By John Wasik
CHICAGO Oct 26While 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
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
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.