Homebuilding Probably Climbed With Sales: U.S. Economy Preview

New home construction and sales of previously owned houses probably climbed in August, a sign residential real estate is one of the economy’s few bright spots, economists said before reports this week. Housing starts increased to a 765,000 annual rate, the fastest in almost four years, from a 746,000 pace in July, according to the median forecast in a Bloomberg survey. Existing-home purchases advanced to a three-month high, while manufacturing contracted in two regions in September, other reports may show.

Record-low borrowing costs and cheaper properties are spurring sales and helping mend an industry more than three years after the end of the recession. To help bolster the economy and employment, the Federal Reserve announced last week a plan for open-ended purchases of mortgage-backed securities.

“I do think that we’re getting close to the point where we are going to get some sort of significant contribution from housing,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. At the same time, “there’s still a lot of headwinds in place -- a lot of potential buyers lack the equity and savings to trade up.”

(Photo credit: Wikipedia)

The Commerce Department will release housing starts data on Sept. 19. Sales of existing homes, due the same day from the National Association of Realtors, climbed to a 4.56 million annual rate from 4.47 million, the survey median showed. 2011 Sales

Sales of new properties made up 6.7 percent of the residential market in 2011, down from a high of 15 percent during the boom of the past decade. Last year marked the worst year for the industry in records going back to 1963, as builders sold 306,000 new homes, down from 323,000 in 2010.

A report from the National Association of Home Builders and Wells Fargo on Sept. 18 may show builder confidence climbed to the highest level since February 2007, according to a Bloomberg survey.

Real estate developer and forest-products company Weyerhaeuser Co. (WY) is seeing improvement in the housing market even as concern about domestic fiscal policy tempers optimism. The Federal Way, Washington-based company’s year-over-year home sales are up about 40 percent, Patricia Bedient, executive vice president and chief financial officer, said at a Sept. 12 conference.

“Traditionally you wouldn’t expect a housing market to be increasing seasonally for this period of time, but it appears to continue to improve,” Bedient said. “Lest we get too excited, I think it will be steadily improving but probably a slow recovery subject to whatever happens at the end of this year.”

Mortgage Rates
Borrowing costs remain favorable. The average rate on a 30- year fixed mortgage held at 3.55 percent in the week ended Sept. 13, near a record-low of 3.49 reported July 26 in data dating to 1971, according to McLean, Virginia-based Freddie Mac.

Investors have become more upbeat about housing. The Standard & Poor’s Supercomposite Homebuilding Index (S15HOME) has advanced 83 percent so far this year, outpacing an almost 17 percent gain in the broader S&P 500. (SPX)

The lack of progress in the labor market persuaded the Fed to announce further accommodation last week. The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said Sept. 13 in a statement at the end of a two-day meeting in Washington.

Fed Statement
The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Manufacturing has been weakening along with the global economy. A Federal Reserve Bank of New York report on Sept. 17 may show manufacturing in the New York area contracted for a second straight month in September, according to the Bloomberg survey median. The Federal Reserve Bank of Philadelphia is forecast to report on Sept. 20 that manufacturing shrank for a fifth consecutive month, another Bloomberg survey projects.

Bloomberg Survey
===============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
===============================================================
Empire Manu. Index        9/17     Sept.      -5.9      -2.0
NAHB Housing Index        9/18     Sept.       37        38
Housing Starts ,000’s     9/19      Aug.      746       765
Housing Starts MOM%       9/19      Aug.     -1.1%      2.6%
Building Permits ,000’s   9/19      Aug.      811       795
Building Permits MOM%     9/19      Aug.      6.7%     -2.0%
Exist Homes Mlns          9/19      Aug.      4.47      4.56
Exist Homes MOM%          9/19      Aug.      2.3%      2.0%
Initial Claims ,000’s     9/20     15-Sep     382       375
Philly Fed Index          9/20     Sept.      -7.1      -4.0
LEI  MOM%                 9/20      Aug.      0.4%     -0.1%
===============================================================

To contact the reporter on this story:
Michelle Jamrisko in Washington at
mjamrisko@bloomberg.net

To contact the editor responsible for this story:
Christopher Wellisz in Washington at
cwellisz@bloomberg.net

By Michelle Jamrisko - Sep 16, 2012 11:01 AM GMT+0700

Taken from:http://www.bloomberg.com/news/2012-09-16/homebuilding-probably-climbed-with-sales-u-s-economy-preview.html

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How To Make Money In Stocks From The Real Estate Rebound

If you are a homeowner and watched the value of your home decline 20% or more, it is only natural to hesitate these days when hearing the words “housing” and “investment” in the same sentence. The dynamics of the real estate market are changing, though, and several homebuilders, home improvement retailers, and construction materials companies have regained much of the value that evaporated since housing prices peaked in 2007.

Following a generational boom, turmoil in real estate market over the last five years torpedoed home prices by as much as 40% in many regions of the U.S., and sank investor confidence along with it. What traditionally had been regarded as a person’s most valuable asset – their home – quickly became an over-leveraged money pit and a financial albatross to many Americans. Trillions of dollars in home equity vanished and as a result, homeowners not wanting to throw good money after bad halted home improvement renovations, including do-it-yourself projects.

