The Investment U e-Letter: Issue #661
Friday, April 13, 2007

U.S. Housing Starts:The “House” Party In Real Estate Is Over
by D.R. Barton, Jr., Advisory Panelist, Mt. Vernon Research

Editor’s Note:Orignially published in the Smart Options E-Report, this U.S. Housing Starts article comes from D.R. Barton, Jr., a top trading analyst for Mt. Vernon Research. D.R. is an expert in technical and quantitative analysis, and is a regular contributor the Smart Options E-Report. We beleive his real estate outlook, based on hard data, provides an important and timely message for investors.

Two weeks ago, the market capped off a solid day following news that February housing starts climbed 9%.

On the face of it, that’s all well and good. But for me, the data wasn’t a cause for celebration.

The solid increase in housing starts was calculated from figures in January - numbers that were 9-year lows! Having plowed through the data and charts, it seems to me that this is a “house of cards” (pun intended) that could get much worse before it gets better

A 16-Year Run Comes to End

If you take a look at the charts below, first showing the figures for housing starts and permits from January 1991 to January 2007, then a closer look at the numbers for the past year, you can clearly see the trend.
U.S. Housing Starts and Permits: 3-Month Moving Average (Tousands)

When you take the broader perspective into account, it’s tough to interpret the small rise in February housing starts. Additionally, housing permits fell again in February - an issue that was overshadowed by the better-than-expected housing starts number. And the data on sales of new homes in February that came out recently was less encouraging.

Beware The Biased Reporting

There’s no question that commercial and residential real estate makes up a huge part of the U.S. economy. But because so many people are now feeding at the real estate trough, it’s tough to find unbiased comments about the market - especially when almost everyone has a vested interest in a continually rising real estate market.Just about every word on the housing market that is printed or spoken in the media is put through that biased filter. That means even the smallest victory is celebrated when it may not actually be good news for the real estate market. There are some new wrinkles that make the housing bubble “different this time.” While we (and other countries) have witnessed normal housing boom and bust cycles over the years, there are two huge mitigating factors that accompany this one:

• Failing to take a lesson from the 1929 stock market crash, regulators have allowed lenders to extend unprecedented leverage to real estate buyers. We have seen what may be only the tip of the iceberg with the problems in the sub-prime lending market.
  
• Increasing Pressure in Public Companies: Because there are a large number of homebuilders listed on the stock market, these companies continue to win major results - both for the good of the market, as well as their shareholders. And when they can’t (like now), their shares get crushed. In the past two weeks alone, Lennar was the second company to put up earnings that were way down - some 70%-80%, and to cap it off, then guide lower for the rest of the year.

With these two big problems, more trouble is looming

New U.S. Home Starts Up, but Sales Down: Investors Beware

As the numbers showed, new home starts in February rose solidly - albeit from very low levels.

But new home sales declined by 4% - below the consensus estimate of almost all analysts. This is the news that had the stock market reeling in the last week of March - and is another warning sign.

But here’s an even more disturbing sign in the new home sales: There were big downward revisions for the last three months of data. This shows that the market may be even weaker than first imagined.

So given this data, what’s a prudent investor to do?

I strongly suggest that you not try to catch a falling knife in the housing market. Just last weekend in Denver, I spoke about investing principles at a predominantly real estate conference and I heard one horror story after another from both brokers and investors.

No matter how good the bargain looks, the real lesson is to always look for solid proof that the market has really turned from down to up before jumping in.

Great investing,

D.R. Barton, Jr.

Today’s Investment U Crib Sheet

• The PHLX Housing Sector Index (^HGX) is composed of 21 companies that operate directly in the U.S. housing construction market - from homebuilders to lumber producers. And the numbers haven’t been good Since February 2, the index is off by more than 15%. Red-hot Real Estate Investment Trusts (REITS) are also cooling off. The Vanguard REIT Index ETF (AMEX: VNQ) is down 8% since February 5.
• D.R. Barton, Jr., is a regular contributor to the Smart Options E-Report, where he breaks down current trends in stocks, currencies and commodities and highlights potential long and short opportunities for readers. To sign up to this free service, visit the website.

Related Articles:

• The Housing Boom: Warren Buffett Hangs Onto A Real Estate Boom Relic
• Housing Market Trends: Attention Bargain Shoppers Real Estate’s New Buying Season Is Here
• The Beginning to the End of the Housing Market? The Second “Story” on Housing

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