Investment Contrarians

Home Prices

Home prices are set by the price a buyer is willing to pay. When this agreement is met, a home sale occurs. As buyers reduce their desire to purchase a home, whether due to loss of a job or other economic stress such as higher interest rates, then home prices fall. Home prices are essentially based on two major determinant: income levels and interest rates. The higher the income level and lower the interest rate, the higher home prices will move up. Conversely, if the opposite conditions are present, then home prices will fall.

How to Profit from a Potential Housing Market Downdraft

By for Investment Contrarians | Nov 1, 2013

Potential Housing Market DowndraftThe housing market has had a nice run up over the past several years, but the party is beginning to fade.

Home prices continue to edge higher with a 12.8% jump in August, according to the S&P/Case-Shiller 20-City Home Price Index. While this seems positive, you also have to wonder if the housing market is headed for a bubble down the road as mortgage rates rise—and they will.

The chart of the S&P/Case-Shiller 20-City Home Price Index below shows the current recovery in home prices. The index is still far below the peak in 2006 and 2007, prior to the subprime blow-up. These were unrealistic levels. We saw downward moves in 2009 and 2012, but it has been clear sailing. Yet the problem is that much of the buying in the housing market was driven by institutional buying. Once this begins to fade as home prices rise, we could see a relapse in the housing market.

S&P Case-Shiller Home Price Chart

Chart courtesy of

We saw a 5.6% decline in pending home sales in September. This metric is not considered as critical as the housing starts and building permits readings, but in my view, it’s a good indicator. In August, pending home sales slid 1.6%. We may be seeing a trend of lower demand for homes, which suggests there could be some issues on the horizon if pending home sales continue to be negative.

Existing home sales were also flat at 5.29 million units in September, down from 5.39 million units in August. Less people are buying homes, and this cannot be good for the homebuilder stocks.

What makes the situation in the housing … Read More

Two Ways to Profit from Lagging Jobs Growth

By for Investment Contrarians | Oct 30, 2013

Lagging Jobs GrowthWith the slew of economic data being released this week, we’re obviously starting to get a better sense of where stocks could be heading over the next few weeks.

Of course, the focus will be on the Federal Reserve meeting today, where it’s really a no-brainer that Federal Reserve Chairman Ben Bernanke will leave his bond buying in place. Now some may argue that it may have been a different outcome if the government impasse didn’t occur, but I doubt that.

The talking points at today’s Federal Reserve meeting? The Federal Reserve will likely talk about how the economy is showing signs of growth, but that it remains fragile and will need to strengthen. The Federal Reserve will also talk about the soft results from the jobs market, and how it also needs to pick up.

The end outcome? A non-response from the Federal Reserve as far as tapering its bond purchases. In fact, based on what is happening, it doesn’t look like any tapering will occur until at least December, but most likely not until Bernanke leaves his post as head of the Federal Reserve in January.

Traders realize the Federal Reserve will keep the flow of money going, which has helped to add support to the stock market. Yet I’m still debating how high stocks can run. The key will be what consumers do during the holiday shopping season that begins in about a month with the critical Black Friday on November 29.

I’m not that optimistic, based on what the retailers said in their September reports. Also, jobs growth continues to be marginal at best, and this … Read More

What Fed’s Monetary Policy Could Look Like Under New Leadership

By for Investment Contrarians | Oct 11, 2013

Monetary PolicyWith news that President Obama will nominate Janet Yellen as the next chair of the Federal Reserve (to replace Ben Bernanke when he steps down on January 31, 2014), I think it’s important to take a look at how monetary policy could change under her leadership.

Yellen has been part of the Federal Reserve system for quite a long time. In one sense, the market will see her as a continuation of the current monetary policy initiatives, as she has been quite close with Bernanke, helping shape the viewpoint of the current Federal Reserve on monetary policy.

Generally speaking, Yellen is considered more dovish (willing to extend low interest rates) than other potential Federal Reserve candidates. In this respect, it’s expected that many sectors of the economy and markets that have benefited from the current monetary policy may continue to benefit for a longer time frame than if another person were elected as leader of the Federal Reserve.

While we all know that at some point the Federal Reserve will begin to reduce its aggressive monetary policy stance, the timeline could be extended. Obviously, this is all just speculation, but Yellen has been vocal in the past about maintaining an aggressive monetary policy stance until the economy really begins to accelerate.

But as dovish as her reputation is, many people don’t know that she was actually one of the first Federal Reserve members to speak up about her concerns regarding the bubble in the housing market back in 2007.

This dichotomy is interesting: on the one hand, she is one of the most aggressive Federal Reserve members currently pushing for … Read More

Why I Feel the Housing Market Is Topping Out

By for Investment Contrarians | Sep 26, 2013

Housing MarketThe housing market continues to produce some healthy gains for investors. Home builders edged higher on Tuesday after the S&P/Case-Shiller 20-City Home Price Index surged another 12.4% in July, above the estimate of 10% and the 12.1% advance in June.

As shown on the chart below, the index has been on a steady upward climb since February 2012, and there appears to be nothing stopping the move in the housing market.

Of course, the accommodative monetary policy adopted by the Federal Reserve has been the primary reason for the advance in home builds, sales, and selling prices—the “evidence” behind the so-called housing market “recovery.”

But be careful.

It’s true that the financing costs for homes could likely stay historically low for a few more years, which would help add support to the housing market. However, I feel there could be a sort of bubble on the horizon.

Case-Shiller Home Price Chart

Chart courtesy of

Let me explain.

The upward move in the housing market has largely been driven by foreclosures, short sales, and very affordable mortgage rates.

The problem now is that financing rates are not going to stay at these low levels indefinitely. Interest rates are heading up, folks, and it’s not a matter of if, but when.

If you believe the Federal Reserve, interest rates will likely begin to turn higher sometime in late 2014, depending on if the unemployment rate can improve to 6.5%. There is no guarantee the jobs market will improve by next year and drive the jobless rate down. In fact, the jobs market may not improve, and we may have to wait until early 2015 … Read More

Why It May Be Time to Walk Away from the Housing Sector

By for Investment Contrarians | Aug 30, 2013

Housing SectorI’m sure you are not surprised to see the housing market continuing to move lower. After several strong years of recovery in the housing market, during which home prices rose and home starts and building permits moved higher, we are now facing some hesitancy in the housing market.

As many of you know, the housing market has been propped up and driven by the Federal Reserve’s quantitative easing policies. But with the easy money eventually drawing to a close, we are seeing some heightened fragility on the charts.

The reality is that mortgage rates are continuing to rise, which we know is counterproductive to any recovery in the housing market. The rate on a 30-year mortgage now sits at 4.8%, according to the Mortgage Bankers Association (MBA). Moreover, with the Fed looking at paring down its bond purchases, more upward pressure will be placed on bond yields and mortgage rates.

And you know what happens when mortgage rates rise: they kill the recovery in the housing market.

The MBA also said that the higher rates have resulted in a decline in mortgage applications for the third straight week.

The steady rise in housing starts and building permits appears to be flattening as rates rise, and developers see demand potentially declining on the horizon.

Take a look at the chart below of the S&P 500 Homebuilders Index. Notice the bearish descending triangle on the chart since the index’s peak in May. We have seen lower highs and lower lows capped by the recent breakdown at the support level, as shown by the horizontal blue line in the chart below.

SPDR S&P Homebuilder Chart

Chart courtesy … Read More