Daily Gains Letter

October’s Upbeat Home Sales Good News for Bears?

By for Daily Gains Letter |

Good News for BearsGood news is not always what it seems. On the surface, October’s new U.S. housing market sales numbers came in well above the forecast. But dig a little into the foundation of the report, and you’ll find more than a few reasons to be skeptical.

But before we dig deeper, let’s first take a look at the overall numbers. In October, sales of new single-family houses came in at a seasonally adjusted rate of 444,000, a whopping 25.4% increase month-over-month above the revised September rate of 354,000 and a 21.6% increase year-over-year. (Source: “New Residential Sales in October 2013,” United State Census Bureau web site, December 4, 2013.)

Those are pretty solid numbers—at least, until you factor in the 20% margin of error on the numbers provided by the U.S. Census Bureau and Department of Housing and Urban Development.

On top of that, sales for June, July, August, and September were all revised lower. Sales were revised downward by 0.9% in June, 4.4% in July, 10% in August, and 6.6% in September.

It’s also all about perspective. On one hand, you could champion the U.S. housing market recovery by noting that the 25.4% increase from September was the biggest one-month gain in more than 30 years! On the other hand, October’s new U.S. housing market home starts number is tempered a little when you consider the September 2013 rate of 354,000 was the weakest reading since April 2012.

Still, you can’t ignore the fact that new starts in the U.S. housing market are up month-over-month—but what’s fueling the growth? It can’t be a result of sustained jobs growth, as the unemployment rate is stuck around seven percent and wages are stagnant. But the fear of rising interest rates, that’s another matter.

Mortgage rates have jumped significantly over the last week or so on positive manufacturing data. Despite the federal funds rate being kept near historic lows, mortgage rates are on the increase. Last week, the average rate on the 30-year fixed conforming loan was 4.51%; this week, it’s at 4.62%. If stronger-than-expected economic data comes out in the coming days, interest rates could climb even higher.

Few things can motivate a potential home buyer to jump onto the property ladder than the chance to secure a low interest rate out of fear that it might rise. Unfortunately, in a tight market, buyers could end up overpaying just to lock in at a low rate.

November’s new U.S. housing market data could be even more interesting. We may see a sustained rebound in place after a slow summer, or we could see numbers revised downward again.

It will be interesting to see the November results in light of the fact that the Mortgage Bankers Association said that its seasonally adjusted index of mortgage application activity (home purchase and refinancing) dropped 12.8% in the last week of November, marking the fifth straight weekly drop. (Source: Lopez, L., “U.S. mortgage applications slide for fifth straight week: MBA,” Reuters web site, December 4, 2013.)

If you’re a U.S. housing market bull, you could consider residential construction companies like Hovnanian Enterprises Inc. (NYSE/HOV), Toll Brothers, Inc. (NYSE/TOL), and Beazer Homes USA, Inc. (NYSE/BZH).

U.S. housing market bears might want to consider researching exchange-traded funds (ETFs) that short the U.S. housing market, including ProShares Short Real Estate (NYSEArca/REK), ProShares UltraShort Real Estate (NYSEArca/SRS), and Direxion Daily Real Estate Bear 3X Shares (NYSEArca/DRV).

As usual, the new U.S. housing market numbers mean different things to different people. If you’re a bull, its full steam ahead; if you’re a bear, housing portends ongoing weakness. No matter how you look at it, both takes present investors with a number of investing options.

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