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Can the Housing Recovery Continue?


Don't bet on it. The recovery in housing is still years away.

There has been a lot of press about two factors that seem encouraging to the housing market:. First, the Case-Shiller home price index rose in June. Second, new permits are increasing for new homebuilders.

Both of these factors have driven a significant run in homebuilders and construction indexes that track closely to the homebuilding industry. But I am very skeptical.

If you have bought the Homebuilders ETF (XHB) and enjoyed the run-up of the last three months (+23%), then it is time to take your profit. Don't be greedy. Just ask yourself the following question: Do I know a lot of people that think the economy is improving? Is the job picture improving or even getting any clearer?

You know the answer to those two questions. Without a better job situation, the low mortgage rates alone cannot drive this market up. Housing prices might drift up a little, but are houses really selling for more in your neighborhood? If the economy continues to trudge along, will people really be lining up and creating demand for existing or new homes that will make any dent in the five-year crater that we call "home equity"?

It defies logic. So if you have profits, get out. Look at the chart of the Homebuilders ETF and the Home Construction Index ETF (ITB) compared to the S&P 500 (^GSPC) over the last three months. If ever a chart screamed for profit taking, this is the chart.

When you see data about the economy, a particular industry, or housing prices, ask yourself this simple question: If the trend is up, is demand out-pacing supply? If the trend is down, is supply out-pacing demand?

In this case, what is your answer on the housing market? I can't believe that demand is out-stripping supply. Nor can I believe that people are creating bidding wars for properties -- not in this economy. Anecdotally, I have heard of more people putting in one price and that is it. Take it or leave it, buyers. That approach doesn't seem like it will drive home prices up.

In addition, banks are still increasing their unfortunate ownership of homes through foreclosures. This trend is still in place with over two million homes in that process. This will only increase supply. The banks still carry a lot of mortgages on their books – and they want it off their books. That selling pressure will not help prices, either. Lastly, the economy has been terrible for over five years now. Five years! How will the young buyers be able to step in the market and buy when they have struggled to grow income and find employment during the last five years?

I think the Case-Shiller data is a small spike that might continue for three to six months. But another decline is right around the corner. I don't think we will free fall. We just aren't at the bottom yet. The recovery in housing is still years away.

So if you are long housing, take your profits. It was a gift. If you aren't invested in homebuilders, find an alternative. There is nothing to see here!
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