Housing Market...Signs of Improvement?

This is an article from "Real Money by TheStreet.com". I don't know about you but for me...any glimmer of improvement is worth taking a look at!

RealMoney by TheStreet.com
Housing Could Bottom Sooner Than You Think
Tuesday November 25, 10:00 am ET
ByDavid Sterman, RealMoney Contributor

If you took a snapshot of the current housing market, you would find little reason for cheer. A flood of "for sale" signs blight many a front yard in neighborhoods all across America, and buyers looking for foreclosed properties seem to be the only visible signs of support. Also, as Jim Cramer recently noted, it is not helpful that homebuilders keep adding to supply.

Nevertheless, the total supply of unsold homes is steadily dropping. As Tony Crescenzi points out, the rate of new household formation handily exceeds the amount of genuinely new homes on the market. (Some construction is the result of tear-downs or storm-damaged properties.)

Importantly, a number of indicators suggest that the worst of the housing slump may have passed. For starters, the steady drop in home prices is beginning to moderate. Home prices had been slumping 2% sequentially for a good portion of 2007, but those drops are now in the 0.50% to 1.00% range. While home prices may fall a bit more over the next few months, they may finally flatten later this winter.

In addition, mortgage rates are on the decline. After hitting 6.63% last July, the average 30-year mortgage has fallen to around 6%, and rates could head yet lower: 10-year T-bill yields have plunged to around 3.15% (at the time of this writing), which implies that 30-year mortgage rates could fall toward the 5% mark.

More telling is the historical relationship between owning and renting a home. From 1975 to 2000, that ratio was fairly constant, but in recent years, it has been far cheaper to rent than buy a home in many markets, as home prices shot up and rental costs rose only modestly. Now, the stunning drop in home prices has pricked a hole that bubble.

As recently as 18 months ago, the cost of owning was far above historical trends (more than 20%) in 16 out of the 20 cities surveyed by Case-Shiller. Now, only four out of the 20 markets surveyed show a 20%-plus gap. In the other 16 markets, the cost to own has reverted back toward the historical mean and, in some cases, is even below the cost of renting.

So many people insist that there are no buyers out there ready to pounce, but that's not the problem. There are plenty of potential homeowners waiting in the wings, most of whom simply want to see some stabilization in housing prices. When sentiment turns among these folks, the housing market will show real signs of life. We do not need to wait for the glut of unsold homes to fall to zero; we just need buyers' confidence to return.

To be sure, rising unemployment does not instill confidence, and this thesis may not play out until unemployment appears to have peaked, which may not happen until later in 2009. Before then, however, the combination of low mortgage rates and a continuing increase in the economic merit of owning vs. renting is bound to start bringing some buyers back into the housing market.

Of course, the latest read on existing home sales wasn't exactly encouraging, and that's likely to be the case for the next couple of months. That being said, investors should closely scrutinize subsequent readings for clues that this ultra-important segment of the economy begins to show signs of getting off the mat.
Following the old saying "it's always darkest before the dawn," sector share prices have been hitting new lows. The S&P Homebuilders Index hit new lows last week after having fallen more than 75% in the past three years. Many of the stocks in the index are selling not far above tangible book value at this point. For example, Pulte Homes sports a market value of about $2.2 billion yet has tangible book value in excess of $3 billion.

The question for many investors is whether that book value will erode further. That may happen if real estate carried on the books needs to get written down even further, which, again, relies on home prices finding a bottom. As a result, a floor in home prices may bring this sector back into the spotlight in the context of impressive price-to-book-value ratios.

Net-net: While many think that the housing bottom is several years away, it could come within the next two to three quarters.

Fix Housing First?

The economy is on everyone's mind. It is the universal challenge we all are forced to confront right now. The banking industry...the insurance giant "AIG"...the investment banks...now the auto industry...everyone is being crushed by this recession and they are looking for government to lead.

While economists will be arguing for decades as to the root cause(s)of this economic crisis, right now we should be focused on stimulating growth. The housing industry is pushing for a "fix housing first" initiative that is focused on stabilizing the housing industry and the real estate markets.

