Real Estate market turns spooky

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Stocks may be trading at record highs, but there have been some strange data in recent economic reports suggesting that for now, at least, the rally in real estate is over. It started on Tuesday of last week, (August 19, 2014) when the Census Bureau released the housing starts report for July. The report showed a sharp, unexpected rise of 8.3% in single family construction after declines in May and June. It would appear that homebuilding companies -- such as DR Horton ( DHI ) and KB Homes ( KBH ) -- have been adding capacity and betting on a strong economy.

The rise in homebuilding is simultaneously encouraging and worrying. If homebuilders have correctly anticipated that there will be buyers for all these homes, then everyone wins. If, however, they are building beyond reasonable expectations of their ability to find good buyers, the result will be a glut of new homes clogging the market and depressing prices. In most markets, falling prices quickly translate into more sales, but to some degree the opposite is true in real estate, where there are still many owners upside-down in their mortgages who can't afford to sell (or at least really don't want to) until prices recover.

On Thursday, August 21, Existing Home Sales figures for July were released, showing an expected 5.15 million sales. That was an improvement over May and June, but still 4.3% below where we were in July 2013. Prices inched up as well, by an expected 4.9%. While the numbers didn't provide any explanation for the far larger rise in housing starts, things could certainly have been worse.


And then things got worse. On Monday, August 25, New Home Sales figures for July were released, and analysts, expecting a modest increase, were surprised to see a decline of 2.4%. Then, on Tuesday, the Case-Shiller 20-city Index was released, showing that home prices had decreased by 0.2% from May to June.

These disappointments were relatively minor and don't yet deserve even to be described as "trends." Next month, we could discover that these were just meaningless blips in the numbers. Or not. The problem is that, taken together, price stagnation  and weak new homes sales create a synergistic headwind against Homebuilders. Homebuilders have a very long spin-up cycle, of course, and their expansion might have looked like a good bet a few months ago, but that changes little. It will turn out badly for them unless there is a strong rise in new home buying. Given ongoing wage stagnation, that scenario is beginning to look less likely.

So is it to be perfect paradise, or pernicious paralysis? I recently suggested that signs of distress in homebuilding stocks would indicate that the  economy was on the wrong track , and could easily trigger a serious stock market correction, or even the end of this bull market. Today, I am, in effect, raising the threat level from yellow to orange. I repeat my previous forecast: if the real estate market really is heading south, it will take the stock market with it.

If you are heavily invested in stocks, keep a close eye on this.

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .


This article was originally published on MarketIntelligeneCenter.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy , real estate

Referenced Stocks: DHI , KBH

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