Why It’s Time to Buy a Home — or This Home Stock…

The housing market is one of the best-looking asset classes for 2011 and 2012. I’ll admit, that prediction may seem shocking right now, especially if you’ve been following my thoughts about the massive wave of mortgage resets threatening home ownership this year. But bear with me — now may be the time to make a bet on housing after all…

In fact, from my perspective, this housing market could be the best place to store your wealth in the coming four or five years.

Obviously, this is a turning of tides for us. In December 2009, I showed you the following chart:

As you can see, we were sitting right in the eye of the apparent housing storm that was brewing. Here we are — nearly a year and a half later. What exactly did happen to these rate resets?

Well, we were both right and wrong. Over the past year, when we were supposed to start seeing large increases in option ARM defaults, we did. But not to the degree this chart suggested. In many cases, banks and homeowners worked out a payment schedule. Add in record-low interest rates, which kept the resets from being overburdening and you get a softer increase.

Clearly, we’re still facing an uphill battle. But as you can see in the updated version of the chart, the mountain isn’t as high of a climb:

Surely, option ARM resets will be a source of trouble for both banks and homeowners in the coming year. But with the performance thus far, calling for a double dip (at least the size of one we previously predicted) would make us sound like the “The end is nigh” guy in Times Square.

There are many reasons the mountain of resets has smoothed out since 2009. First, many of these mortgages have already defaulted. With home values falling as fast and far as they have, many homeowners were extremely underwater on their loans. So they walked.

Renegotiated loans also caused the softening of the reset wave. With low interest rates, homeowners could work out more favorable long-term payment options.

Still, there could certainly be a second housing crisis. There are more vacant homes on the market than at nearly any other time in history:

The continued high unemployment rate is still having the largest effect on the housing market. And that doesn’t look like it’ll change anytime soon. But the worst of the job cuts are over. Most companies have already had their largest layoffs. That’s what sent the housing market into a tailspin the first time, but it’s highly unlikely that they can do that again.

The last argument we have for reversing our double-dip prediction is the economics of homeownership. It is now less of a bet on home prices as it was during the housing bubble. It is now just more economical to buy a house.

With the massive crash in home prices over the last several years and remarkably low mortgage rates, more people can actually afford a mortgage now than ever. Take a look at this chart:

According to the National Association of Realtors’ Housing Affordability Index — an industry-standard — more people can afford to buy a house with today’s average income levels, current housing prices and mortgage rates than at any other time in the index’s 40-year history.

Prior to this recent recession, the index had never traveled above 160 — which translates into an average national medium family income of 160% of the mortgage-qualifying rate for a median-priced home. Today, that number is 192.

The number we are watching the closest is new housing starts, which is looking worse every month. In the most recent release, new housing starts dropped a whopping 22%.

Obviously, this is a wildly unpredictable and volatile statistic. But it was surely enough to scare many investors.

Housing starts should flat line for the rest of this year. But in the coming years, we expect it to start increasing again.

So while all of this adds up to no more than flat sales for the housing industry in the short term, we do expect it to boost housing stocks’ top line in the long term. And there are plenty of ways for investors to add housing exposure to their portfolios at bargain prices right now…

Sincerely,
Jim Nelson
Penny Sleuth

April 26, 2011

Editor’s Note: If you’re seeking housing exposure, don’t even think about buying real estate investment trusts (better known as REITs) — they just don’t represent real estate the way investors think they do. Instead, the most direct long-term opportunities come from small-cap homebuilders like Beazer Homes (NYSE: BZH), a stock that we suggested had 48% near-term upside back in July of last year. Since the day that article ran, shares have rallied 38% — and there’s still considerable room to run longer-term.

[Independence Note: As with every company we mention here in the Penny Sleuth, neither the author nor any of the Sleuth’s other editorial staff have a financial position in Beazer Homes. Because of that, we’re completely independent, and able to provide you with unbiased analysis — try holding other penny stock newsletters up to that same standard.]

Why It’s Time to Buy a Home — or This Home Stock… was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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