How to Profit from the Weakening U.S. Housing Market

Housing-Market / US Housing Feb 28, 2014 - 11:46 AM GMT

John Paul Whitefoot writes: It doesn’t take much to get the bulls excited when it comes to the U.S. housing market. Solid new-home sales data seems to have erased everyone’s memory of the raft of negative housing market numbers that have been flowing in for months.

But first, the good news! The U.S. Department of Commerce announced Wednesday that sales of new U.S. single-family homes soared 9.6% month-over-month in January to a seasonally adjusted annual rate of 468,000, the highest level since July 2008. January’s numbers are also 2.2% ahead of January 2013 estimates of 458,000. (Source: “New Residential Sales in January 2014,” United States Census Bureau, February 26, 2014.)

While Wall Street is busy blaming the cold weather for weak earnings, the winter winds have not held back new-home sales. In fact, in sharp contrast to Wall Street’s cold weather blame game, regions hardest hit by unusually cold temperatures experienced solid growth, easing concerns of a sharp slowdown in the U.S. housing market.

Sales in the Northeast soared 73.7% to a seven-month high, sales in the south climbed 10.5% to a more than five-year high, and sales in the west climbed 11%. The only region to experience a drop in new-home sales was the Midwest, where new-home sales retraced 17%.

If new-home sales were the foundation of the U.S. housing market’s health, everything would be looking up. Unfortunately, they’re not. That’s because new-home sales represent a small segment of the U.S. housing market—just 9.2%.

New-home sales figures, because they are measured when contracts are signed, are considered to be more sensitive to weather than existing-home sales, which are tallied when contracts close. So the fact that new-home sales figures came in so strong is a little perplexing, especially when you consider the rest of the U.S. housing market numbers.

On Wednesday, the Mortgage Bankers Association said that mortgage applications to buy a home fell last week to their lowest level in 20 years—a possible indicator that the typically busy spring housing season could be a bust. (Source: Lopez, L., “U.S. mortgage applications slip in latest week: MBA,” Reuters, February 26, 2014.)

As for existing-home sales, they seem to be a more reliable, consistently negative indicator. Sales of existing homes fell 5.1% in January from December to a seasonally adjusted rate of 4.62 million. This represents the fifth decline in the U.S. housing market in the last six months, with sales touching levels that haven’t been seen for the last 18 months. (Source: “Existing-Home Sales Drop in January While Prices Continue to Grow,” National Association of Realtors web site, January 21, 2014.)

The number of first-time homebuyers—the engine of the U.S. housing market—is getting smaller and smaller. First-time homebuyers accounted for just 26% of January’s existing-home sale purchases, down from 27% in December and 30% in January 2012. It’s also the lowest level since the National Association of Realtors began tracking this metric in 2008 and it’s a far cry from the 30-year average of 40%, a number that real estate professionals and economists consider ideal.

Who’s buying all the existing homes if not first-time homebuyers? Well-heeled investors. All-cash sales made up 33% of January’s existing-home sales—up from 32% in December and 28% in January 2013. Individual investors purchased 20% of homes in January, with seven out of 10 paying cash.

Until the U.S. economy, jobs, and wages pick up, first-time homebuyers will continue to get squeezed out of the housing market.

Even though the housing market is showing continued signs of weakening, homes are still being built, renovated, and sold. So there’s no reason to turn your back on stocks like The Home Depot, Inc. (NYSE/HD), Lowes Companies, Inc. (NYSE/LOW), or even Lumber Liquidators Holdings, Inc. (NYSE/LL).

This article How to Profit from the Weakening Housing Market was originally published at Daily Gains Letter

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