More Room to Run in Housing

In the last 24 hours we've gotten two kinds of confirmations, which some would say are conflicting. The first was stronger-than-expected housing results from Lennar (LEN), while the other confirms the dire situation that many Americans are still grappling with. Actually, both confirm two positions that I have been sharing. Lennar and its results confirm that the housing rebound is far from over. Over the last few weeks, housing stocks and those for related suppliers have taken it on the chin, pulling back from the high single digits to the low double digits. The recent back-up in mortgage rates had some calling for the demise of the housing market, rather than calling it for what it really was: a get-off-the-fence moment for those housing observers. Lennar's results, which include high-double-digit increases in new orders, backlog and backlog dollar value, bode well for the coming months. With the shares well off their recent near-$44 peak set on May 14, subscribers should look to revisit this opportunity. Keep in mind that Lennar is not the only homebuilder that reported big backlog increases. We've seen this at Toll Brothers (TOL), Ryland Group (RYL) and D.R. Horton (DHI). Lennar is simply the latest and I suspect KBHome (KBH) will join that group when it reports it quarterly results later this week. With that many-stock-encompassing rebound in housing, two alternatives would be the SPDR S&P Homebuilders ETF (XHB) and iShares Dow Jones US Home Construction (ITB). Of the two, ITB is more-heavily weighted toward the homebuilders as its top holdings include Pulte Group (PHM), D.R. Horton, Lennar, Toll Brothers and NVR (NVR). That compares to the top holdings in XHB that include William-Sonoma (WSM), Tempur-Pedic (TPX), Select Comfort (SCSS) and Bed Bath & Beyond (BBBY). Of the two ETFs, I would favor ITB shares over XHB near term. Part of that jibes with my view that consumers are buying more of what they need than what they want. They may want nicer pots and pans from William Sonoma, but in order to get the house they want, they may have to settle for buying their cookware at Target (TGT) or even Costco (COST). I've been vocal that disposable income is under pressure, as is the savings rate. Hammering home that point was a new survey released by Bankrate.com that found that 75% of Americans are living paycheck-to-paycheck, with little to no emergency savings. That, too, was confirmed by online lender CashNetUSA, which found that 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. Not only is that dire, but it confirms that the cash-strapped consumer is alive and well. You know the cash-strapped consumer. He or she is trading down at Costco and similar venues, is eating home more and streaming video rather than going to the movies. Do I think the cash-strapped consumer will eventually weigh on the housing market? Of course, but not for some time. Aside what is likely to be a pickup in mortgage applications when viewed in the rear mirror in a few months, housing inventory remains at historic lows and that means we need to build more houses. Will the housing market get as robust as it was in 2005-2006? Maybe, maybe not. But until we see a slowdown in new home orders, backlogs start to flatten out and cancellations pick up, there's more room to run in the housing stocks.

More Room to Run in Housing

The cash-strapped-consumer won't have an effect just yet.

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