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Housing stocks are the canary in the coal mine for investment sectors dependent on discretionary spending.
The historically low interest rates and booming housing markets of recent years allowed consumers to tap home equity, which buoyed the economy as a whole because consumer spending accounts for 75 percent of the gross domestic product.
Now we are in on a multiyear down-slope, say some leading economists and stock-pickers.
Merrill Lynch economist David Rosenberg wrote in a recent research report that "we may be in the fourth or fifth inning of this down-cycle in terms of magnitude, but in terms of duration, it's probably no better than inning number 2."
In case there was any doubt about the end of the most recent housing boom, publicly-traded home-builder stocks have taken a beating on Wall Street in recent months and many of the investment community's "wise-men" of the street have recently chimed in.
In an address to the Bond Market Association recently, former Federal Reserve Chairman Alan Greenspan said that as far as the housing market is concerned, "the boom is over."
In his recent annual report to shareholders, Berkshire Hathaway Chairman Warren Buffett underlined his concerns about the sector.
The National Association of Home Builders/Wells Fargo Housing Market Index for May declined to hit its lowest mark since mid-1995. Even association Chief Economist David Seiders thinks new-home sales will be off by 12 percent from 2005.
The problems in the sector became visible when interest rates touched bottom at about 5.75 percent in June 2005 and began to steadily rise.
Today the 30-year rate is about 6.84 percent.
As rates moved up, formerly-robust home loan demand withered, and inevitably, housing stocks began to drift downward from multiyear highs.
Freddie Mac, the home-loan giant, estimates that mortgage refinancing will drop by 33 percent this year from last year's level.
Most knowledgeable observers, including the National Association of Realtors, predict mortgage rates could keep rising over the near term, driving home costs even higher. Rising financing costs come on top of spiraling raw material costs, partially stimulated by near-record energy costs.
It is a mixed picture for home builders because cancellations and incentives, often as high as 20 percent, have both increased, while new orders have fallen significantly.
The message one routinely hears these days in new-home sales centers ranges from a newly "balanced market" to a unique "buyer's opportunity."
Those optimistic sales-pitch messages contrast with what been going on in the public markets: many investors are fleeing the sector.
Toll Brothers, the leading U.S. luxury home builder, has seen its market value drop by nearly 20 percent this year while another big builder, Hovnanian Enterprises Inc., has dropped more than one-third in a similar time frame.
While not all home builders are down for the year, most of the larger, national players are.
The Dow Jones home construction index, composed of 36 companies, is off by more than 20 percent this year.
Paul Kasriel, chief economist at Chicago-based Northern Trust, says that "the sector peaked in July," and we are now "still in the early stages of the down-draft."
The high inventory levels and pending "re-sets of teaser mortgages" are among reasons that Kasriel thinks that the recovery of the home-building sector will be a "multiyear" affair.
Soon, predicts Kasriel, the low "teaser-rates" with which builders attract prospective buyers, "won't be so much of such a tease."
Kasriel also says that the regulators are "providing friendly persuasion" to lenders to tighten underwriting standards because of fraud and failure levels.
All of which, Kasriel says, points toward leaner times in the home-building sector, "unless the Fed stops raising rates."
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