Time for a brief bit of snark about the housing sector and housing stocks due to my contrarian reaction to the very recent bullish call on housing and housing stocks from Goldman. First, a trip briefly down Memory Lane to provide context:
From The Street.com about a bearish call Goldman made six months ago, Stay Away From Homebuilder Rally, Goldman Sachs Says, which contains:
Not so fast, says Goldman Sachs analyst Joshua Pollard. While the housing sector may be gaining its footing, the improvements are lagging valuations.
“With homebuilding stocks outperforming the market by 3,500 basis points in the last three months, we would wait for a pullback or a clearer picture that housing is healing quicker than it currently is,” Pollard writes.
That was then, with a huge move up in the prices of housing stocks yet to come. This is now, also from Pollard at Goldman in Goldman Sachs Sees ‘Strong’ Recovery Starting for Housing. Here is the lede from Bloomberg:
U.S. homebuilders are an attractive investment as the housing market starts a “strong” recovery that may drive a surge in new-home sales, Goldman Sachs Group Inc. (GS) said in a report today.
Housing has a “long list of positives,” including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes, Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. They raised their rating on the homebuilding industry to attractive from neutral.
Does this sound more like a top of the cycle or the bottom of the cycle, given that numerous homebuilding stocks have soared in the past six months? (I know that’s a leading question…)
Here is a LINK to today’s Calculated Risk post on estimated new home sales for June. Please click on the first graph and tell me if you have a high degree of confidence about which the graph will wiggle and for how long you are willing to predict the recent uptrend will continue and if so, how strong any prolonged uptrend will be (and what economic profits are to be gleaned by the builders).
After I completed this post, I saw that Mish addresses this topic today. Here’s a link to his post.
Let’s move beyond housing.
Here was the general mood on Wall Street in January, also from Bloomberg (LINK):
S&P 500 Caps Best Start to Year Since 1987 on Economic Optimism
As most of you likely realize, that was a crash year, and there was not even a recession.
Housing appears to be the sum of all hopes right now in this year, 2012, which has seen the longest consecutive string of consecutive weekly gains for the NASDAQ since— no, not ‘since’: ever.
So, if the U.S. has entered or is about to enter its 48th national recession and if in said recession a recession-average stock bear market of 30% ensures, how can housing prices also fail to drop and drop meaningfully?
Reversal ahead, say within the next twelve months and perhaps much sooner than that?
Since you’re a creature of Santa Barbara I can tell you that both the midwest and east-coast residential markets have shown firming in the last six months. I attribute this to be nothing more than reduced interest rates allowing more victims through the turnstile. Salaries are dropping, so lowering the monthly mortgage payment is the only way to stimulate applicant demand.
My personal observations on commercial real estate(CR) in both areas reflect your insights on Santa Barbara CR. I’ve observed accelerating business closures on both the midwest and suburban east coasts. These are not frivolous businesses closing (i.e aromatherapy Inc), but rather decades long institutions which have succumbed to sagging demand.
I’ve talked to local merchants who claim landlords are raising rents, thus driving them out of business. Many of these locations have remained vacant for close to a year. One business-owner asserted that large out of town real estate concerns with little insights into the midwest markets are ‘acting on the numbers’ (drinking the cool-aid?) and pushing them under. The disconnect between reality and rents is profound. This is what happens when real estate portfolios are managed by high frequency trading computers in their spare time.
As, I’m not a muppet, I give Goldman Sachs as much credibility as CNBC. How many times has housing starts surged vs declining GDP? Barry Ritholtz is reasonably bearish on housing.
http://www.ritholtz.com/blog/2012/07/housing-data-surprises-to-downside-permits-starts-completions/
I visit Calculated Risk only for the pretty charts. Calculated Risk has always taken the ‘glass is half full’ approach to housing. I believe the author of that blog invested heavily in Southern California real estate a few years back. Having personally dabbled in the Sunny So. Cal real estate market I can say it is ground zero for climate inspired delusional thinking (love the place, just not the real estate markets).
P.S – I see little evidence of ‘business as usual’ . I’m waiting for the next shoe to drop on Europe, China and now climate change. I’m staying in liquid assets and building up my Ramen noodle stash.
Bantha
Thanks for the comments- informative and helpful.
FYI I vacation in SB b/c I can’t take the heat; I’m a Florida resident where I own a condo. Based on actual comps in my building, comparing a distress sale or two to a non-distress sale, the value of my condo has “risen” 20+% in the past 12 months. Real? Dubious…
Interesting comments on CR; blogger etiquette leads me not to comment further.