While home values are still well below their peak levels from 2007, we are starting to see enough activity on the housing front to signal a sustainable rebound in residential real estate driven principally by the following:

* Changing supply and demand dynamics – We have experienced a prolonged period of declining home prices accompanied by little new home construction. Yet more recently, excess supply has been absorbed in many of the more desirable real estate markets leading to modestly higher demand. According to the National Association of Home Builders, new home sales climbed 22% from July to September.

(Photo credit: Ravi Karandeekar)

*Continued favorable interest rate environment – Not only do we expect interest rates to remain low, there is a distinct possibility they could move even lower. Given the weak jobs report released in early September, there is a strong likelihood another round of quantitative easing is imminent and the Federal Reserve could elect to purchase long-term mortgage securities this time around. Such an action would drive historically low interest rates even lower, including the 30-year mortgage rate, furthering reducing the barriers of entry for potential homebuyers.

*Growing sense of urgency – With prices leveling out and even rising in some markets, there has been greater activity on the part of potential homeowners, who are now showing greater interest after years of sitting on the sidelines in hopes that declining values would lead to even greater affordability. The most recent S&P/Case-Shiller Home Price Index (measuring 20 U.S. cities) rose for the first time in two years (by 0.5%). While always optimistic, the National Association of Realtors recently predicted average home prices would rise by 5% this year and another 5% next year. As the evidence grows that a firm basement for property values has been established, and that valuations are more likely to go up than down, those would-be buyers will re-engage in the real estate market, increasing both demand and competition.

Assuming these trends continue (and we expect they will), how can investors participate in the upside potential of a residential real estate rebound? Here are a number of ways:

*Play the building and construction angle by seeking exposure to home improvement retailers and construction materials companies. As the real estate market stabilizes further, homeowners will be less hesitant to fix up their primary residence. Others will finally see the incentive to refurbish investment properties purchased on the lower level of the price spectrum. Whether it’s to make a sale or improve their own long-term surroundings, there is a growing realization that renovations and expansions are once again a prudent investment.

*Take builders and construction head on by purchasing stocks of home developers. This is a more risky approach for investors as these types of companies experienced high levels of volatility during the financial crisis. However, with excess housing supply largely absorbed and housing starts beginning to increase, it’s not a strategy that should be ignored entirely. ETFs like the XHB and ITB make it easy to buy a basket of builders.

*Buy shares in companies or mutual funds situated to take advantage of increased transactions in the housing market. This is a more conservative approach to play the real estate rebound. Title companies are one example of a business model positioned to capitalize on improving real estate conditions and have typically carried with them lower volatility than the stocks of homebuilders.

One asset class to think twice about before investing in is multi-family and residential real estate investment trusts (REITs). Rising apartment rents and high occupancy rates have lifted REIT earnings in recent years. If the budding trends continue, however, many tenants will have a growing incentive to buy instead of rent. If more renters become homeowners, vacancy rates could rise and REIT revenues could fall from current levels.

Here are some specific examples of companies that could take advantage of the positive trends gaining momentum in residential real estate:

Home Depot (NYSE: HD), the leading home improvement retailer, has shown remarkable execution against several key strategies to drive up sales and profit margins in recent quarters. Rising home values should drive sellers to fix up and buyers to renovate the “phantom” number of homes waiting to be put onto the marketplace. The company is taking market share from major competitors Lowes and Sears, and margins are likely to hit new highs in the coming years on modest same store sales growth. Increased housing turnover would drive further profit growth rates and returns.

First American Financial (NYSE: FAF) is a title insurance company that issues policies to cover potential losses associated with property ownership (i.e. unpaid taxes, liens or assessments). With 27 percent share of the market, FAF is in a virtual duopoly with its one major competitor. Increased real estate transactions translate into more title insurance policies. Added revenues can be highly leveraged across fixed expenses, so profit growth has the potential to improve at even higher rates. While lower mortgage rates and increased refinancing has already increased revenues from their low point in 2009, faster rates of growth could drive share prices even higher.

Lennar Corp. (NYSE: LEN ) is the third largest builder of single family attached and detached homes across most of the U.S.. It also engages in real estate development and trading and has an attractive pipeline of land due to opportunistic buying in a distressed housing market. Orders rose 40 percent in the most recent quarter and average sales prices moved up 2 percent to $250,000. The backlog stands 61 percent higher than a year ago. Profit margins are already higher than peers and margin expansion is likely based on decreased incentives and a movement away from speculative home building.

There’s no guarantee, of course, that residential real estate prices will continue to rise from current levels. Additionally, specific conditions can vary significantly from one zip code to another – and certainly from one geographic region to another. Regardless of that uncertainty, however, depressed housing prices and historically low interest rates , have created both an upside opportunity for investors and a silver lining going forward: An entire generation of aspiring homeowners who five years ago appeared largely shutout of an overpriced real estate market, now face an affordable path to home ownership.

Ben Marks is president and chief investment officer of Marks Group Wealth Management, a Minnetonka, Minn.-based independent registered investment advisory with approximately $450 million in assets under management.

Disclosure: Marks Group Wealth Management owns certain of the aforementioned stocks on behalf of their clients.

By Ben Marks

Taken from: http://www.forbes.com/sites/greatspeculations/2012/09/12/how-to-make-money-in-stocks-from-the-real-estate-rebound/
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