COLUMN-Happy-ish thoughts about investing in housing

Fri Oct 26, 2012 10:57am EDT

By John Wasik

CHICAGO Oct 26(Reuters) - While most of the recent news on housing seems to indicate a modest turnaround - like yesterday's report that pending home sales rose but at a slower than expected rate - you still have to be selective in how you invest. A resurgence may not be a sustainable, nor will every area benefit.

It would be too easy to say that the housing market has bottomed out or that the general economy is pushing housing along. Still some demographic trends are acting as catalysts.

Most indicators appear to be showing green when it comes to U.S. housing in recent months. Housing starts, which have been dismally low in the wake of the 2008 meltdown, rose 15 percent in September - the quickest pace in more than four years - according to the U.S. Commerce Department. Building permits grew almost 12 percent. Construction of town homes and condos was up 25 percent for the period.

With the Federal Reserve's easing program keeping a giant foot on mortgage rates, you can still get a 30-year loan for under 4 percent. And home prices were up 1.6 percent in the last S&P Case-Shiller Composite 20 Index report in July. Supplies of homes are tightening as demand increases and more investors re-enter the market.

It's worthwhile looking at these optimistic long-range trends:

1. Demand is on your side.

Perhaps the most valid reason to be long-term bullish is the disconnect between household formation and pent-up demand. This is a measure of people who normally would be buying homes and the amount of housing actually being bought. Mostly because of the recession, there's a 2.6 million shortfall in household formation, estimates Timothy Dunne, writing for ritholtz.com, a economics blog run by Barry Ritholtz.

Instead of buying homes and starting families right after college like their parents did, young adults and others eager to own homes are either renting or living with their parents. Their situation is further exacerbated by college loans and a paucity of high-paying jobs.

2. If you build it, they will buy it

The International Monetary Fund estimates that the U.S. population will grow by 15 million from 2012 through 2017. That translates into a need for some 6 million new housing units by 2017, according to a report by JPMorgan Chase.

This is largely bullish for homebuilders like Lennar , D.R. Horton and PulteGroup. It also benefits retailers like Home Depot and Lowes. So you could benefit from a boom by buying stock in these companies, or you could benefit as an individual home buyer because a sustained recovery is also good for price appreciation - but over several years.

3. Buying is a better deal than renting.

Rents are now 20 percent more expensive than mortgage payments, according to JPMorgan, and that's in today's mixed economic conditions. Given a sustained recovery, housing affordability will be a major driver of the conversion of renters to buyers.

That means there are bargains to be found, often where the bubble and recession did its worst damage. The most affordable areas are Detroit, Atlanta, Minneapolis, Phoenix and St. Louis. Some 14 of the 25 largest metro areas are deemed affordable. The least affordable are Los Angeles, Miami, San Diego, New York and San Francisco, according to a recent survey by Interest.com.

OTHER SIDE OF THE COIN

There are some negative trends to consider, however, which is why you have to proceed cautiously in this market. We may not have a straight-line recovery - home resales actually fell 1.7 percent in September - so the current upsurge in home-related stocks may not last very long.

If you're in housing stocks, you'd do best with a broad portfolio of homebuilders, building materials companies and retailers. Consider the SPDR S&P Homebuilders ETF and iShares Dow Jones US Home Construction Index ETF.

And think about employment. It's going to be hard to sustain a robust recovery with an unemployment rate of just under 8 percent. It will have to continue to improve for the housing market to regain its legs.

If unemployment does drop, even slightly, and at the same time there is a decline of vacant and foreclosed homes, the curve for U.S. housing will chug in the right direction - that is, if the economy's locomotive is gaining steam rather than losing it. At the moment though, we're watching "the little engine that could" struggling up a steep hill.

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