Why the Housing Downtrend Will Continue

The January housing market data were much worse than expected. Readers here know how I have been negative on the housing market for some time, despite those who say the sector is ripe for a rebound. I say, “no,” at least not in the foreseeable future. The downtrend in the housing market will continue, as both housing starts and building permits continue to slide.

The picture for housing continues to look relatively bleak at this time. The January numbers were atrocious. The monthly housing starts have been below estimates in eight of the last 12 months, including a very weak reading in January in which there were only 1.408 million starts, the lowest reading in over three years and well below the estimate of 1.60 million.

Moreover, the trend for building permits looks equally bad. The monthly building permits have been below estimates in 10 of the last 12 months back to February 2006, and they have declined in 11 of the last 12 months.

What makes me believe the softness will continue are the higher interest rates, which have 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 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 long-term investors to buy on dips. HD pays $0.90 in dividends for a current yield of 2.20%.

For those of you familiar with options, the Home Depot January 2009 LEAPS may be worth a look. For instance, the slightly out of the money $40 call at $5.80 has a breakeven of $45.80. Profits arise should Home Depot trade higher than $45.80 by January 16, 2009, about 23 months from now.