Investment Contrarians

homebuilder stocks

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

Lack of Economic Data Hiding True Health of Housing Market

By for Investment Contrarians | Oct 18, 2013

True Health of Housing MarketOne of the difficult situations that arose from the U.S. government shutdown was the lack of economic data. Since economic data is extremely important to fine-tune your investments, without it, investors are essentially driving in the dark. With the decision to push back the debt ceiling and temporarily reopen the government, we’ll likely see some data coming in over the next few weeks.

However, in the meantime, there are still private organizations that have been issuing their reports on economic data throughout the U.S. government shutdown period.

The latest report on the housing market is by the National Association of Home Builders, with the Housing Market Index (HMI) dropping to 55 in October—a four-month low, and lower than the expected 58. (Source: “Builder Confidence Down in October,” National Association of Home Builders, October 16, 2013.)

The survey is interesting because, normally, homebuilder stocks as a group are quite optimistic. This confluence of negative variables, including higher interest rates and the government shutdown, has had an impact on the housing market, trickling into the sentiment of the homebuilder stocks.

While the government freeze is now over (at least for now), higher interest rates are still with us. While mortgage rates remain near historic lows, the move up in interest rates over the past few months has caused a significant dent in the housing market.

What this tells me is that the average American is far more worried about their future than many analysts would like to believe.

While the survey does indicate that optimism among homebuilder stocks still remains positive, the drop in confidence is noteworthy. Frankly, I’m not surprised; these … 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

Well-Known Stocks to Avoid as Mortgage Rates Rise

By for Investment Contrarians | Aug 30, 2013

Mortgage Rates RiseWell, that didn’t take long. Over the past few months, I’ve been warning readers that higher interest rates are coming, and this will affect millions of Americans through increased levels of mortgage rates.

In just the last couple of months, we’ve seen the rates for mortgages jump significantly. While many pundits believe that the housing market could continue at its torrid pace in spite of higher mortgage rates, the evidence appears to show just the opposite.

Two recent data points in the housing market indicate, in my analysis, that mortgage rates are indeed having an impact on the market.

New residential sales for July 2013 were 394,000 on a seasonally adjusted annual rate, a drop of 13.4% from the level in June, according to the U.S. Census Bureau. (Source: U.S. Census Bureau web site, last accessed August 28, 2013.)

Following that dramatic drop in new sales, we just got a report on pending home sales. Pending sales are a forward-looking indicator in the housing market, and this report shows the contracts that have just been signed.

The Pending Home Sales Index for July was 109.5, a drop of 1.3% from June, according to the National Association of Realtors (NAR). In the report, the organization specifically cited higher mortgage rates as having an impact on lower levels of pending sales. (Source: “July Pending Home Sales Slip,” National Association of Realtors web site, August 28, 2013.)

I’ve always been a big advocate for using data from multiple sources. Here are two separate organizations that are clearly showing higher mortgage rates are indeed having an impact on the housing market.

This should not … Read More

What’s Really Priced into the Housing Market’s Gains

By for Investment Contrarians | Jul 24, 2013

Housing MarketOver the past couple of months, the data regarding economic growth in America has been mixed, but improving. It is important to note that many of the sectors that have improved are primarily related to lower interest rates that have been engineered by the Federal Reserve.

Obviously, two of the important sectors that have benefited from lower interest rates are the housing market and vehicle sales.

The question on everyone’s mind: can the economy continue improving without the Federal Reserve keeping interest rates low?

There are new data that might raise doubts, especially when it comes to the housing market.

According to Freddie Mac, the average 30-year mortgage has been in the range between 3.34% and 3.63% from January until the end of May this year. Since the end of May, interest rates have spiked, with the current average 30-year mortgage now at 4.51%. (Source: “Weekly Primary Mortgage Market Survey,” Freddie Mac web site, July 11, 2013, accessed July 19, 2013.)

One of the impacts on the housing market from higher interest rates has been the significant drop in mortgage refinancing. We have seen from banks’ financial reports that their refinancing business has dropped substantially.

That’s not a surprise, because fewer people will want to refinance as interest rates move up.

The real question is: can the housing market for new homes continue growing?

New homes are important components of the housing market, as they generate significant levels of job creation and economic activity versus resale activity.

There is a lag in the housing market as interest rates rise; therefore, we need to consider several data points before coming to … Read More