The Housing Market Will Continue to Be Soft

The February housing market data was mixed. Readers here know how I have been negative on the housing market, despite those who say the sector is ripe for a rebound. I say, “no,” at least not in the foreseeable future. The softness in the housing market continues as both housing starts and building permits continue to slide. Add in the woes in the subprime mortgage market and the concerns intensify.

The upward move of rates has been a detriment for the housing market, especially the subprime lenders who give loans to those with less-than-ideal credit. As rates rise, these borrowers are faced with a significant increase in monthly mortgage costs, making them vulnerable to delinquencies. People’s Choice Financial Corp. filed for Chapter 11 bankruptcy protection. Former Fed Chairman Alan Greenspan believes weakness in the subprime market will not impact the broader economy if the housing market does not weaken significantly. This is a big “if.”

The picture for housing continues to look relatively bleak at this time. The monthly housing starts have been below estimates in seven of the last 12 months. The February reading of 1.525 million starts was better than the estimate of 1.445 million and above January’s dismal reading of 1.399 million, but it was still the second worst reading in over three years. The trend for building permits equally looks bad. The monthly building permits have been below estimates in 11 of the last 12 months back to March 2006 and have declined in 11 of the last 12 months.

What make me believe the softness will continue are the higher interest rates, and the subprime concerns, which has clearly impacted borrowing and the housing market.

In my view, I would continue to stay clear of the housing market for the time being unless we get a strong sense that the slide will end. There are better areas to put your capital. The area I continue to like is the renovation stocks, which I believe will hold better than home builders, although we are also seeing some weakness here.

Home renovation companies Home Depot Inc. (NYSE/HD) and Lowe’s Companies (NYSE/LOW) both cut their respective outlooks, but I advise buying on dips for long-term investors. HD pays $0.90 in dividends for a current yield of 2.40%.

For those of you familiar with options, the Home Depot January 2009 LEAPS may be worth a look. For instance, the in the money $35 call at $6.80 has a breakeven point of $41.80. Profits arise should Home Depot trade higher than $41.80 by January 16, 2009, about 21 months from now.