The Roof Isn’t Caving in on Housing

02/02/2007 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, says that all the pessimism about housing isn't justified. He expects housing markets to bottom out and begin to look better later in the year and sees opportunities for contrarians...

"Without question, Naples, Florida is one of the most beautiful and desirable communities in the whole country. But everything has its price-and housing prices in Naples, a year or so ago, reached their outer limit.

"In late October, 51 homes in Naples went on the auction block--not ramshackle fixer-uppers, but places that typically would have sold for $600,000 to $1 million a year ago. Yet only 33 of the 51 homes caught a bid, and those averaged selling prices 25% below what they were worth at the 2005 peak. So, are home prices about to collapse from coast to coast? Sorry, but I don't think so.

"Yes, home prices in some communities--particularly in California, Florida, Arizona, and parts of the Northeast--are still too high in relation to people's incomes. The "correction" there could drag on for another year or more. But I see three main reasons why most US housing markets should start to look better in the second half of 2007.

"Interest rates on fixed-rate mortgages have tumbled--from about 6.8% last summer on a 30-year mortgage to 6.1% recently--and are cushioning the housing market's decline.

"Builders have cut back on starting new homes. Housing starts for October--the last month for which statistics are available as I write this--fell 27.4% from the year-ago period. Building permits were down 28%. This is actually good news. In any cyclical industry, you can't work down excess inventory until the supply of new product subsides. That's happening now.

"The Dow Jones US Home Construction index, which incorporates all the major publicly traded homebuilders, plummeted 50% from July 2005 to July 2006. Since then, homebuilder stocks--defying a barrage of bad press--have mounted a vigorous rebound.

"If the pattern of past housing cycles holds true, we can expect building and sales activity nationwide to hit bottom some time between February and May. Home prices will stop falling a couple of months later, although we may not see much appreciation for several years (especially in the bubble markets of yore).

"Given the amount of pessimism we're hearing, it's almost certain that some excellent investment opportunities are staring us in the face. If you live in one of the metro areas that the bubble largely passed by, you could begin shopping for properties even now. For the rest of us, the best buys are in housing-related stocks."

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