Some Objectivity on Housing

The state of the housing market is a hot topic for most people, and not just homeowners.  Those making bearish forecasts on the economy and the stock market create scenarios that begin with a collapse in home prices.  Those who are apologists for the home building industry also take extreme positions.

One source we have followed has been David Malpass, who has been consistently accurate in his forecasts about the limited effect of the housing decline on the overall economy.

Another favorite source is Scott Rothbort, founder of LakeView Asset Management and a major contributor to Street Insight, the premium publication of  While Scott has broad expertise, there are two special reasons to listen to what he says about housing.

  • Without a preconceived theory he is free to act in the best interest of his investors and readers.  He can and does change his mind with the evidence.
  • He has covered hundreds of earnings reports and calls for Street Insight.  He knows what to listen for and how to interpret it.

What is his analysis?  He has posted a long and thoughtful piece at his blog, which should interest everyone.  Here is the principal conclusion:

My opinion is that the cyclical decline in housing is near or at an
end. Furthermore, the big meaty shorts trades have already been booked.
We will continue to have a high level of volatility in the sector and
more trading opportunities will present themselves as the sub-prime,
housing and interest rate dramas continue to unfold. The next step for
this sector is going to be takeovers especially if the bears continue
to push shares lower.

Check out the full article to appreciate the reasoning and evidence Scott uses.

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  • RB February 15, 2007  

    Out here in Orange County, California — the long-term average for mortgage payment for the median home as a proportion of the median income is 34%. Currently, it is in excess of 50%. Numbers for many other places in California are similar. Perhaps the rest of the country is not so bad, but I find it hard to believe that this is the bottom for OC. Besides, the minimum down-cycle has been four years (1978-1982) and we are less than a year into the downturn here (median prices have gone down by~7% since June 2006). I find it hard to believe that people are starting to call a bottom when housing is “just” beginning to unravel — in fact, it has been less than 8 months out here in OC.

  • marlyn trades February 15, 2007  

    I happen to agree with this assessment. I use the “front page story of MSM” as my primary tool and in the past three weeks I have seen three stories on the collapse of the housing market here in Maryland on the front page of the Baltimore Sun – one story was in the upper right hand column (number one with a bullet).
    I immediately upon market open loaded up on the homies. There is no better contrary indicator than the local news editor finally deciding to run “that story.”

  • Nova Law February 15, 2007  

    What is different from housing compared to other asset classes is that if an owner cannot get the price he wants, the tendency is not to lower the price, but to just hold on to it and wait the market out.
    Speculators will surely be hurt most in a declining real estate market, but it’s unlikely that genuine pain will be widespread amongst homeowners. They’ll just hang on to what they have a few years longer than they otherwise would have.

  • RB February 15, 2007  

    Sold to you by Mr. Gates’ portfolio manager
    Spring selling season is round the corner and I suppose we will get an idea of where housing sentiment lies soon. Housing prices are sticky and so where popular conception will doubtless be wrong is in expecting a crash — but home prices get lowered by motivated sellers and their effect on comparables for the neighborhood. This is not even theory — prices are down 7% in OC — in a strong economy to boot, explain that!

  • Bill aka NO DooDahs! February 15, 2007  

    Last I checked, anyone interested in rental real estate as an investment would examine individual properties on their own merits and wouldn’t give two hootanannies about “housing” as a gestalt. The main advantages of real estate as an investment are leverage, capital gains exemptions if lived in, and depreciation tax credits and tax-free Starker exchanges for rentals, none of which are impacted by the “national median home price.”
    To my knowledge, New York, Chicago, and London all fail to have liquid markets for “housing futures” contracts. Similarly, I have yet to see anyone trading a futures market in GPD, although Vegas might have an over/under side bet. Keep in mind that the “economy” is not the same thing as the GDP.
    Both the general stock market and the homebuilders’ stocks as a group bottomed in the summer of 2006. Does the rest matter?