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U.S. Housing Market Changes Opening Up Surprising Pockets of Investment Value

Housing-Market / US Housing Apr 24, 2010 - 02:41 PM GMT

By: Mike_Larson


Best Financial Markets Analysis ArticleBoy did last week’s column prompt a lot of comments. And frankly I’m not surprised. Many people thought I was nuts when I called the housing market top in 2005. They simply didn’t believe my prediction that the market would crash, rather than gently level off.

A key reason: The mainstream press and traditional Wall Street analysts were leading them astray. Those guys couldn’t stop pointing out how everything was GREAT. They forecast sunshine and roses, with home prices supposedly growing to the sky forever and ever.

Now many people don’t want to believe the message I began communicating a year ago. I pointed out in May 2009 that I saw early indicators of a shift in housing market conditions. Heck, I went even further. I suggested that investors cover any “short” positions in housing-related stocks … and even begin looking for pockets of investment value.

How’d that call work out?

Between May 1, 2009 and a few days ago, the benchmark Philadelphia Housing Index (HGX) increased more than 32 percent in value. Then this week it made a massive upside breakout. Multiple stocks in the sector have doubled, tripled, or more. And the price of lumber — a key input in home construction — has soared from around $160 per 1,000 board feet to $322. That 101 percent gain makes wood one of the best performing commodities on the planet!

Bottom line: You can’t believe everything you read or hear in the mainstream press or on TV. You have to consider the variant view — that the time for doom and gloom is past, and the time for unearthing pockets of investment value is at hand!

Critical Answers to Key Housing Questions

Before I get into some of the places I’m looking for value investments, let me address the questions I keep getting over and over, especially in the wake of last week’s column. I hope my answers will help you avoid the unhelpful skepticism that is blinding so many others to real money-making opportunities.

Q. Don’t you know that millions of foreclosures are hitting the market? How the heck can you have a recovery when that’s the case?

A. Do I know that? Of course I do! I’d be a pretty lousy analyst if I didn’t. But you know what? Many of those properties are being ABSORBED. They’re being priced aggressively, and they’re being snapped up quickly. Some are ending up in the hands of investors. But many are going to traditional buyers who can actually afford to buy homes again thanks to the collapse in prices.

Here’s something else that isn’t being talked about much:

While late-stage delinquencies (90+ days) and loans in some stage of foreclosure have piled up like crazy, there is some evidence of stabilization in early-stage delinquencies. That’s not just in mortgages, by the way, but also things like credit cards.

So yes, we’re dealing with a mountain of distressed inventory. But it’s not getting bigger, and leading indicators suggest we’ll see improvement before long.

Q. Banks aren’t making loans any more. Nobody can get a mortgage!

A. This is another media canard. Yes, standards are much tighter than they were a few years ago. That’s a good thing. But the tightening trend has long since stopped getting worse. If anything, conditions are starting to gradually ease again.

Case in point: The Fed’s Senior Loan Officer Survey on Bank Lending Practices. This quarterly survey chronicles how willing banks are to make various types of loans, including home mortgages.

In the worst depths of the housing crisis (Q3 2008), a net 74 percent of the institutions surveyed were tightening standards on traditional home mortgages. It truly was almost impossible to get a mortgage.

Lending standards are starting to loosen.
Lending standards are starting to loosen.

But that number has shrunk steadily since then — to just 13.2 percent in the first quarter of this year, according to Fed data. That’s the best reading going all the way back to the end of 2006! I’m also seeing a bit of easing in jumbo loan qualifying standards. Even the mortgage securitization market is starting to stir again after lying dormant for many, many months.

Q. What about “shadow inventory?” Aren’t banks sitting on a mountain of unsold homes? When they dump that junk on the market, it’ll crater everything!

A. Yes, shadow inventory is out there. Banks, Fannie Mae and Freddie Mac, and other parties do have a lot of property that they own outright. Other homes are still nominally owned by borrowers. But those borrowers are way behind on payments. By all rights, these properties should be quickly seized, then sold to new buyers. And if that happened, then prices would crater.

