 2012 1:27PM
Until the good paying full time jobs come back and inventory decreases, housing will remain in the tank.
Mar 30, 2012 5:07PM

I have been looking for about 1 year. I will be buying VA so the house has to meet better standards than most.  I have seen several REO properties and they are generally full of problems.  If purchasing from a homeowner, they want of course to preserve what equity they thought they had until the bubble broke, so they are not dropping price very much.  I also see investors buying into areas.  I recently saw a short sale that i was really interested in but my realtor said it was going off the market because the bank didnt want to eat the loss and figured it would  put it on the market a year from now.  I expect they will evict the residents.  It appears that the banks are not as motivated as i would think.  No i am not bullish on buying....Since i am now single and kids are grown, i only need 1 or 2 bedtroom and a townhouse looks good.until you see that the HOA fees are $300. per month........and no guarentee that they will not go higher.  Think i will rent. There are plenty of rentals and they are building more like crazy around here

Apr 1, 2012 7:45AM
Our economic problems are far deeper then housing. Our economy is not setup to adapt to the world we live in. Furthermore, I don't see the economic or political leadership that will bring our economy into the future. America has a lot of chaos to go though before we manage our economic problems. 
Mar 30, 2012 8:55PM
Most here are missing the point.  He's not talking about a bad time to buy, he's talking about a bad time to build if you are an investment builder.  With another wave of foreclosures hitting the market those new homes will will not likely turn a profit.
Mar 30, 2012 4:58PM

Ya if you have mony for a big down payment then yes, now is the time to buy,but I don't!

Mar 30, 2012 11:09PM
I recently purchased a house that was listed two years ago for $295,000 and I bought it for $203,000 with a 30 year mortgage at 3.875%.  

That is a nice mortgage rate, but remember a house is only worth what someone else is willing to pay for it. Sales only take place if someone pays cash, or is able to get a loan. 
Mar 30, 2012 7:34PM
lots of empty houses around me.  makes the neighborhood look unkept. 
Mar 30, 2012 6:00PM
OK, fair enough. You believe housing is a long way off from rebounding because,..........there are a lot of foreclosed properties ready to hit the market. So?  I recently purchased a house that was listed two years ago for $295,000 and I bought it for $203,000 with a 30 year mortgage at 3.875%.  Yep, I'm a fool all right. I have never seen mortgage rates this low, ever. Actually I looked it up and even at the height of the Great Depression it was only 3% maximum. And the home wasn't over priced by $92,000, the owners needed to move and I made the offer. Now, does anyone with an ounce of sense, not understand that when markets move, they can move fast, often without warning or rational? 
Mar 30, 2012 11:18PM
 He's not talking about a bad time to buy, he's talking about a bad time to build if you are an investment builder.  With another wave of foreclosures hitting the market those new homes will will not likely turn a profit.  

Well, I sure would not do any spec homes. I thought multi-family homes were being built.
I suppose if they built something a reasonable size and a starter home or one level retirement home it would sell. Problem is lots are so expensive now.
Mar 30, 2012 11:12PM
. I have never seen mortgage rates this low, ever. Actually I looked it up and even at the height of the Great Depression it was only 3% maximum.   -- Wasn't that about the time the Gov. got into backing mortgages to try to create a middle class, since the private lenders were not willing to take risk?

Mar 31, 2012 3:13PM
Low prices and low interest rates. What more does a potential buyer want? You don't need a 20% down payment for an FHA loan. You do need good credit of course. Rents will keep going up - 3 to 5 % per year will mean a rent increase of 119 % in 20 years. For a soon to be retired person like me there is no choice; my mortgage will stay the same and rent will more than double.
Mar 30, 2012 11:09PM
  I have friends in Cape Coral that bought a foreclosure and fixed it up, ended up selling it for what they put into it. Then they bought a 500,000 (was built in 2005) short sale for 220,000 in 2010. No way was a 1800 square foot home worth 500,000 even if it did have a pool and a dock on the canal.  The homes around it are no longer selling for such a high dollar per square foot either. 
Apr 1, 2012 11:42AM
Prices are inverse to interest rates. When interest rates go up the price of houses go down.
Mar 30, 2012 9:12PM
Everything in Atlanta is still hurting . 
Mar 30, 2012 5:48PM
THERE HAS NEVER BEEN A BETTER TIME TO BUY FOR A COMBINATION OF REASONS...great inventory, amazing interest rates & prices...WOW!!! You have to live somewhere & monthly rentals are ridiculous! If you are going to move, it is now & it will be a very brief opportunity!!
Mar 30, 2012 5:48PM
What about a housing shortage?  People have to live somewhere......
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