Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Housing Market

The housing market is comprised of buyers and sellers of homes. Information on the housing market encompasses the supply and demand for homes as well as the inventory level of unsold homes. In markets around the country and different nations, you will have a natural progression of demand and supply. In some markets, there are new citizens moving to the city creating demand and, unless there is enough supply to match this demand, prices will rise. Income levels and mortgage rates also play a role in determining how many transactions occur in any given housing market.

How to Play the Strong Housing Data

By for Profit Confidential

Strong Housing DataThe housing market picked up steam in July after some stalling in the first half of the year, which was negatively affected by bad winter conditions in the first quarter. Housing starts surged 15.7% to a seasonally adjusted 1.09 million units in July, the market’s highest production in eight months. This break of one million units is key. Plus, the lagging building permits number was equally strong at an annualized 1.05 million units, up 7.7% year-over-year and 8.1% sequentially versus June.

The metrics clearly indicate a housing market that is strong and growing. Low interest rates continue to be the catalyst that is driving the housing market with the help of an improving jobs market.

An area that I continue to favor going forward in the housing market is the home construction and renovation supplies sector, as homeowners move to renovate their homes.

In this segment, the “Best of Breed” is The Home Depot, Inc. (NYSE/HD), which beat earnings-per-share (EPS) estimates and revenues in its second-quarter earnings season. The company also reported an increase of 5.8% on company-wide same-store sales in the quarter, including a 6.4% year-over-year rise in the U.S. housing market. The Home Depot can be a great stock for buy-and-hold investors, but with a market cap of more than $120 billion, there are alternative growth plays investors may want to consider that aren’t so expensive.

In the small-cap construction and renovation housing market, you may want to take a look at a stock like Builders FirstSource, Inc. (NASDAQ/BLDR), which has a market cap of $669 million.

Builders FirstSource Inc Chart

Chart courtesy of www.StockCharts.com

Builders FirstSource focuses on the residential new … Read More

Surprise: U.S. Housing Prices Now in a Decline

By for Profit Confidential

Three Strikes Against the U.S. Housing MarketThe S&P Case-Shiller 20-City Home Price Index, a measure of the housing market in key American cities, declined in May by 0.31% from April—the first monthly decline in home prices in 27 months. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 30, 2014.)

The number of homes being built in the U.S. is also falling.  In June, the annual rate of new homes being built in the U.S. housing market declined 9.3% from May to the lowest level in eight months. (Source: U.S. Census Bureau, July 17, 2014.)

And pending home sales in the U.S. housing market declined in the month of June by 1.1% from the previous month. Pending home sales now sit 7.3% lower than they were in June of 2013. (Source: National Association of Realtors, July 28, 2014.) Pending home sales are considered to be a leading indicator of the housing market.

As no surprise, companies directly related to the housing market are struggling. The chart below of the U.S. Housing Index tracks the stock prices of companies involved in construction, mortgages, and home-building materials.

Housing Index Chart

Chart courtesy of www.StockCharts.com

The chart is collapsing, trading near its lowest level of 2014. Over the past few days, the index fell below both its 200-day moving average and its 50-day moving average.

Dear reader, please let me set the record straight: I don’t expect to see an outright collapse in home prices like we saw in 2007. What I am pointing out to you today is that the momentum we saw in the U.S. housing market in 2012 and 2013 is dissipating.

This observation is consistent … Read More

Setting Up for the Slaughter

By for Profit Confidential

Stock Market Valuations Touching Historical ExtremesInvestors poured $4.3 billion into the SPDR S&P 500 (NYSE/SPY) last week, an exchange-traded fund (ETF) that tracks the S&P 500. For the week, ETFs tracking U.S. equities witnessed the most inflows in the last four weeks. (Source: Reuters, July 17, 2014.)

And as investors continue to inject vast sums of money into the stocks, stock valuations are at historical extremes. When I want to see how expensive the stock market is getting, I look at the S&P 500 Shiller P/E multiple (the value of stocks compared to what they earn adjusted for inflation)…and it’s screaming overvalued.

In July, the S&P 500 Shiller P/E stood at 25.96. That means that for every $1.00 a company makes, investors are willing to pay $25.96. The stock market has reached this P/E valuation (25.96) only seven percent of the time since 1881.

The number suggests the stock market is overvalued by 57%, according to its historical average of 16.55. (Source: Yale University web site, last accessed July 18, 2014.) The last time the S&P 500 Shiller P/E was above the current level was in October of 2007—just before one of the worst market sell-offs in history.

But this isn’t the only indicator suggesting the stock market is overvalued.

Another indicator of stock market valuation I look at is called the market capitalization-to-GDP multiple. Very simply put, this indicator is a gauge of the value of the stock market compared to the overall economy. It has been a good predictor of where key stock indices will head.

At the end of the first quarter of this year, the Wilshire 5000 Full Cap Price Index … Read More

Why Higher Interest Rates Will Become a Necessity

By for Profit Confidential

A Weak Economy Masked By an Artificial Stock Market RallyLet’s start with the U.S. housing market. Has the recovery for it ended or just stalled?

My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.

I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.

In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)

JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)

And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)

So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.

But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.

We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 18,000. (Source: USA Today, July 15, 2014.) … Read More

Three Housing Market Indicators Yell “Trouble Ahead”

By for Profit Confidential

Next Shoe May Be Dropping the U.S. Housing MarketThe U.S. housing market is in trouble again, and as crazy as it sounds, it won’t surprise me to see home prices decline soon.

Here are three reasons why:

Existing-home sales have been declining since July of last year. The annual rate of existing-home sales in July of 2013 was 5.38 million. In April of this year, this rate fell to 4.65 million. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 22, 2014.)

Mortgage originations in the U.S. housing market have been falling consistently, as illustrated by this chart:

Mortgage Originations, U.S. Housing Market

Quarter Mortgage Originations
Q3 2013 $549 Billion
Q4 2013 $452 Billion
Q1 2014 $332 Billion

Data source: Federal Reserve Bank of New York web site,
last accessed May 22, 2014

Between the third quarter of 2013 and the first quarter of 2014, mortgage originations in the U.S. economy declined by 40%. Mortgage originations at U.S. banks in the first quarter of 2014 were the lowest since the third quarter of 2011!

Then there is the National Association of Home Builders/Wells Fargo Housing Index (HMI). This index tracks the confidence of homebuilders in the U.S. housing market. It’s telling us that the recovery talk is based on nothing but false hope. The HMI dropped to its lowest level in 12 months in May of this year. (Source: National Association of Home Builders, May 15, 2014.)

Dear reader, I know I have had a bearish stance on the U.S. housing market for some time now. Those concerns are starting to materialize in the marketplace. Don’t buy into what the mainstream says, that all is … Read More

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