New Day Dawns for Housing

05/24/2012 11:19 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

April sales data and results from a luxury builder suggest the market is starting to turn. It’s a big positive for the economy and related stocks, writes senior editor Igor Greenwald.

The Eurozone crisis has been a godsend for the business channels. Instead of the deadly dull earnings and economic charts, we’re treated daily to deadly serious protests, furrowed-brow summitry, doomsday warnings, and cameos in front of landmark ruins.

And no doubt the financial health of Europe matters a great deal to the US economy. But I’m going to float the near-heretical notion that the state of the US housing market just might prove more important to our economic prospects in the long run. And we’ve seen notable progress on the home front this week while everyone’s been chasing the latest Greek rumor.

On Tuesday, the National Association of Realtors said April sales of previously occupied homes rose 3.4% on a seasonally adjusted basis from March, and 10% from April of 2011. The median sale price was also up 10% in a year’s time, because bargain-basement foreclosures accounted for a smaller proportion of the sales.

And while foreclosures remain a big problem, they’re almost certain to be a significantly smaller problem in the intermediate future than in the recent past, so the trend toward higher prices is likely to persist.

But it’s not really about the foreclosures anymore. It’s about the growing interest of securely employed middle-class buyers who, with real estate at its most affordable in decades, can finally trade up, or perhaps just split up after riding out the storm together out of necessity.

Homes priced between $250,000 and $500,000 are clearly in the market’s sweet spot, their sales rising 21.1% year-over-year in April, almost in lockstep across every geographic region. Pricier digs were also in demand, with sale of million-dollar homes up 13.4%.

As for the homes in the $100,000 to $250,000 range, which account for nearly half of all sales, they were up 8.8% year-over-year. Inventory inched up to 6.6 months of current sales, but was still the lowest for April since 2006, shortly before home prices began their long descent.

Moreover, the Realtors’ economist, Lawrence Yun, talked smack like he hasn’t for years. “It is no longer just the investors who are taking advantage of high affordability conditions. A return of normal home buying for occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices,” he said.

“The general downtrend in both listed and shadow inventory has shifted from a buyers’ market to one that is much more balanced, but in some areas it has become a seller’s market.”

Now, this is the same man who assured us at the end of 2006 that “the market has essentially already bottomed.” The Realtors are in no way an objective source on the state of the housing market. Still, the recent happy talk is a stark contrast to the state of affairs just two years ago, when the same group was bracing for the worst amid mounting foreclosures, just as the federal tax credit for first-time homebuyers was about to expire.

The Realtors are hardly the only font of optimism. “It appears that the housing market has moved into a new and stronger phase of recovery as we have experienced broad-based improvement across most of our regions over the past six months. The spring selling season has been the most robust and sustained since the downturn began,” said Douglas C. Yearley, Jr., the CEO of luxury builder Toll Brothers (TOL) yesterday in announcing quarterly results solidly above expectations.

And while he also said that “buyer confidence, though improved, is fragile,” it was in fact sturdy enough to push up the leading indicator of Toll’s May deposits up 39% year-over-year.

On Monday, hedge-fund manager David Einhorn told investors in his reinsurance company that improvement in the housing market is “pretty broadly based.”

Tellingly, Toll Brothers shares never even tested their upwardly sloping 50-day moving average while so many other high flyers were getting defenestrated. The stock ranks ninth among all the midcaps in the S&P 400 according to StockCharts Technical Rank, and another home builder, MDC Holdings (MDC) is just two rungs lower.

Within the S&P 500, the same technical formula places three builders and leading paint supplier Sherwin Williams (SHW) in the top eight.

I’ve been hammering on this theme for months, and see no reason to stop now. Stocks like Fortune Brands Home & Security (FBHS), with significant upside exposure to the housing market, haven’t held up as well as the homebuilders of late, yet are probably better bets in the long run.

The numbers from the Realtors and Toll should also add polish to the prospects of furniture merchants like Ethan Allen (ETH). Yet that stock is down nearly 20% from its March high and sells for less than it did a year ago, when business was considerably duller.

I realize that extrapolating from Toll to Fortune Brands and Ethan Allen isn’t as exciting as tracking Greek opinion polls. But it could prove considerably more profitable.

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