I believe the general premise is valid and potentially viable...if we can bring stability to the housing market, we can provide a base from which growth could begin. I do not know if this proposal is the best way or the only way to achieve that goal. Take a look at the website "Fix Housing First". I would love to get some feedback or even some better ideas!

We're gonna need a bigger boat...

The past week has been akin to being in a slow speed ship wreck. We have been sitting on the deck of the Titanic arguing over whether or not we should bail out the first class cabins. Meanwhile the band played on...

Do I endorse a $700,000,000,000.00 government welfare program for Investment Bankers and Corporate Fat-Cats? Of course not... Do I endorse free markets where the risk of loss is the ultimate means of keeping the system honest? Of course I do. However, we are not dealing with a "zero sum game" in this case. Nothing in life is ever as simple as "yes or no".

We can argue about blame and credit...regulation and deregulation...until we are blue in the face. The essential truth is more nuanced and ultimately less satisfying. We need to decide whether or not we will save ourselves to "fight" another day. The ship is sinking...let's save the ship before we fire the crew.

$700,000,000.00 is an incomprehensible amount. 25% unemployment is an unfathomable possibility. If we can save the ship before we all drown...I promise we can go back to fighting over taxes, guns, religion, culture, proximity to Russia, flag pins, and war. Until then...let's grab a bucket and start bailing.

The American Dream: The Green Solution?

American automakers are suspending production on low mileage vehicles. Inventory levels of SUV’s and Light Trucks exceed four months. Gas is selling at $4.25 a gallon. Americans have reduced their mileage driven by over one billion miles per month. Meanwhile hybrid cars are selling above list.

Americans want to do what is right for society, the environment, the trees…but more importantly they want to save energy and energy costs. It makes good sense. But in the new home building business we simply trudge onward…reducing prices, increasing incentives, hoping to find the bottom of the market.

Take a look at this video...it spells out the challenges and the opportunities pretty clearly.



We need a new building boom but a sustainable and responsible boom. We need the American Dream business to be part of the American Green Solution.

I would like to propose that Senator Obama suggest an enhancement to the federal tax credits for energy efficient new homes as is contained in the federal Energy Policy Act of 2005. I would suggest that this program could also be combined with a tax incentive for consumers that purchase an energy efficient new home as well.

Currently the 2005 Energy Policy Act limits the tax credit to builders at $2000. It is estimated that making a new home “energy efficient” enough to qualify for the tax credit would require as much as a 4% to 7% increase in direct cost. This cost would be passed on to the consumer and would have a direct and negative effect on the pricing elasticity relative to less efficient new homes. I propose increasing this credit to a maximum of $5000 per home. The credit could be targeted to new homes under $500,000 for maximum impact. We would then increase the likelihood that builders will build more homes that would qualify for this sort of tax advantage.

The consumer should also be rewarded for purchasing a more energy efficient new home as well. The tax incentives should be immediate and worthwhile. A $500 tax rebate would be a reasonable target as it would not be a budget buster but it would provide real tangible benefits directly to the consumer. We need to address both the supply and demand pressures for adopting green building technology.

The homebuilding industry is not only a major employer but it is also a driving force for our economy as a whole. We are currently experiencing the worst housing downturn in over 19 years. We need to stimulate responsible growth in this industry. We also need to increase the focus on energy efficiency in our homes as well as our automobiles. Rather than constantly focusing on gas prices, we can save energy and reduce harmful by products just by changing the way we build our new homes. It is estimated that new homes may be as much as 20% to 30% more efficient than homes of thirty years ago.

Right now programs like Energy Star and LEED are delivering homes that are between 25% and 50% more energy efficient than other new homes. Why not encourage that? It would be the equivalent of taking a car that currently gets 25 miles per gallon and improving that to 31-37 with no new technology!

A program that targets energy consumption and green house gas reduction while stimulating the housing industry would be a great way to get America building again!