Housing Can Turn the Tide

03/19/2012 11:45 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Barron’s may be a little late in trumpeting the housing recovery, but it’s not wrong. And that means near-term growth could surprise, writes MoneyShow.com senior editor Igor Greenwald.

“Home prices ready to rebound,” this week’s Barron’s cover proclaims. To illustrate the point, a couple and their dog are shown mid-leap, arms flailing at a chimney disgorging puffy dollar signs.

A year ago, they might have been waving a sad farewell to all that equity going up in smoke. But now they’re clearly jumping for joy after reading that “within the next 12 months, housing prices will bottom out. After that, expect a gradual annual rise.”

OK, so maybe the house should have been belching question marks to represent a forecast so carefully hedged. All the same, Barron’s found plenty of hopeful signs, from rising homebuilder confidence, to improved housing affordability, to the leveling off already evident in upscale markets and distressed ones that have nowhere to go but up.

The shadow inventory of homes not yet listed by lenders is destined to shrink in the years ahead, while demand for housing should surge as families constrained by financial need finally splinter.

The only question is whether investors who bought the rumor of a housing recovery late last year will now sell the Barron’s-cover fact, because it’s not as if it will come as a surprise to anyone tracking the market action this year.

I’m addicted to the StockCharts technical ratings, a daily rundown of what’s hot and what’s not among large-cap, midcap and small-cap stocks. The system uses simple, clear performance indicators to rank each group on a scale from 1 to 100.

As of Friday, this was the top five among S&P 500 stocks: PulteGroup (PHM), Lennar (LEN), Sears Holdings (SHLD), DR Horton (DHI), and Masco (MAS). So three homebuilders and two other names highly leveraged to a housing recovery. Apple (AAPL) was next, followed by two regional banks.

It’s a similar story among the midcap and small-cap stocks, with housing-related plays leading the way, among them two names recently highlighted here.

So clearly, the housing recovery story has been out there awhile. Recent job gains also haven’t passed unnoticed. The longer those two trends persist, the harder it will become to keep insisting that investing landscape remains haunted by an overhang of debt, limiting future economic performance.

That’s the “New Normal” paradigm advanced by investing titans such as Ray Dalio of the Bridgewater Associates hedge fund, and the bond salesmen at PIMCO. It holds that the massive accumulation of debt over the last two decades must still be unwound over many years, hampering growth.

But what if the historic implosion of the housing and labor markets was a bigger deviation from the mean than the run-up in debt? As Barron’s points out, housing is roughly twice as affordable now relative to income and interest costs as it was at the peak of the housing bubble.

Markets like Phoenix, Miami, and Las Vegas are benefiting from a surge of foreign buyers from places like Canada and Brazil, for whom current US prices represent amazing bargains relative to their home markets. [To illustrate the disparity, the average home price in Vancouver is $806,000, compared to a median of $113,700 in Phoenix—Editor.]

And housing has traditionally been the spark that has ignited broader recoveries. What happens to “New Normal” if that pattern holds?

The jobs report released earlier this month registered 132.7 million non-farm payrolls, unchanged from seven years ago, while the gross domestic product has grown 20% over the same span. So we’re overdue for a hiring spurt, and shouldn’t be surprised by the record profit margins.

Given the current economic slack, those margins wouldn’t even necessarily have to decline, as increased hiring squeezes more output from previously idled machinery and plants.

Guys like Dalio are never the last to notice. The hedge-fund manager, who told Charlie Rose he was “concerned” about the economic outlook in a generally downbeat interview last October, has now upgraded the US to “the most beautiful deleveraging yet seen” in comments to The Economist, though he’s not backing off his slow-growth forecast.

Still, if he’s right that “the risk of chaos has been reduced,” the direct outcome of that has to be some reversion to the mean in housing and jobs, if only for a time. And that implies at least temporarily faster growth.

The message hasn’t been lost on investors in bonds and gold, who’ve been busy selling these rainy-day hedges lately. But after years of shifting cash from stocks to such alternatives, it’s safe to say we’re still collectively positioned for heavy downpours.

If spring has really sprung, the hedge-trimming may have only just begun. And stocks remain the best way to play a reversion to the mean in our use of our productive capacity.

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