But that just ain’t going to happen! The government has made it entirely clear that they will NOT force those parties to liquidate.

Banking regulators are going to let some of the inventory fester while they look the other way. Policymakers are also going to continually add more goodies to keep lenders from foreclosing … and add more sweeteners to lower borrower payments via the loan modification process.

Heck, some homes are being foreclosed, then rented back to troubled borrowers!

So yes, there could be a few million “shadow” homes to deal with. But they’ll be dealt with over time — parceled out into the market rather than dumped all at once. This will keep the recovery from being a vigorous one, but will also avoid a fresh sizable NEW crash in home prices.

Q. You’re on record predicting a surge in interest rates. Won’t that pummel housing?

A. Later on, higher rates will cause problems for housing. But not right now. Mitigating factors should offset the impact of higher rates during the first phase of the rate climb.

Remember, rates are rising in conjunction with an improvement in the global and domestic economies. Job losses are easing and consumer confidence is improving somewhat. Those forces will likely compensate for higher financing costs — until rates rise fast enough and far enough to overpower them.

Think I’m nuts?

Then consider this: Thirty-year fixed mortgage rates surged 33 percent from 6.49 percent in October 1998 to 8.64 percent in May 2000. During that same time, home sales plunged, right? Wrong! Existing single-family home sales held steady at around 4.57 million units. New home sales dipped a barely noticeable 4 percent.

Bottom line: When rates rise far enough and fast enough to win the battle with improving economic conditions, THEN you want to worry. But not until then. Until then, focus on what I keep harping on — the FIRST-ROUND impact of rising rates, such as plunging bond prices and how to profit from them.

Oh and in case you’re wondering, within a day of the first contract on my house falling through, I had multiple new showings. A replacements contract was signed less than a week later.

Nothing’s certain in this market, of course. This sale could fall through too. But you can clearly see that when the price is right, buyers are ready to act. That’s a big difference from 2008 and early 2009.

Some Contrarian Ideas to Ponder

So what does this all mean from an investment standpoint? That you can continue to find profit opportunities tied to evolving conditions in the housing market — if you know where to look!

Demand for lumber is on the rise.
Demand for lumber is on the rise.

Take lumber. Mills fired workers and shuttered facilities all over the country during the housing crash. Producers basically stopped cutting down trees and processing them into plywood and 2X4s.

But now global lumber demand is picking up again. At the same time, suppliers have virtually no inventory because they’ve liquidated everything. That has helped drive lumber prices to the highest level since 2006. Potential beneficiaries include timberland owners and home improvement retailers.

I can’t share names here, because that wouldn’t be fair to my paying subscribers. But if you do some research, you may turn them up.

Or how about the mortgage insurers?

I told you to dump these dogs every day of the week and twice on Sunday back in the 2005-2008 timeframe. But now they’re starting to rise from the dead again.

Reasons: Stabilizing housing market conditions, the turn in early-stage loan delinquencies, and all the government loan modification programs, which will likely reduce claims going forward. You may be able to find some ideas there.

Then there’s the bond market …

A turn in housing is just one more reason why interest rates have to rise. They are simply too low given the current economic conditions, especially if the growth drag from housing is behind us.

My final piece of advice: Don’t let dogmatic thinking or just plain bad reporting blind you from opportunity. That destroyed the real estate bulls back in 2005, and it could cost real estate bears big bucks today.

Until next time,


P.S. I’ll be attending the Money Show at Caesars Palace in Las Vegas in early May, and I’d love it if you could join me.

The conference runs from Monday, May 10 through Thursday, May 13. You can register by giving the folks at the Money Show a call at 800-970-4355. Mention the priority code “018207.” You can also register online at

In Las Vegas, feel free to stop by booth #422 to chat. You can also join me for my presentation, Debts, Deficits and the Great Bond Market Crash of 2010-2011, to be held on May 13 from 10:30am-11:15am in room: Octavius 19-20. I’m looking forward to seeing you there.

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