The Latest You Need to Know on the Housing Sector

by George Leong, B. Comm.

There were some early signs of a potential turning in the distressed housing market in recent weeks. We are seeing a lift in existing and new home sales, as prices are at levels that are attracting buying interest from homebuyers and property investors. The major reason for the increase in sales was generated from the sale of foreclosed properties. While this may not be what you want to see, the buying of foreclosed housing does help clear up inventory that otherwise would be sitting around. Cities such as Cleveland and Detroit have a glut of foreclosures.

As I have commented in previous articles, the one-month housing data results could be an aberration. What I want to see is a steady positive trend developing in the key building permits and housing starts data, which will be released on April 16.

Another positive that we saw on Wednesday was the announcement of a merger in the housing sector. When was the last time we heard of a merger in housing? It may not seem to be a big deal on the surface, but it shows there are some housing companies that believe the sector may soon begin to improve and that a housing bottom may be in place. I do not feel totally confident that this is the case given the weak jobs market. I would need to see jobs creation before getting more positive.

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Pulte Homes, Inc. (NYSE/PHM) has announced that it would acquire Centex Corporation (NYSE/CTX) in an all-stock transaction worth about $1.3 billion. The merger would create the country’s largest homebuilding company, with shareholders of Pulte owning 68% of the combined company.

The stock-for-stock deal may not be that great if you own Centex, but given the lack of cash in housing stocks, it makes a whole lot of sense for Pulte and should create a stronger company when the housing market improves.

Even with the proposed merger, I would be hesitant in entering a housing trade at this time. The industry fundamentals have a long way to go. The companies have terrible fundamental metrics and are losing tons of cash. Only an economic and housing reversal later this year will help to lift the sector. The risk that I see is that, should the recession extend into 2010 and the jobs market continue to be weak, this would pressure consumer confidence and the desire of consumers to want to buy big-ticket items such as housing.

Millions of jobs continue to be lost each month in the private and public sectors. President Obama has his massive economic stimulus plan in motion, but it is still too early to see the results. And consumers need to spend in order to drive the economy along with jobs and housing. We are not there yet, so be careful.

Over the next few weeks, watch for the onslaught of first-quarter earnings. However, there is renewed fear that the guidance will be weak. And, despite the four-week rally, there are some concerns regarding whether this is simply a bear market rally. In an interview on Yahoo’s Tech Ticker, investment guru George Soros said that there would continue to be problems in the banking sector and that the current rally will fail. It is hard to argue against a market legend who made over $1.0 billion betting against the British pound decades ago.