Pending Increase in Home Sales Time to Stick your Toe Back into Real Estate

Those wondering where to put their money might be looking at the real estate data and wondering if it’s too early to put a toe into the waters. Undoubtedly, today’s housing prices are some of the best available since the 1970s, and with bailout money encouraging banks to send money into the community to help infuse jobs into the current economic slump, home buyers will find some great mortgage deals to assist them. But it’s not all gravy out there. Income verification will be tough, and public sentiment and government oversight will prevent builders from offering mortgage deals that reflect the previous climate’s mistakes.

Data from California, Nevada, and Florida, states that led the list in foreclosures last year, all show increases in sales of existing homes for the last month of 2008. It would appear that those with the cash to spend are taking advantage of the slump in housing to scoop up the good deals. However, homes in all of these states are selling at prices some 20-40% lower than their peak. At the current rate, inventories of homes on the market should close out by late 2010. D.R. Horton (DHI) is one builder there that is poised to be ready for the resumption of building there, offering models with smaller floorplans and more affordable pricing. Pulte (PHM) is another builder with a reputation for quality that will have to adapt its models to accommodate the new economic reality. Centex (CTX) and Lennar (LEN) are both well-known names in home construction that are now at the drawing board working to cut floor space and lower prices.

In California, the problem is more complex, as home prices rose at a rate 5 to 6 times what it would cost to build a comparable home. With prices dropping precipitously, many homeowners find themselves upside down with their mortgages. Million-dollar homes have seen a 50% decrease in sales, so builders with smaller, more affordable homes will have an advantage going forward even there.

Nevada, who led the list in foreclosures in 2008, saw a hint of a turnaround at the end of the year with a 7% increase in existing home sales in December. Prices are continuing to drop however, which will make it increasing difficult for Nevada builders to offer new construction at competitive prices. Demand is expected to increase, however, as new retirees and others move to the state. Any home builder operating in Nevada will have to work very hard to compete in a market where there are too many homes, at too low a price, with cost of materials driving building costs upward.

Note that all of these are desirable areas for retirees, and may, in the upcoming years, see considerable uptick in demand. For the investor willing to wait a while for returns, the low cost of these battered builder stocks might be an opportunity that shouldn’t be missed. It is unlikely that home-building will languish for long in the U.S., with an expanding population, retiring demographic, and greater mobility to follow the job markets.