Homes Now at 2004 Prices

I’ll be the first to make this observation: Home prices are reaching the level they traded at in 2004. In my view, 2005 was the speculative peak for U.S. home prices. The market cooled in 2006, and it continues to cool this year.

Yesterday, the U.S. Commerce Department reported that sales of new single-family homes fell by 3.9% in February to the slowest pace in about seven years. The supply of unsold new homes is now at a 16-year high!

But the stock charts tell the true story. If we look at the Dow Jones U.S. Home Construction Index, we see the index is currently trading at the same level it did in December 2004. My readers know I’m a big believer in stock charts predicting the future six to 12 months out. And that’s exactly what we can see in the stock chart that includes the largest U.S. home builders.

What does this mean for you, me, and investors in general? Well, there are three things that come to mind.

First, Wall Street lied to us again while the stock charts told the truth. Last year, analysts were telling us the stock market had discounted the price of home builder stocks too much. I remember reading articles about funds buying the home builder stocks because they thought the stock market had been too hard on them. Yesterday, Lennar, one of the largest U.S. home builders, said its first quarter profit dropped 73%. Lennar said it will miss analyst forecasts this year. Other home builders are not faring much better. The lesson: Don’t believe Wall Street, believe the stock charts.

Second, the government comes to the rescue too late. When the tech boom was hitting the stock market in 1999, the government didn’t care much. Only after the bubble burst were new accounting/securities rules introduced to protect investors. But it was too late, investors were already burned! And same story with real estate in the boom that just ended. The government didn’t care much about 100% financing or qualifying for mortgages with no income verification. It just continued until the bubble burst and investors were burned again. Not until 20 subprime lenders failed did the government do anything. Now, the FBI is investigating Beazer Homes, a large U.S. builder, about its lending practices. The lesson: The government doesn’t come to the aid of its citizens during boom times — it waits until the bust happens.

Third, we have yet to feel the economic fallout of the housing market. Greenspan was wrong in his opinion that the soft housing market would not hit the economy. Subprime lenders have already closed their doors. Consumers are having increasing difficulty meeting their monthly payments, as billions in ARMs reset this year. As the average American consumer’s financial belt gets tighter, he will cut his spending on other consumer goods aside from housing. Consumer goods stocks (except for necessities) are the last place I’d want to have my money invested in right now.