Checking the Housing Channel at the Beach

 | Jul 08, 2013 | 4:00 PM EDT
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When I travel, I like to just keep my eyes open and see what's going on in various parts of the country. Although the information garnered in this manner is anecdotal in nature and not as empirical as what the always highly accurate Wall Street and government economists prefer, I have found it to be valuable.

When you talk to people and observe, you can often come away with information that conflicts with the disseminated data. This can help you develop what Michael Steinhardt used to call a "variant perception." My recent week at New Smyrna Beach, Fla.,  is an example.

For the first several days at the beach, it was almost unnaturally quiet. We were often the only people along our little stretch of beach a few miles south of town. The downtown shopping and dining district was almost scary-movie empty during the week. On Thursday, traffic picked up, and the beaches were more crowded, and downtown picked up pace a bit as the holiday arrived.

This was Fourth of July weekend, and although a huge Nascar race was being held just a few miles north, the town never really filled up as I would have expected. Even on the weekend, we had no trouble walking into restaurants without a reservation or finding a waterfront table at the bar. It looks to me like the consumer is still not taking long vacations and is using long weekends instead of the once-traditional family week at the beach. They feel a little better about their situation but not comfortable enough to return to their old spending habits.

That makes them a lot smarter than some real estate operators. Since the dog and I are both fans of good food and afternoon naps, we have learned to take several long walks a day. Walking around the beach town, we discovered that there is a lot of second-home and vacation property inventory on the market. However, it was almost a cliche to find two homes with "for sale" signs bracketing a lot being cleared and a new home being built. This was consistent with other observations about the consumers -- many of the homes were empty for the week. There appears to be way too much new construction activity for this point in the recovery cycle.

This concerned me enough that I made some phone calls and did a little digging. It appears to me that some parts of the country are seeing a normal recovery. Home prices are stabilizing and inventories are slowly decreasing. However, in some parts of the country that were hardest hit, there has been heavy buying of homes for rental properties.

A staggering amount of institutional and hedge fund money has been flooding into the housing market. Several real estate investment trusts, such as Silver Bay Realty Trust (SBY), have been formed to buy up residential properties for rental homes. This has caused a temporary inventory shortage and fast double-digit price increases. It would seem that some builders and -- even worse -- lenders are rushing to take advantage of what seem like a hot real estate market. I was talking to a neighbor this morning who has decided to put his house on the market because it has gone up in price too far too fast. This would be mildly disturbing if not for the fact that he is a real estate appraiser who has two decades of experience. That makes it very disturbing in my eyes.

All year, I have suggested staying away from or outright selling the homebuilders and large REITS. As these stocks always seem to do, they went up steadily after my initial remarks, but they are now starting to fall sharply. I would suggest that the distortions caused by their own buying also make the single-family-home REITs a very poor buy right now. There is way too much activity in the building markets, and institutions are conducting transactions far above the level of smaller private real estate buying and selling. The builders rushing to build homes in Florida, California and Arizona are going to take some earnings hits later this year when buyers fail to appear and prices retreat once again. Of course, rising interest rates would just be another body blow to both builders and owners.

Looking at the real estate market on a national level, I see a stabilizing market. However I also see a huge institutional and individual price disconnect, and I suspect that inventory levels and prices are going to weaken in the months ahead. This is going to spill over into the "trade of the decade" -- the small-bank trade --  as I am going to be very suspicious of any banks that make new loans for large new construction. Too much too fast almost always ends too soon for those involved.

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