For years, investors and homeowners alike have tried to call the
bottom in the housing market
. So far, home prices haven't cooperated. But looking at the way
that home buyers have behaved recently reveals some insight into
what the future of housing may look like -- and where you should
concentrate your attention when it comes to investing.
A tale of two housing markets
You don't have to look hard to find
of just how bad off the housing industry is right now. Just last
week, government data came out on February sales of new homes,
which dropped to a record low annualized rate of just 250,000.
Looking back over the past 12 months, only 349,000 new homes sold,
which was also a record low. The inventory of new homes for sale
rose to nearly nine months.
Source: Census Bureau.
The continuing weakness in new home sales has weighed on the
stocks of homebuilders for a long time. Although
) , and
) have seen some share gains in recent months, they still trade
well below their highs from five years ago, as the housing boom
came to an end.
Yet despite the attention that new home sales receive, they
really represent only a small portion of overall sales. Similar
figures on sales of existing homes, while still weak, aren't nearly
as pessimistic. The corresponding numbers for February showed an
annual sales rate of 4.88 million existing homes, with 8.6 months
of supply in the inventory of existing homes for sale as inventory
began its annual rise in preparation for the spring sales season.
That's well off the highs of around 7 million during the housing
boom, but it also represents a big rebound from lows below 4
million in the middle of last year.
Source: National Association of Realtors.
Looking for value?
The typical conclusion to draw from the supremacy of existing home
sales over new homes focuses on what homeowners have to do before
putting their homes up for sale in a buyer's market for housing.
able to pick the cream of the crop, sellers competing with each
other have to renovate their homes to make the cut, driving up
) , and
(LL) . Indeed, some of the more hopeful predictions for these
stocks rely on continuing interest in renovating rather than an
outright rebound in housing overall.
That conclusion makes it seem as if the current state of the
housing industry is just cyclical and that eventually new home
sales will rebound. But looking at consumer behavior in an entirely
different industry -- auto sales -- suggests a more overarching
have risen to record high levels, even as new-car sales have
remained low. With cash-strapped car buyers struggling to make ends
meet, saving even a small amount on a good-condition used car makes
more sense than paying up for a new one. Though counterintuitive,
this has actually helped
, because even with somewhat weak sales, the upward pressure on
used-car prices has also supported new-car prices, allowing them to
keep margins relatively high.
If that phenomenon repeats itself in the housing industry, what
you should look for first is for existing home prices to rise. Only
once that happens will homebuilders be in a position to benefit --
but the benefits may come sooner than you'd expect if you just look
at raw data on new home sales.
The right move in real estate
With home prices for existing and new homes still low, perhaps the
best way to profit from the housing downturn is simply to buy real
estate directly. If you can afford the time and expense involved,
you can take advantage of high inventory and weak demand to get the
home of your dreams -- or a big prospective moneymaker.
But if you prefer to invest passively, the time isn't ripe for
homebuilding stocks yet. Until market conditions change,
homebuilders will continue rising and falling in fits and
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is glad to have a roof over his head. He doesn't own shares of
the companies mentioned in this article. General Motors, Home
Depot, and Lowe's are
Motley Fool Inside Value
selections. Lumber Liquidators is a
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recommendation. Ford is a
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