Yet another housing data point to digest. This time it’s the monthly New Home Sales report from the Census Bureau. It looks like all of the headlines concerning the release are touting a 3.3% rise in new home sales from last month (to an annualized rate of 526,000), and a number of articles are once again implying that, again, this may again be yet the latest sign again that the end of the real estate downturn again is here – once again.
Most of the articles I've seen either ignore or glance over the fact that last month's figure was revised down from an annualized rate of 526,000 to 509,000. So, if last month's figure hadn't been revised lower, this month's figure would have been dead flat with last month. Depending on your level of optimism or pessimism, that's either 0% growth or a 0% decline, but it's definitely less than 3.3% growth. It is, however, a nice easy way to manufacture growth. Personally, I'm thinking of revising my April intelligence lower by 10% to boost my self-esteem this month.
To be fair, the report itself isn't completely terrible. The months-of-supply figure (how long it would take to sell the new homes currently for sale given the current rate of sales) fell modestly from an absurdly high 11.1 months to a ridiculously elevated 10.6 months. That's the right direction, but only time will tell if it's the beginning of a trend. It does illustrate what needs to happen to get back to equilibrium -- builders need to build fewer houses relative to the level of sales. You can track all of the home price data, builder optimism surveys, permit numbers, and sales info you like, but residential housing isn’t going to bottom out until the months-of-supply (inventory) figures for both new and existing homes get a lot closer to normal levels.
As an aside, those who are clamoring for a return to normalcy (which I think includes everyone) should be embracing the fall in housing prices. The lower prices will make housing once again affordable to more people and thus lead to the higher demand that the housing market needs. Moves by Congress to offer "aid" and to "support" the housing market at best will forestall the correction in prices that must ultimately occur to get back to equilibrium.
Despite having strong contrarian sympathies, I currently remain modestly short the real estate sector -- primarily through exposure to two ETFs (long SRS and short XHB). I suspect the real estate shakeout will take longer to occur than many think. Furthermore, it's very unlikely that we'll experience another real estate boom for quite some time.
The home builder industry is likely to emerge a bit smaller and more consolidated with rather unspectacular growth and margin opportunities. Even once they bottom, I imagine that there will be more fertile pastures elsewhere - probably in fertile pastures (I like agriculture.). That’s not to say that there may not be some intriguing deep value plays at some point, but at the current time, my strategy with the housing sector is fairly straightforward -- short substantial advances, cover on the declines, and some day finish staining my deck.
