Unexpected New Housing Trends
09/08/2006 12:00 am EST
Veteran investor John Dessauer ignores the naysayers and explains—in comprehensive detail—just why current trends in the housing industry look favorable to him. And he adds a recommendation to take advantage of the opposing media hype…
‘The “popping of the housing bubble” is the most anticipated “crash” in modern times, but that’s because the media wanted it to happen and are looking at only one side of the story. “Affordability” is the key to a healthy housing market. Mortgage rates rose from 6.15% in January to 6.80% in July, pushing the cost of mortgages up. But then, in the next four weeks, 30-year mortgage rates fell back to 6.52%. This trend is likely to continue, taking the 30-year rate back to 6.25%. The combination of moderating prices and lower mortgage rates is positive for housing.
“The Joint Center for Housing Studies at Harvard University issued a report called The State of the Nation’s Housing 2006, available on the Web. Two points stand out to me: In the last decade, the US created 12.6 million new households, and we’ll add 14.6 million more in the next decade. Long-term demand for housing will remain strong, due to rising incomes and basic demographics.
“Secondly, the popular fear of a “precipitous decline” in prices is addressed. In July, the price for existing homes rose 0.9% over July 2005. August could show a small price decline, but a “precipitous decline” is defined as a drop of 5% or more in the median home price nationwide. All past declines of that magnitude were preceded by severe overbuilding and/or a dramatic rise in unemployment. Neither condition is present today. Therefore, a steep fall in house prices is unlikely. Prices can come down in those markets where prices shot up too fast. A separate survey showed that 26 metropolitan areas experienced price declines for homes in that quarter while 37 enjoyed double-digit price gains. Overall housing is on solid fundamental ground. With prices off their highs, more buyers will be able to afford a good home.
“Once excess speculation is wrung out and the oversupply of homes worked down, we will see new growth. IndyMac (NDE NYSE) is expanding, by building new regional offices in Orlando and Boston. IndyMac is clearly taking advantage of the housing slowdown to gain market share, at the expense of weak competitors. Earnings estimates for 2006 are $5.23 per share. At under eight times this estimate, and with a nearly 5% dividend yield, IndyMac is a very attractive buy.”
“Wall Street is terrified of a housing melt down. Their fears are not just exaggerated but are so intense as to be near hysterical. Real estate will enjoy another growth cycle. The time to buy housing-related stocks is in a down cycle, like now.”