Free Annual Reports
Housing Stocks: Embrace Your Fear
"You know, I always say you should get greedy when others are fearful and fearful when others are greedy," Warren Buffett told a group of business students recently. I can't think of a better statement when looking toward housing stocks right now.
The comment was published in a Fortune article titled "What Warren Thinks..." by Nicholas Varchaver on Monday, April 14. The author was present at a weekend meeting where Buffett spoke to a group of 150 Wharton business students at Berkshire Hathway's (NYSE:BRK.A, BRK.B) headquarters. Buffett had been asked what he thought investors should do given the current state of the markets. As always, I think his advice was spot on.
What Would Warren Do?
The general investing public is sick of hearing about housing woes, and stock-specific housing news has somewhat disappeared from headlines lately. Most people like it that way too, as the bulk of the public doesn't really like to look at something that could be a "burden". But here's the rub, while many investors have tuned out housing stocks, many of the stocks have been slowly - and quietly - recovering during 2008. (Read more on the housing woes in Subprime Lending: Helping Hand Or Underhanded? and How Will The Subprime Mess Impact You?)
There was an 11.9% decline in housing starts during March and a 24.6% drop in multifamily starts in the same time frame. The decline puts housing starts at the lowest level in 17 years. But there is a little good news. According to the NAHB Housing Market Index on Tuesday, while starts have declined, overall activity has stabilized over the past three months.
What's more, looking into the MBA Mortgage Applications report, we see overall, the last two weeks have seen 5.4% and 2.5% increases respectively. The refinance index accounted for all of the gains in the present week, however, edging up 5.2%. When we look at the numbers though, even though the present results look small, they are significantly more positive than the 38.1% decline in March refinance applications and 11.8% drop in March purchasing applications.
Right now, any number above zero is good. Looking forward, with Wednesday's Consumer Price Index results indicating inflation is inline with inflation tolerance, the FOMC now has a green light for the expected quarter-point rate cut in June. At the end of the day, lower rates should help housing recover.
Crossing Over Into The Light
The Dow Jones Home Construction Index (DJUSHB) is just now attempting to cross back above both the 200- and 50-DMA's in the 360-380 area, after hitting a low of 245.76 in the second week of January. If you take a look at KB Homes (NYSE:KBH), Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM), you will notice all three are crossing back above the 200-DMAs. (To find out how you can combine the best of both of these strategies, read Blending Technical And Fundamental Analysis .)
So, if housing news is so bad why are housing stocks quietly rallying?
The answer is simple. Smart money "prices-in" market moves six to nine months ahead of where the actual market is now. Savvy investors who started buying in January were betting the housing markets would start to show solid signs of improvement as early as June, coincidentally timed with the Fed's next rate cut, and as late as September, coincidentally, just before the Presidential election.
In one last word of caution, when stocks recover back to the 200-DMA, they can often fail again, something investors who are looking at housing stocks now will want to be aware of. However, if housing stocks show confirmation over the next few weeks, the bottom may be in.
Last Word from the Wise
In the end, the recovery in housing stocks could already be well on the way. As a note for those who prefer the "doom and gloom", perhaps it would be wise to listen to Buffet who said during the same interview, "The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway."
The comment was published in a Fortune article titled "What Warren Thinks..." by Nicholas Varchaver on Monday, April 14. The author was present at a weekend meeting where Buffett spoke to a group of 150 Wharton business students at Berkshire Hathway's (NYSE:BRK.A, BRK.B) headquarters. Buffett had been asked what he thought investors should do given the current state of the markets. As always, I think his advice was spot on.
What Would Warren Do?
The general investing public is sick of hearing about housing woes, and stock-specific housing news has somewhat disappeared from headlines lately. Most people like it that way too, as the bulk of the public doesn't really like to look at something that could be a "burden". But here's the rub, while many investors have tuned out housing stocks, many of the stocks have been slowly - and quietly - recovering during 2008. (Read more on the housing woes in Subprime Lending: Helping Hand Or Underhanded? and How Will The Subprime Mess Impact You?)
There was an 11.9% decline in housing starts during March and a 24.6% drop in multifamily starts in the same time frame. The decline puts housing starts at the lowest level in 17 years. But there is a little good news. According to the NAHB Housing Market Index on Tuesday, while starts have declined, overall activity has stabilized over the past three months.
What's more, looking into the MBA Mortgage Applications report, we see overall, the last two weeks have seen 5.4% and 2.5% increases respectively. The refinance index accounted for all of the gains in the present week, however, edging up 5.2%. When we look at the numbers though, even though the present results look small, they are significantly more positive than the 38.1% decline in March refinance applications and 11.8% drop in March purchasing applications.
Crossing Over Into The Light
The Dow Jones Home Construction Index (DJUSHB) is just now attempting to cross back above both the 200- and 50-DMA's in the 360-380 area, after hitting a low of 245.76 in the second week of January. If you take a look at KB Homes (NYSE:KBH), Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM), you will notice all three are crossing back above the 200-DMAs. (To find out how you can combine the best of both of these strategies, read Blending Technical And Fundamental Analysis .)
So, if housing news is so bad why are housing stocks quietly rallying?
The answer is simple. Smart money "prices-in" market moves six to nine months ahead of where the actual market is now. Savvy investors who started buying in January were betting the housing markets would start to show solid signs of improvement as early as June, coincidentally timed with the Fed's next rate cut, and as late as September, coincidentally, just before the Presidential election.
In one last word of caution, when stocks recover back to the 200-DMA, they can often fail again, something investors who are looking at housing stocks now will want to be aware of. However, if housing stocks show confirmation over the next few weeks, the bottom may be in.
Last Word from the Wise
In the end, the recovery in housing stocks could already be well on the way. As a note for those who prefer the "doom and gloom", perhaps it would be wise to listen to Buffet who said during the same interview, "The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway."
by
Mark Whistler
Mark Whistler is the author of the book "Trading Pairs", published by John Wiley & Sons in 2004, and he is one of two creators of PairsTrader.com. Mark's new book, "Trade With Passion and Purpose: Spiritual, Psychological and Philosophical Keys to Becoming a Top Trader" is available at Amazon.com. Mark's trading specialty is statistical arbitrage, although he writes and conducts research for the Oxford Club and Mt. Vernon Options Club. Some of his other writing credentials include The Motley Fool, Active Trader Magazine, BullMarket.com, OptionInvestor.com and Working-Money online.
Free Annual Reports
